Auditing
Financial Reporting
Construction
Technology
Internal Controls
General
Final Jeopardy
100
What is wrong with the following sentence?
An auditor's goal is to give the readers absolute assurance that the financial statements are free from material misstatement
Auditors give reasonable assurance, not absolute assurance, due to the nature of financial reporting and audit procedures
100
Which of the following should be disclosed in a summary of significant accounting policies?
A. Depreciation expense
B. Future minimum lease payments
C. Basis of profit recognition on long-term construction contracts
D. Summary of long-term debt
C. Basis of profit recognition on long-term construction contracts
The other options either belong in their own note or as a line item somewhere in the financial statements
100
This calculation is required by the IRC to determine and account for any over or underreporting of previously recognized income on jobs for those using the percentage-of-completion method
Look-back calculation
Since the percentage-of-completion method requires estimates made by management, the IRS does not allow contractors to have a "free ride" if their estimates were significantly off
100
What is the control activity that requires multiple methods from independent categories of credentials to verify a user's identity called, and what is it's purpose?
Multifactor authentication, and the purpose is to create a layered defense that increases the difficulty of an unauthorized person to access logins, computers, etc
100
Which of the following would be least likely to be identified as a risk by a company during their risk assessment process?
A. Changes in operating environment
B. New personnel
C. Current year growth consistent with growth in the past
D. Corporate restructuring
C. Current year growth consistent with growth in the past
Any large changes to the company or management can should be identified as a riskier area
100
What type of evidence would provide the highest level of assurance in an audit engagement?
A. Evidence secured solely from within the entity
B. Evidence obtained from independent sources
C. Evidence obtained indirectly
D. Evidence obtained from multiple internal inquiries
B. Evidence obtained from independent sources
The most reliable information is obtained from independent sources being sent directly to the auditor
100
Review the following transactions and determine what journal entries should be made:
1. A law firm provided legal services to a customer during the fourth quarter. The law firm sent out a bill for $14,500 to its customer prior to year-end, but the company did not record the transaction given expected delays with holiday mail. (Make the journal entry for the law firm, not the customer)
2. A company paid $350,000 in rent during the year for its office buildings, debiting rent expense and crediting cash for this amount. Upon further review by the controller, 25 percent of the cash paid represents a prepayment of next year’s first-quarter rent obligations.
3. Sales for the year were $40,000,000 with 60 percent of this amount sold on account, and 40 percent in cash. Historically, the company has recognized 2 percent of all accounts receivables as being uncollectible. There was no entry made by the accounting department to reflect potential uncollectible accounts receivables. Assume all sales on accounts still need collected at year end
1. Accounts receivable $14,500
Revenue $14,500
2. Prepaid rent $87,500
Rent expense $87,500
3. Credit loss expense $480,000
Allowance for credit losses $480,000
200
The number that is determined by/influenced by what amount would sway a reasonable user of the financial statements is known as?
Materiality
200
A company with a December 31, 2023 year-end plans to issue their financial statements by March 31, 2024. On February 4th, 2024, a fire in their warehouse destroyed inventory valued at $100,000. What is the correct response in relation to the financial statements?
A. Disclosure with no estimated financial impact
B. Disclosure with estimated financial impact
C. Journal entry with no disclosure
D. Journal entry with disclosure
B. Disclosure with estimated financial impact
Since the event occurred after the balance sheet date, no journal entry should be made, however, a disclosure should be made. Also, since the estimated loss is known, it should be included as well
200
Normally, under an unapproved change order, expenses related to the additional work are currently expensed while revenue is not recognized until approval for the scope of the work and the price are obtained. However, there is an instance where the contractor can recognize the revenue associated with an unapproved change order. What is this scenario?
Management considers realization of the change order to be probable (contractor has historical experience providing the probable assurance of realization and the contractor has received a bona fide pricing offer from a customer and records only the amount of the offer as revenue)
200
During the process of electronically transmitting data, which of the following IT controls would provide the most assurance that unauthorized disclosure of sensitive information would be prevented?
A. Separate transmission of the data file and its password
B. Restricted access
C. A strongly worded confidentiality warning
D. Encryption
D. Encryption
Encryption involves digital keys to scramble and unscramble data, making it harder to be used if intercepted by an unauthorized user/source
200
What is wrong with the following sentence?
The establishment and maintenance of a system of internal control is an important responsibility of the external auditor
Internal controls are the responsibility of management, not the external auditor
200
Which of the following do not fit and why?
A. Direct labor
B. Storage warehouse costs
C. Materials
D. Subcontract costs
B. Storage warehouse costs
The other three are typically direct costs
300
The language "except for" is used in the opinion section of an Auditor's Report when what type of opinion is rendered?
Qualified opinion
In a qualified opinion, the misstatement(s) are material but not pervasive. Therefore, the auditor will state that they are presented fairly except for the described misstatements
300
When revenue is received for work that has not been performed, a liability account titled what is created?
Deferred revenue
Since worked is owed, a liability is created
300
What is a surety and what is its relationship to the customer and the contractor?
A surety is a guarantor that guarantees the completion of a contract according to the terms of that particular contract. The surety guarantees completion to the customer and steps into the contractor's shoes if they cannot complete its bonded obligations
300
What is wrong with the following sentence?
An auditor would expect a company's automated controls to take care of large, unusual, or nonrecurring transactions
Automated controls should be used for high volume or recurring transactions that don't require a lot of judgement/consideration
300
Management's approach toward business risks, hiring and advancement policies, and participation of those charged with governance are all factors of which component of internal control?
Control environment
The control environment deals with the tone of the organization and is generated by management and those charged with governance
300
What does COSO stand for?
Committee of Sponsoring Organizations of the Treadway Commission
400
What is the difference between inherent risk and control risk?
Inherent risk is the susceptibility of an account/class of transactions/disclosure to be materially misstated before considering any related controls. Control risk is the risk that a material misstatement will not be prevented or detected by the company's system of internal control
400
Anita Co. had the following balances at December 31, 2023:
Cash in checking account $350,000
Cash in money market account $250,000
U.S Tresury bill (purchased 12/1/23, matures 2/28/24) $800,000
U.S Tresury bill (purchased 3/1/23, matures 2/28/24) $500,000
What amount should Anita Co. report as cash and cash equivalents on their December 31, 2023 balance sheet?
$1,400,000
The cash in the checking and money market accounts are easily convertible to cash, so they should be included in cash and cash equivalents
The U.S treasury bill for $800,000 has a maturity date within 90 days of its purchase date, so it should be included in cash and cash equivalents
The U.S treasury bill for $500,000 does not have a maturity date within 90 days of its purchase date, so it should not be included in cash and cash equivalents
400
In most instances, which method of income recognition for contractors is the best for allowing the deferral of recognizing taxable income?
Completed-contract method
Under this method, contractors can defer recognizing taxable income until the contract is done or nearly done
400
Company A is looking into four potential projects and will accept them if the IRR is 10% or above, as shown in cell E2. What is the formula used in cell C2, which can be copied down to cell C3 through C5, to generate the results shown below?
=IF(B2>=E$2,"Accept","Reject")
400
Name the five components of internal control
Control environment, risk assessment, information and communication, monitoring, and control activities
400
There are 3 things wrong with the following balance sheet, what are they?
- Should say "December 31, 2023" not "For the year ended December 31, 2023"
- Missing dollar sign on assets total
- Sum for current liabilities only says "total liabilities"