Auditing and Assurance Services Exam 3
Evaluations of financial information through analysis of plausible relationships among both financial and
non-financial data - (correct Answer) - Analytical Procedures
Controls hat apply to the processing of specific computer applications and are part of the computer
programs used in the accounting system - (correct Answer) - Application controls
Expressed or implied representations by management that are reflected in the financial statement
components - (correct Answer) - Assertions
Audit evidence obtained by the auditor as a direct written response to the auditor from a third party (the
confirming party) in paper form or by electronic or other medium - (correct Answer) - Confirmation
The process of covering a cash shortage by applying cash from one customer's accounts receivable
against another customer's accounts receivable - (correct Answer) - Lapping
A confirmation request to which the recipient responds only if the amount or information stated is
incorrect - (correct Answer) - Negative confirmation
A confirmation request to which the recipient responds whether or not he or she agrees with the
amount or information stated - (correct Answer) - Positive confirmation
The auditor's decision to rely on the entity's control, test those controls, and reduce the direct tests of
the financial statement accounts - (correct Answer) - Reliance strategy
Tests to detect errors or fraud in individual transactions - (correct Answer) - Substantive tests of
transactions
Audit procedures performed to test the operating effectiveness of controls in preventing or detecting
material misstatements at the relevant assertion level - (correct Answer) - Tests of controls
Tests that concentrate on the details of amounts contained in an account balance and in disclosures -
(correct Answer) - Tests of details of account balances and disclosures
A transaction being traced by an auditor from origination through the entity's information system until it
is reflected in the entity's financial reports. It encompasses the entire process of initiating, authorizing,
recording, processing, and reporting individual transactions and controls for each of the significant
processes identified. - (correct Answer) - Walkthrough
A confirmation request on which the recipient fills in the amount or furnishes the information requested
- (correct Answer) - Blank or zero-balance confirmation
Computer programs that allow auditors to test computer files and databases - (correct Answer) -
Computer-assisted audit techniques
Controls that relate to the overall information-processing environment and have a pervasive effect on
,the entity's computer operations - (correct Answer) - General Controls
Costs assigned to products based on expected costs, which may differ from actual costs - (correct
Answer) - Standard costs
An asset that is not physical in nature. Corporate intellectual property (items such as patents,
trademarks, copyrights), goodwill, and brand recognition are common - (correct Answer) - Intangible
Asset
When a creditor or bank has the right to sell the mortgaged or collateral property of those who fail to
meet the obligations of a loan contract. - (correct Answer) - Lien
A type of asset that arises on a balance sheet as a result of a business making payments for goods and
services to be received in the near future. While they are initially recorded as assets, their value is
expenses over time as the benefit is received. - (correct Answer) - Prepaid expense
An asset that is vital to business operations but cannot be easily liquidated (e.g. warehouse,
manufacturing equipment) - (correct Answer) - Property, plant and equipment
Experts engaged or employed by auditors to provide evidential matter. - (correct Answer) - Specialist
Short-term, highly liquid investments that are readily convertible to cash or so near their maturity that
there is little risk of change in their value (e.g. money market funds, Treasury bills) - (correct Answer) -
Cash equivalents
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date - (correct Answer) - Fair Value
A bank account containing a stipulated amount of money used for limited purposes (e.g. frequently used
for disbursing payroll and dividend checks) - (correct Answer) - Imprest account
A technique used to reconcile the cash receipts and disbursements recorded on the clients books with
the cash deposited into and disbursed from the clients bank account for a specific time period - (correct
Answer) - Proof of cash
For the control activities to be effective, employees maintaining the accounts receivable subsidiary
ledger should not also approve.
A. Employee overtime wages
B. Credit granted to customers
C. Write-offs of customer accounts
D. Cash disbursements - (correct Answer) - C
Which of the following controls is most likely to help ensure that all credit revenue transactions of an
entity are recorded?
A. The billing department supervisor sends a copy of each approved sales order to the credit department
for comparison to the customer's authorized credit limit and current account balance
, B. The accounting department supervisor independently reconciles the accounts receivable subsidiary
ledger to the accounts receivable control account each month.
C. The accounting department supervisor controls the mailing of monthly statements to customers and
investigates any differences reported by customers
D. The billing department supervisor matches prenumbered shipping documents with entries in the sales
journal - (correct Answer) - B
Which of the following internal controls would be most likely to deter the lapping of collections from
customers?
A. Independent internal verification of dates of entry in the cash receipts journal with dates of daily cash
summaries
B. Authorization of write-offs of uncollectible accounts by a supervisor independent of the credit
approval function
C. Segregation of duties between receiving cash and posting the accounts receivable ledger
D. Supervisory comparison of the daily cash summary with the sum of the cash receipts journal entries -
(correct Answer) - B
Smith Corporation has numerous customers. A customer file is kept on disk. Each customer file contains
a name, an address, a credit limit, and an account balance. The auditor wishes to test this file to
determine whether credit limits are being exceeded. The best procedure for the auditor to follow would
be to
A. Develop test data that would cause some account balances to exceed the credit limit and determine if
the system properly detects such situations
B. Develop a program o compare credit limits with account balances and print out the details of any
account with a balance exceeding its credit limit
C. Request a printout of all account balances so that they can be manually checked against the credit
limits
D. Request a printout of a sample of account balances so that they can be individually checked against
the respective credit limits - (correct Answer) - D
Cash receipts from sales on account have been misappropriated. Which of the following acts would
conceal this defalcation and be least likely to be detected by an auditor
A. Understating the sales journal
B. Overstating the accounts receivable control account
C. Overstating the accounts receivable subsidiary ledger
D. Understating the cash receipts journal - (correct Answer) - C
Evaluations of financial information through analysis of plausible relationships among both financial and
non-financial data - (correct Answer) - Analytical Procedures
Controls hat apply to the processing of specific computer applications and are part of the computer
programs used in the accounting system - (correct Answer) - Application controls
Expressed or implied representations by management that are reflected in the financial statement
components - (correct Answer) - Assertions
Audit evidence obtained by the auditor as a direct written response to the auditor from a third party (the
confirming party) in paper form or by electronic or other medium - (correct Answer) - Confirmation
The process of covering a cash shortage by applying cash from one customer's accounts receivable
against another customer's accounts receivable - (correct Answer) - Lapping
A confirmation request to which the recipient responds only if the amount or information stated is
incorrect - (correct Answer) - Negative confirmation
A confirmation request to which the recipient responds whether or not he or she agrees with the
amount or information stated - (correct Answer) - Positive confirmation
The auditor's decision to rely on the entity's control, test those controls, and reduce the direct tests of
the financial statement accounts - (correct Answer) - Reliance strategy
Tests to detect errors or fraud in individual transactions - (correct Answer) - Substantive tests of
transactions
Audit procedures performed to test the operating effectiveness of controls in preventing or detecting
material misstatements at the relevant assertion level - (correct Answer) - Tests of controls
Tests that concentrate on the details of amounts contained in an account balance and in disclosures -
(correct Answer) - Tests of details of account balances and disclosures
A transaction being traced by an auditor from origination through the entity's information system until it
is reflected in the entity's financial reports. It encompasses the entire process of initiating, authorizing,
recording, processing, and reporting individual transactions and controls for each of the significant
processes identified. - (correct Answer) - Walkthrough
A confirmation request on which the recipient fills in the amount or furnishes the information requested
- (correct Answer) - Blank or zero-balance confirmation
Computer programs that allow auditors to test computer files and databases - (correct Answer) -
Computer-assisted audit techniques
Controls that relate to the overall information-processing environment and have a pervasive effect on
,the entity's computer operations - (correct Answer) - General Controls
Costs assigned to products based on expected costs, which may differ from actual costs - (correct
Answer) - Standard costs
An asset that is not physical in nature. Corporate intellectual property (items such as patents,
trademarks, copyrights), goodwill, and brand recognition are common - (correct Answer) - Intangible
Asset
When a creditor or bank has the right to sell the mortgaged or collateral property of those who fail to
meet the obligations of a loan contract. - (correct Answer) - Lien
A type of asset that arises on a balance sheet as a result of a business making payments for goods and
services to be received in the near future. While they are initially recorded as assets, their value is
expenses over time as the benefit is received. - (correct Answer) - Prepaid expense
An asset that is vital to business operations but cannot be easily liquidated (e.g. warehouse,
manufacturing equipment) - (correct Answer) - Property, plant and equipment
Experts engaged or employed by auditors to provide evidential matter. - (correct Answer) - Specialist
Short-term, highly liquid investments that are readily convertible to cash or so near their maturity that
there is little risk of change in their value (e.g. money market funds, Treasury bills) - (correct Answer) -
Cash equivalents
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date - (correct Answer) - Fair Value
A bank account containing a stipulated amount of money used for limited purposes (e.g. frequently used
for disbursing payroll and dividend checks) - (correct Answer) - Imprest account
A technique used to reconcile the cash receipts and disbursements recorded on the clients books with
the cash deposited into and disbursed from the clients bank account for a specific time period - (correct
Answer) - Proof of cash
For the control activities to be effective, employees maintaining the accounts receivable subsidiary
ledger should not also approve.
A. Employee overtime wages
B. Credit granted to customers
C. Write-offs of customer accounts
D. Cash disbursements - (correct Answer) - C
Which of the following controls is most likely to help ensure that all credit revenue transactions of an
entity are recorded?
A. The billing department supervisor sends a copy of each approved sales order to the credit department
for comparison to the customer's authorized credit limit and current account balance
, B. The accounting department supervisor independently reconciles the accounts receivable subsidiary
ledger to the accounts receivable control account each month.
C. The accounting department supervisor controls the mailing of monthly statements to customers and
investigates any differences reported by customers
D. The billing department supervisor matches prenumbered shipping documents with entries in the sales
journal - (correct Answer) - B
Which of the following internal controls would be most likely to deter the lapping of collections from
customers?
A. Independent internal verification of dates of entry in the cash receipts journal with dates of daily cash
summaries
B. Authorization of write-offs of uncollectible accounts by a supervisor independent of the credit
approval function
C. Segregation of duties between receiving cash and posting the accounts receivable ledger
D. Supervisory comparison of the daily cash summary with the sum of the cash receipts journal entries -
(correct Answer) - B
Smith Corporation has numerous customers. A customer file is kept on disk. Each customer file contains
a name, an address, a credit limit, and an account balance. The auditor wishes to test this file to
determine whether credit limits are being exceeded. The best procedure for the auditor to follow would
be to
A. Develop test data that would cause some account balances to exceed the credit limit and determine if
the system properly detects such situations
B. Develop a program o compare credit limits with account balances and print out the details of any
account with a balance exceeding its credit limit
C. Request a printout of all account balances so that they can be manually checked against the credit
limits
D. Request a printout of a sample of account balances so that they can be individually checked against
the respective credit limits - (correct Answer) - D
Cash receipts from sales on account have been misappropriated. Which of the following acts would
conceal this defalcation and be least likely to be detected by an auditor
A. Understating the sales journal
B. Overstating the accounts receivable control account
C. Overstating the accounts receivable subsidiary ledger
D. Understating the cash receipts journal - (correct Answer) - C
