ACC 4110 Exam 2

The following table depicts the auditor's estimated computed upper deviation rate compared with the tolerable deviation rate, and it also depicts the true population deviation rate compared with the tolerable deviation rate. As a result of test of controls, the auditor assesses control risk higher than necessary and thereby increases substantive testing. This is illustrated by situation

2

Payment for purchases is authorized for the proper amount: In spite of your excellent work calculating a sample size, your audit manager instructed you to take a sample of 200 vouchers to test. Your test identified only one case where the proper authorization signature was missing and payment was still made to the vendor. Using the tables in Chapter 8 of the text book, what is the computed upper deviation rate for this test at a 95% confidence level? 1.5% 2.0% 2.4% 3.2%

2.4%

Proper signatures on disbursement checks: To test disbursements for purchases you wish to be 95% confident of your results. Given the nature of this test and the presence of compensating controls you have chosen a tolerable deviation rate of 3%. Based on past experience you expect a population deviation rate of 0.75%. Based on the tables in Chapter 8 of the text book, the sample size should be which of the following? 117 129 208 Sample size is too large to be cost-effective.

208

Proper signatures on disbursement checks: In spite of your excellent work calculating a sample size, your audit manager instructed you to take a sample of 200 disbursement checks to test. Your test identified two cases where the proper authorization signature was missing and the payment was still made. Using the tables in Chapter 8 of the text book, what is the computed upper deviation rate for this test at a 95% confidence level? 1.0% 2.7% 3.2% 3.9%

3.2%

This question is based on the following information: An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide 1-percent risk of assessing control risk too low for the assertion that not more than 7 percent of the sales invoices lacked approval. The auditor estimated from previous experience that about 2 ½ percent of the sales invoices lacked approval. A sample of 200 invoices was examined, and 7 of them were lacking approval. The auditor then determined the computed upper deviation rate to be 8 percent. The planned allowance for sampling risk was 5 ½ percent. 4 ½ percent. 3 ½ percent. 1 percent.

4 ½ percent.

Purchase authorizations for purchase orders: In spite of your excellent work calculating a sample size, your audit manager instructed you to take a sample of 120 purchase requisitions to test. Your test identified three cases where the proper authorization signature was missing and the order was still placed by the purchasing department. Using the tables in Chapter 8 of the text book, what is the computed upper deviation rate for this test at a 90% confidence level? 2.0% 4.2% 5.5%. Over 20%

5.5%

Purchase authorizations for purchase orders: To test purchase requisitions for proper authorizations for purchase orders you wish to be 90% confident of your results. Given the nature of this test and the presence of compensating controls you have chosen a tolerable deviation rate of 5%. Based on past experience you expect a population deviation rate of 1.25%. Based on the tables in Chapter 8 of the text book, the sample size should be which of the following? 77 105 124 Sample size is too large to be cost-effective

77

AnnaLisa, an auditor for N. M. Neal & Associates, is prevented by the management of Lileah Company from auditing controls over inventory. Lileah is a public company. Management explains that controls over inventory were recently implemented by a highly regarded public accounting firm that the company hired as a consultant and insists that it is a waste of time for AnnaLisa to evaluate these controls. Inventory is a material account, but procedures performed as part of the financial statement audit indicate the account is fairly stated. AnnaLisa found no material weaknesses in any other area of the client's internal control relating to financial reporting. What kind of report should AnnaLisa issue on the effectiveness of Lileah's internal control? An unqualified report. An adverse report. A disclaimer of opinion. An exculpatory opinion.

A disclaimer of opinion.

Which of the following best defines nonsampling risk? A mistake or failure of the auditor in the application of a statistical method or in the analysis of results. The risk of concluding that a control or balance is correct when it is in error. Selecting a sample that is not representative of the population being tested. Selecting a sample that is representative of the population being tested.

A mistake or failure of the auditor in the application of a statistical method or in the analysis of results.

When assessing the tolerable deviation rate, the auditor should consider that, while deviations from control procedures increase the risk of material misstatements, such deviations do not necessarily result in misstatements. This explains why A recorded disbursement that does not show evidence of required approval may nevertheless be a transaction that is properly authorized and recorded. Deviations would result in errors in the accounting records only if the deviations and the misstatements occurred on different transactions. Deviations from pertinent control procedures at a given rate ordinarily would be expected to result in misstatements at a higher rate. A recorded disbursement that is properly authorized may nevertheless be a transaction that contains a material misstatement.

A recorded disbursement that does not show evidence of required approval may nevertheless be a transaction that is properly authorized and recorded.

In auditing ICRF for a public company, Emily finds that the company has a significant subsidiary located in a foreign country. Emily's accounting firm has no offices in that country, and the entity has thus engaged another reputable firm to conduct the audit of internal control for that subsidiary. The other auditor's report indicates that there are no material weaknesses in the foreign subsidiary's ICFR. What should Emily do? Disclaim an opinion because she cannot rely on the opinion of another auditor in dealing with a significant subsidiary. Accept the other auditor's opinion and express an unqualified opinion, making no reference to the other auditor's report in her audit opinion. Accept the other auditor's opinion after evaluating the auditor's work, and make reference to the other auditor's report in her audit opinion. Qualify the opinion because she is unable to conduct the testing herself, and this constitutes a significant scope limitation.

Accept the other auditor's opinion after evaluating the auditor's work, and make reference to the other auditor's report in her audit opinion.

A primary advantage of using generalized audit software packages to audit the financial statements of an entity that uses an IT system is that the auditor may Consider increasing the use of substantive tests of transactions in place of analytical procedures. Substantiate the accuracy of data through self-checking digits and hash totals. Reduce the level of required tests of controls to a relatively small amount. Access information stored on computer files while having a limited understanding of the client's hardware and software features.

Access information stored on computer files while having a limited understanding of the client's hardware and software features.

Which of the following control activities is not usually performed in the accounts payable department? Matching the vendor's invoice with the related receiving report. Approving vouchers for payment by having an authorized employee sign the vouchers. Indicating the asset and expense accounts to be debited. Accounting for unused prenumbered purchase orders and receiving reports.

Accounting for unused prenumbered purchase orders and receiving reports.

An auditor's primary consideration regarding an entity's internal controls is whether they Prevent management override. Relate to the control environment. Reflect management's philosophy and operating style. Affect the financial statement assertions.

Affect the financial statement assertions.

Proper signatures on disbursement checks: Independent of the information above, assume that your tolerable deviation rate is 0%, you wish to be 90% confident in your results, and you found no errors in a sample of 200 purchase requisitions. Which of the following would be the proper conclusion to draw from this information? Sampling was not appropriate given the assumptions in this problem. Based on a sample size of 200 you should not rely on this internal control. You must examine all 20,642 disbursement checks without finding any deviations in order to rely on this internal control given these assumptions. All of the above are correct statements.

All of the above are correct statements.

An employee in the purchasing department routinely orders personal items in the name of the employer and has them delivered to his home address. The employing entity has routinely paid for all of these purchases without detecting that they were fraudulent. Which of the following internal control weaknesses could have contributed to the purchasing employee's ability to perpetrate this fraud? Not requiring authorizations for all purchases. Paying invoices without collecting appropriate supporting documentation. Lack of separation of duties. All of the above internal control weaknesses could have contributed to the fraud.

All of the above internal control weaknesses could have contributed to the fraud.

Internal control is a process designed to provide reasonable assurance regarding the achievement of which objective? Effectiveness and efficiency of operations. Reliability of financial reporting. Compliance with applicable laws and regulations. All of the above.

All of the above.

The auditor of a publicly held corporation has noted one material weakness present in the internal controls over financial reporting at year end. The most appropriate opinion to be expressed on the internal controls of the corporation is which of the following? An unqualified audit opinion. A qualified audit opinion. An adverse opinion. A disclaimer of opinion.

An adverse opinion.

In auditing a public company, Natalie, an auditor for N. M. Meal & Associates, identifies four deficiencies in ICRF. Three of the deficiencies are unlikely to result in financial misstatements that are material. One of the deficiencies is reasonably likely to result in misstatements that are not material but significant. What type of audit report should Natalie issue? An unqualified report. An adverse report. A disclaimer of opinion. An exculpatory opinion.

An unqualified report.

A review of cash disbursements after the client's year end most likely would reveal which of the following misstatements? An unrecorded sale completed just prior to year end. Duplicate recording of a purchase prior to year end. An overstatement of accounts payable at year end. An unrecorded payable that existed at year end.

An unrecorded payable that existed at year end.

In auditing the internal controls of a publicly held audit client the auditor discovers that monthly reconciliations of bank accounts are not being performed by the client. The auditor believes that this audit finding merits the attention of those charged with governance. Considering existing compensating controls of separation of duties, review of documentation prior to making disbursements, and proper authorizations convince the auditor that there is a remote possibility of a material misstatement occurring on the financial statements due to this omitted internal control. In this scenario not performing monthly bank reconciliations most likely would be considered a(n) Answer none of these. other control deficiency. significant deficiency in internal control. material weakness in internal control.

Answer none of these.

SOC 1, Type 2 reports by the service organization's auditor typically Provide reasonable assurance that their financial statements are free of material misstatements. Ensure that the entity will not have any misstatements in areas related to the service organization's activities. Ensure that the entity is billed correctly. Assess whether the service organization's controls are suitably designed and operating effectively.

Assess whether the service organization's controls are suitably designed and operating effectively.

After obtaining an understanding of an entity's internal control system, an auditor may set control risk at high for some assertions because he or she Believes the internal controls are unlikely to be effective. Determines that the pertinent internal control components are not well documented. Performs tests of controls to restrict detection risk to an acceptable level. Identifies internal controls that are likely to prevent material misstatements.

Believes the internal controls are unlikely to be effective.

On receiving the cutoff bank statement, the auditor should vouch Deposits in transit on the year-end bank reconciliation to deposits in the cash receipts journal. Checks dated before year-end listed as outstanding on the year-end bank reconciliation to the cut-off statement. Deposits listed on the cutoff statement to deposits in the cash receipts journal. Checks dated after year-end to outstanding checks listed on the year-end bank reconciliation and to the cutoff statement.

Checks dated before year-end listed as outstanding on the year-end bank reconciliation to the cut-off statement.

An auditor testing long-term investments would ordinarily use substantive analytical procedures to ascertain the reasonableness of the Existence of unrealized gains or losses in the portfolio. Completeness of recorded investments income. Classification between current and noncurrent portfolios. Valuation of marketable equity securities.

Completeness of recorded investments income.

If the number of days' sales in accounts receivable (365 days/receivables turnover) decreases significantly, which of the following assertions for accounts receivable most likely is violated? Existence or occurrence. Completeness. Rights and obligations. Classification.

Completeness.

Assessing control risk below high involves all of the following except Identifying specific controls to rely on. Concluding that controls are ineffective. Performing tests of controls. Analyzing the achieved level of control risk after performing tests of controls.

Concluding that controls are ineffective.

Which of the following audit procedures would provide the auditor with the greatest assurance regarding the adequacy of internal controls over cash on hand? Conducting a surprise count of cash on hand and reconciling it with the accounting records. Testing the year-end bank reconciliations. Performing a walk through of a purchase transaction. Inquiry of the client's management and staff members handling cash.

Conducting a surprise count of cash on hand and reconciling it with the accounting records.

Unrecorded accounts payable balances most likely would be discovered by which of the following? Noting a shortage of inventory during the test counts of inventory at year end. Footing individual accounts payable account balances and comparing the total with the accounts payable account. Confirming accounts payable accounts showing small and zero balances. Vouching a sample of accounts payable balances to the purchase orders.

Confirming accounts payable accounts showing small and zero balances.

To establish the existence and rights of a long-term investment in the common stock of a publicly traded company, an auditor ordinarily performs a security count or Relies on the client's internal controls if the auditor has reasonable assurance that the control activities are being applied as prescribed. Confirms the number of shares owned that are held by an independent custodian. Determines the market price per share at the balance sheet date from published quotations. Confirms the number of shares owned with the issuing company.

Confirms the number of shares owned that are held by an independent custodian.

Entity-level controls can have a pervasive effect on the entity's ability to meet the control criteria. Which of the following is not an entry-level control? Controls to monitor results of operations. Management's risk assessment process. Control to monitor the inventory taking process. The period-end financial reporting process.

Control to monitor the inventory taking process.

Which of the following controls would most likely be tested during an interim period? Controls over nonroutine transactions. Controls over the period-end financial reporting process. Controls that operate on a continuous basis. Controls over transactions that involve a high degree of subjectivity.

Controls that operate on a continuous basis.

A control deviation caused by an employee performing a control procedure that he or she is not authorized to perform is always considered a Deficiency in design. Deficiency in operation. Significant deficiency. Material weakness.

Deficiency in operation.

Refer to the Miles Company Bank Transfer Schedule on page 569 of the text. The tick mark (triangle) most likely indicates that the amount was traced to the Deposit in transit of the applicable bank reconciliation. December cash receipts journal. January cash receipts journal. Year-end bank confirmations.

Deposit in transit of the applicable bank reconciliation.

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 Develop test data that would cause some account balances to exceed the credit limit and determine if the system properly detects such situations. Develop a program to compare credit limits with account balances and print out the details of any account with a balance exceeding its credit limit. Request a printout of all account balances so that they can be manually checked against the credit limits. Request a printout of a sample of account balances so that they can be individually checked against the respective credit limits.

Develop a program to compare credit limits with account balances and print out the details of any account with a balance exceeding its credit limit.

In a properly designed accounts payable system, a voucher is prepared after the invoice, purchase order, requisition, and receiving report are verified. The next step in the system is Cancellation of the supporting documents. Entry of the check amount in the check register. Entering of the voucher into the voucher register. Approval of the voucher for payment.

Entering of the voucher into the voucher register.

Of the following, which best describes a test of internal controls that might be employed by an independent auditor? Examining purchase orders to verify proper authorization of purchase transactions. Vouching recorded sales transactions to test for overstatement. Recalculating bad debt expense and comparing it with the amount reported by the client. Observing a client's count of inventory at year end.

Examining purchase orders to verify proper authorization of purchase transactions.

Which of the following activities is the best example of the use of audit sampling? Performing a transaction walkthrough. Examining ten percent of the accounts receivable accounts to estimate the dollar amount of misstatement in all accounts receivable. Examining authorization signatures on all purchase orders prepared during the period under audit to determine whether a material weakness exists in this control. All of these are equally good examples of audit sampling.

Examining ten percent of the accounts receivable accounts to estimate the dollar amount of misstatement in all accounts receivable.

If accounts receivable turnover (credit sales/receivables) was 7.1 times in 2011 compared to only 5.6 times in 2012, it is possible that there were Unrecorded credit sales in 2012. Unrecorded cash receipts in 2011. More thorough credit investigations made by the company late in 2011. Fictitious sales in 2012.

Fictitious sales in 2012.

An auditor anticipates assessing control risk at a low level in an IT environment. Under these circumstances, on which of the following controls would the auditor initially focus? Data capture controls. Application controls. Output controls. General controls.

General controls.

An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor to Eliminate the risk of nonsampling errors. Reduce audit risk and materiality to a relatively low level. Measure the sufficiency of the evidential matter obtained. Minimize the failure to detect errors and fraud.

Measure the sufficiency of the evidential matter obtained.

An auditor should perform alternative procedures to substantiate the existence of accounts receivable when No reply to a positive confirmation request is received. No reply to a negative confirmation request is received. The collectability of the receivables is in doubt. Pledging of the receivables is probable.

No reply to a positive confirmation request is received.

The highest quality and most reliable audit evidence that segregation of duties is properly implemented is obtained by Inspection of documents prepared by a third party, but which contain the initials of those applying client controls. Observation by the auditor of the employees performing control activities. Inspection of a flowchart of duties performed and available personnel. Inquiries of employees who apply control activities.

Observation by the auditor of the employees performing control activities.

Refer to the Miles Company Bank Transfer Schedule on page 569 of the text. The tick mark (diamond) most likely indicates that the amount was traced to the December cash disbursements journal. Outstanding check list of the applicable bank reconciliation. January cash disbursements journal. Year-end bank confirmations.

Outstanding check list of the applicable bank reconciliation.

COSO named several primary objectives of internal control. Which of the following is NOT one of those objectives? Efficiency and effectiveness of operations. Prevention of fraud. Compliance with laws and regulations. Reliable financial reporting.

Prevention of fraud.

Of the following four documents, which document most likely would be used to initiate a purchase transaction in a large corporation? Voucher. Receiving report. Purchase requisition. Purchase order.

Purchase requisition.

Purchase cutoff procedures should be designed to test whether all inventory Purchased and received before the end of the year was paid for. Ordered before the end of the year was received. Purchased and received before the end of the year was recorded. Owned by the company is in the possession of the company at the end of the year.

Purchased and received before the end of the year was recorded.

Which of the following audit tools, documentation, and/or procedures are primarily used in testing internal controls? Vouching, retracing, and recalculation. Analytical procedures. Questionnaires, flowcharts, narrative descriptions, and organizational charts. Analyst's reports, recalculation, and external confirmation.

Questionnaires, flowcharts, narrative descriptions, and organizational charts.

Internal control is strengthened when the quantity of merchandise ordered is omitted from the copy of the purchase order sent to the Department that initiated the requisition. Receiving department. Purchasing agent. Accounts payable department.

Receiving department.

To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received is recorded. The population of documents for this test consists of all Vendor invoices. Purchase orders. Receiving reports. Canceled checks.

Receiving reports.

In a properly designed purchasing process, the same employee most likely would match vendors' invoices with receiving reports and also Post the detailed accounts payable records. Recompute the calculations on vendors' invoices. Reconcile the accounts payroll ledger. Cancel vendors' invoices after payment.

Recompute the calculations on vendors' invoices.

An auditor would most likely verify the interest earned on bond investments by Vouching the receipt and deposit of interest checks. Confirming the bond interest rate with the issuer of the bonds. Recomputing the interest earned on the basis of face amount, interest rate, and period held. Testing the controls over cash receipts.

Recomputing the interest earned on the basis of face amount, interest rate, and period held.

Which of the following is likely to be the most effective audit procedure for verifying dividends earned on investments in publicly traded equity securities? Trace deposits of dividend checks to the cash receipts book. Reconcile recorded earnings with the dividend earnings reported in the investment broker statement. Compare the amounts received with prior-year dividends received. Recompute selected extensions and footings of dividend schedules and compare totals to the general ledger.

Reconcile recorded earnings with the dividend earnings reported in the investment broker statement.

The independent auditor performs appropriate tests of internal controls for a privately held client and determines that the internal controls are weaker than expected. The auditor's appropriate response to this finding is to: Reduce detection risk by increasing substantive tests of balances. Revise the estimate of inherent risk to compensate for the weakness in internal controls. Issue a qualified or adverse opinion on the financial statements taken as a whole. Require management to improve the internal controls prior to completing the audit of the financial statements.

Reduce detection risk by increasing substantive tests of balances.

The auditor of a publicly held corporation has the primary responsibility for which of the following activities? Designing and implementing internal controls. Rendering an opinion on internal controls. Assuring compliance with internal controls. All of these.

Rendering an opinion on internal controls.

Which of the following audit techniques would most likely provide an auditor with the most assurance about the effectiveness of the operation of a control? Inquiry of client personnel. Reperformance of the control by the auditor. Observation of entity personnel. Walkthrough.

Reperformance of the control by the auditor.

Which of the following audit procedures is best for identifying unrecorded trade accounts payable? Examination of unusual relationships between monthly accounts payable balances and recorded cash payments. Reconciliation of vendors' statements to the file of receiving reports to identify items received just prior to the balance sheet date. Investigation of payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports. Review of cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.

Review of cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.

Payment for purchases is authorized for the proper amount: To test vouchers for proper authorizations you wish to be 95% confident of your results. Given the nature of this test and the lack of compensating controls you have chosen a tolerable deviation rate of 2%. Based on past experience you expect a population deviation rate of 0.50%. Based on the tables in Chapter 8 of the text book, the sample size should be which of the following? 194 236 265 Sample size is too large to be cost-effective

Sample size is too large to be cost-effective

Which of the following procedures is least likely to be performed before the balance sheet date? Test of internal control over cash. Confirmation of receivables. Search for unrecorded liabilities. Observation of inventory.

Search for unrecorded liabilities.

An auditor ordinarily sends a standard confirmation request to all banks with which the client has done business during the year under audit, regardless of the year-end balance. One purpose of this procedure is to Provide the data necessary to prepare a proof of cash. Request that a cutoff bank statement and related checks be sent to the auditor. Detect kiting activities that may otherwise not be discovered. Seek information about loans from the banks.

Seek information about loans from the banks.

Which of the following internal controls would be most likely to deter the lapping of collections from customers? Independent internal verification of dates of entry in the cash receipts journal with dates of daily cash summaries. Authorization of write-offs of uncollectible accounts by a supervisor independent of the credit approval function. Segregation of duties between receiving cash and posting the accounts receivable ledger. Supervisory comparison of the daily cash summary with the sum of the cash receipts journal entries.

Segregation of duties between receiving cash and posting the accounts receivable ledger.

If the financial reporting risks for a location are low and the entity has good entity-level controls, management may rely on which of the following for their assessment. Documentation and test controls over specific risks. Self-assessment processes in conjunction with entity-level controls. Documentation and test entity-level controls over the entire entity. Selective control test at that location.

Self-assessment processes in conjunction with entity-level controls.

A CPA performing the audit of a private entity must disclose which of the following internal control weaknesses to management and those charged with governance? Only material weaknesses in internal controls. Significant deficiencies and material weaknesses in internal controls. All weaknesses existing in the client's internal controls. None of the above. Weaknesses need only be reported to management.

Significant deficiencies and material weaknesses in internal controls

Significant deficiencies and material weaknesses must be communicated to an entity's audit committee because they represent Material fraud or illegal acts perpetrated by high-level management. Disclosures of information that significantly contradict the auditor's going concern assumption Significant deficiencies in the design or operation of internal control Potential manipulation or falsification of accounting records.

Significant deficiencies in the design or operation of internal control

Significant deficiencies are matters that come to an auditor's attention that should be communicated to an entity's audit committee because they represent Disclosures of information that significantly contradict the auditor's going concern assumption. Material fraud or illegal acts perpetrated by high-level management. Significant deficiencies in the design or operation of the internal control. Manipulation or falsification of accounting records or documents from which financial statements are prepared.

Significant deficiencies in the design or operation of the internal control.

The audit firm's valuation specialist would likely be brought in to assist in the audit of fair value measurements at an entity when the following is present: The entity is a new audit client. Significant uncertainty exists in key inputs to the entity's valuation models. The entity has a financial instrument with a Level 2 input. The entity owns a large and diverse portfolio of publicly traded stock.

Significant uncertainty exists in key inputs to the entity's valuation models.

An auditor is using statistical sampling in testing internal controls for a publicly held company. The auditor's computed upper deviation rate is 4.2% when the tolerable deviation rate was originally set at 4%. Which of the following is the best course of action for the auditor to take? Since the computed upper deviation rate and the tolerable deviation rate are close the auditor may enlarge the sample to obtain a better estimate of the true error rate in the population. Since the computed upper deviation rate and the tolerable deviation rate are close the auditor should revise the tolerable deviation rate to 4.3% so she/he can rely on the internal controls. Since the computed upper deviation rate is greater than the tolerable deviation rate the auditor may rely on the internal controls. Stop testing this internal control and issue an adverse opinion on the adequacy of the client's internal controls.

Since the computed upper deviation rate and the tolerable deviation rate are close the auditor may enlarge the sample to obtain a better estimate of the true error rate in the population.

The primary evidence regarding year-end bank balances is documented in the Standard bank confirmations. Outstanding check listing. Interbank transfer schedule. Bank deposit lead schedule.

Standard bank confirmations.

What impact do strong internal controls of an audit client have on the audit of a client's financial statements? They may replace the audit of certain material transactions and/or balances. Strong internal controls increase the amount of substantive testing required in the audit. They have no direct impact on the audit of transactions and balances . Strong internal controls may be relied upon to reduce substantive testing.

Strong internal controls may be relied upon to reduce substantive testing.

Regardless of the assessed level of control risk, an auditor would perform some Test of controls to determine the effectiveness of internal controls. Analytical procedures to verify the design of internal controls. Substantive procedures to restrict detection risk for significant transactions classes. Dual-purpose tests to evaluate both the risk of monetary misstatement and preliminary control risk.

Substantive procedures to restrict detection risk for significant transactions classes.

Part 4 of 4 (1 of 3 questions) The following general question does not directly relate to the previous scenarios. A decision to place reliance on a client's internal controls implies which of the following? No substantive testing of transactions and balances will be needed. Substantive testing of transactions and balances may be reduced. Substantive testing of transactions and balances is not affected by reliance on internal controls. Increased substantive testing of transactions and balances will be needed.

Substantive testing of transactions and balances may be reduced.

Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because A majority of recipients usually lack the willingness to respond objectively. Some recipients may report incorrect balances that require extensive follow-up. The auditor cannot infer that all nonrespondents have verified their account information. Negative confirmations do not produce evidence that is statistically quantifiable.

The auditor cannot infer that all nonrespondents have verified their account information.

Which of the following statements concerning control deficiencies is true? The auditor should communicate to management, in writing, all control deficiencies in internal control identified during the audit. All significant deficiencies are material weaknesses. All control deficiencies are significant deficiencies. An auditor must immediately report material weaknesses and significant deficiencies discovered during an audit to the PCAOB.

The auditor should communicate to management, in writing, all control deficiencies in internal control identified during the audit.

The Sarbanes-Oxley Act of 2002 requires management to include a report on the effectiveness of ICFR in the entity's annual report. It also requires auditors to report on the effectiveness of ICFR. Which of the following statements concerning these requirements is false? The auditor should evaluate whether internal controls are effective in accurately and fairly reflecting the firm's transactions. Management's report should state its responsibility for establishing and maintaining an adequate internal control system. Management should identify material weaknesses in its report. The auditor should provide recommendations for improving internal control in the audit report.

The auditor should provide recommendations for improving internal control in the audit report.

Which of the following controls is most likely to help ensure that all credit revenue transactions of an entity are recorded? 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. The accounting department supervisor independently reconciles the accounts receivable subsidiary ledger to the accounts receivable control account each month. The accounting department supervisor controls the mailing of monthly statements to customers and investigates any differences reported by customers. The billing department supervisor matches prenumbered shipping documents with entries in the sales journal

The billing department supervisor matches prenumbered shipping documents with entries in the sales journal

Part 4 of 4 (1 of 3 questions) The following general question does not directly relate to the previous scenarios. When the population being audited is already large, what effect does doubling the population size have on the size of the sample? Assume that the tolerable error, expected error rate, and confidence level remain constant. The change in the population size will have little or no effect on the sample size. Sample size will decrease when the population size doubles. Sample size doubles when the population size doubles. Sample size will increase by more than double when the population size doubles.

The change in the population size will have little or no effect on the sample size.

Purchase authorizations for purchase orders: Independent of the information above, assume that your tolerable deviation rate is 4%, you wish to be 90% confident in your results, and you found no errors in a sample of 100 purchase requisitions. Which of the following would be the proper conclusion to draw from this information? You may not rely on this internal control. The computed upper deviation rate is 2.3%. You must continue sampling until you find at least one deviation in order to draw an appropriate conclusion. None of the above are correct statements.

The computed upper deviation rate is 2.3%.

Samples to test internal controls are intended to provide a basis for an auditor to conclude whether The controls are operating effectively. The financial statements are materially misstated. The risk of incorrect acceptance is too high. Materiality for planning purposes is at a sufficiently low level.

The controls are operating effectively.

Which of the following statements about internal control is correct? A properly maintained internal control system reasonably ensures that collusion among employees cannot occur. The establishment and maintenance of internal control is an important responsibility of the internal auditor. An exceptionally strong internal control system is enough for the auditor to eliminate substantive procedures on a significant account balance. The cost-benefit relationship is a primary criterion that should be considered in designing an internal control system.

The cost-benefit relationship is a primary criterion that should be considered in designing an internal control system.

As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses control risk lower than appropriate. The most likely explanation for this situation is that The deviation rates of both the auditor's sample and the population exceed the tolerable deviation rate. The deviation rates of both the auditor's sample and the population are less than the tolerable deviation rate. The deviation rate in the auditor's sample is less than the tolerable deviation rate, but the deviation rate in the population exceeds the tolerable deviation rate. The deviation rate in the auditor's sample exceeds the tolerable deviation rate, but the deviation rate in the population is less than the tolerable deviation rate.

The deviation rate in the auditor's sample is less than the tolerable deviation rate, but the deviation rate in the population exceeds the tolerable deviation rate.

Which of the following is not a factor that might affect the likelihood that a control deficiency could result in a misstatement in an account balance? The susceptibility of the related assets or liability to loss or fraud. The interaction or relationship of the control with other controls. The financial statement amounts exposed to the deficiency. The nature of the financial statement accounts, disclosures, and assertions involved.

The financial statement amounts exposed to the deficiency.

Monitoring is a major component of the COSO Internal Control-Integrated Framework. Which of the following is not correct in how the company can implement the monitoring component? Monitoring can be an ongoing process. Monitoring can be conducted as a separate evaluation. Monitoring and other audit work conducted by internal audit staff can reduce external audit costs. The independent auditor can serve as part of the entity's control environment and continuous monitoring.

The independent auditor can serve as part of the entity's control environment and continuous monitoring.

What is an auditor's evaluation of a statistical sample for attributes when a test of 50 documents results in three deviations if the tolerable deviation rate is 7 percent, the expected population deviation rate is 5 percent, and the allowance for sampling risk is 2 percent? The planned assessed level of control risk should be modified because the tolerable deviation rate plus the allowance for sampling risk exceeds the expected population deviation rate. The sample results should be accepted as support for the planned assessed level of control risk because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable deviation rate. The sample results should be accepted as support for the planned assessed level of control risk because the tolerable deviation rate less the allowance for sampling risk equals the expected population deviation rate. The planned assessed level of control risk should be modified because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable deviation rate.

The planned assessed level of control risk should be modified because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable deviation rate.

Which of the following controls would most effectively ensure that the proper custody of assets in the investing process is maintained? Direct access to securities in the safe-deposit box is limited to one corporate officer. Personnel who post investment transactions to the general ledger are not permitted to update the investment subsidiary ledger. Purchase and sale of investments are executed on the specific authorization of the board of directors. The recorded balances in the investment subsidiary leger are periodically compared with the contents of the safe-deposit box by independent personnel.

The recorded balances in the investment subsidiary leger are periodically compared with the contents of the safe-deposit box by independent personnel.

Which of the following most likely represents a weakness in internal control of an IT system? The systems analyst review output and controls the distribution of output from the IT department. The accounts payable clerk prepares data for computer processing and enters the data into the computer. The systems programmer designs the operating and control functions of programs and participates in testing operating systems. The control clerk establishes control over data received by the IT department and reconciles control totals after processing.

The systems analyst review output and controls the distribution of output from the IT department.

When goods are received, the receiving clerk should match the goods with The purchase order and the requisition form. The vendor invoice and the purchase order. The vendor shipping document and the purchase order. The vendor invoice and the vendor shipping document.

The vendor shipping document and the purchase order.

When auditors report on the effectiveness of internal control "as of" a specific date and obtain evidence about the operating effectiveness of controls at an interim date, which of the following items would be the least helpful in evaluating the additional evidence to gather for the remaining period? Any significant changes that occurred in internal control subsequent to the interim date. The length of the remaining period. The specific controls tested prior to the "as of" date and the results of those tests. The walkthrough of the control system conducted at interim.

The walkthrough of the control system conducted at interim.

Which of the following statements is correct concerning statistical sampling in tests of controls? Deviations from controls at a given rate usually result in misstatements at a higher rate. As the population size doubles, the sample size should also double. The qualitative aspects of deviations are not considered by the auditor. There is an inverse relationship between the sample size and the tolerable deviation rate.

There is an inverse relationship between the sample size and the tolerable deviation rate.

When auditing the financial statements of a publicly held client the auditor discovers a material misstatement in accounts receivable. What impact is this misstatement most likely to have on the auditor's opinion on the internal controls of the audit client? This misstatement likely will result in the auditor issuing a qualified opinion on the internal controls of the client. This misstatement likely will result in a disclaimer of opinion on the internal controls of the client. This misstatement likely will result in an adverse opinion on the internal controls of the client. This misstatement will have no impact on the auditor's opinion on the internal controls since the discovered misstatement was not related to the audit of internal controls.

This misstatement likely will result in an adverse opinion on the internal controls of the client.

This question is based on the following information: An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide 1-percent risk of assessing control risk too low for the assertion that not more than 7 percent of the sales invoices lacked approval. The auditor estimated from previous experience that about 2 ½ percent of the sales invoices lacked approval. A sample of 200 invoices was examined, and 7 of them were lacking approval. The auditor then determined the computed upper deviation rate to be 8 percent. In the evaluation of this sample, the auditor decided to increase the level of the preliminary assessment of control risk because the Tolerable deviation rate (7 percent) was less than the computed upper deviation rate (8 percent). Expected population deviation rate (7 percent) was more than the percentage of errors in the sample (3 ½ percent). Computed upper deviation rate (8 percent) was more than the percentage of errors in the sample (3 ½ percent). Expected population deviation rate (2 ½ percent) was less than the tolerable deviation rate (7 percent).

Tolerable deviation rate (7 percent) was less than the computed upper deviation rate (8 percent).

A walkthrough is one procedure used by an auditor as part of the internal control audit. A walkthrough requires an auditor to Tour the organization's facilities and locations before beginning any audit work. Trace a transaction from every class of transactions from origination through the company's information system. Trace a transaction from each major class of transactions from origination through the company's information systems. Trace a transaction from each major class of transactions from origination through the company's information system until it is reflected in the company's financial reports.

Trace a transaction from each major class of transactions from origination through the company's information system until it is reflected in the company's financial reports.

For effective internal control purposes, which of the following individuals should be responsible for mailing signed checks? Receptionist. Treasurer. Accounts payable clerk. Payroll clerk.

Treasurer.

For effective internal control purposes an individual performing which of the following functions should be assigned responsibility for mailing signed checks to suppliers of inventory? Treasury. Payroll. Purchasing. Accounts payable.

Treasury.

An auditor's flowchart of a client's accounting system is a diagrammatic representation that depicts the auditor's Program for tests of controls . Understanding of the system. Understanding of the types of fraud that are probable, giving the present system. Documentation of the study and evaluation of the system.

Understanding of the system.

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? Understating the sales journal. Overstating the accounts receivable control account. Overstating the accounts receivable subsidiary ledger. Understating the cash receipts journal.

Understating the sales journal.

Which of the following is most likely to be detected by an auditor's review of a client's sales cutoff? Unrecorded sales for the year. Lapping of year-end accounts receivable. Excessive sales discounts. Unauthorized goods returned for credit.

Unrecorded sales for the year.

In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivables to support management's financial statement assertion of Existence. Valuation and allocation. Completeness. Rights and obligations.

Valuation and allocation.

When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely would be Vendors with whom the entity has previously done business. Amounts recorded in the accounts payable subsidiary ledger. Payees of checks drawn in the month after year-end. Invoices filed in the entity's open invoice file.

Vendors with whom the entity has previously done business.

For the control activities to be effective, employees maintaining the accounts receivable subsidiary ledger should not also approve Employee overtime wages Credit granted to customers Write-offs of customer accounts Cash disbursements

Write-offs of customer accounts

Proper signatures on disbursement checks: Without regard to the above information, assume that your tolerable deviation rate is 2%, you wish to be 90% confident in your results, and you found four errors in a sample of 200 purchase requisitions. Which of the following would be the proper conclusion to draw from this information? You may rely on this internal control. You must increase your sample size. You may not place reliance on this internal control. There is insufficient information to draw a conclusion.

You may not place reliance on this internal control.

Payment for purchases is authorized for the proper amount: Without regard to the above information, assume that you properly calculated a sample size of 150 vouchers. You wish to be 95% confident in your results and you found no errors in the sample of 150 vouchers. Which of the following would be the proper conclusion to draw from this information? You may rely on this internal control. Increase your sample size. Do not rely on this internal control. There is insufficient information to draw a conclusion.

You may rely on this internal control.

Purchase authorizations for purchase orders: Without regard to the above information, assume that your tolerable deviation rate is 4%, you wish to be 90% confident in your results, and you found one error in a sample of 100 purchase requisitions. Which of the following would be the proper conclusion to draw from this information? You may rely on this internal control. Increase your sample size. Do not rely on this internal control. There is insufficient information to draw a conclusion.

You may rely on this internal control.

Payment for purchases is authorized for the proper amount: Independent of the information above, assume that your tolerable deviation rate is 2%, you wish to be 95% confident in your results, and you found no errors in a sample of 100 vouchers. Which of the following would be the proper conclusion to draw from this information? Since the tolerable rate is 2% and you did not find any errors you may rely on this internal control. Your sample size was too small to achieve the desired results so you should increase your sample size to draw an appropriate conclusion. Since the computed upper limit is 3.0% you may rely on this internal control. Your sample size was too large to achieve the desired results.

Your sample size was too small to achieve the desired results so you should increase your sample size to draw an appropriate conclusion.

In attribute sampling an increase in the desired level of confidence, holding all other factors constant, would result in an unpredictable change in sample size. no change to the sample size. a larger sample size. a smaller sample size.

a larger sample size.

A significant deficiency in internal controls is best described as a material weakness in the internal controls. a substantial weakness in internal controls that is less than material. none of these. an inconsequential weakness in the internal controls.

a substantial weakness in internal controls that is less than material.

The use of judgment sampling in an audit of the financial statements is never appropriate. allows the auditor to better use known information about the population being tested. is not appropriate when statistical methods are available. always produces superior results at a lower cost.

allows the auditor to better use known information about the population being tested.

Negative confirmation letters used by the auditor are most appropriately used when auditing one or a few material accounts. are referred to as negative because they require the recipient to respond directly to the auditor whether the information in the confirmation letter is correct or incorrect. are not accurately described by any of these answers. provide stronger audit evidence than all other types of confirmation letters.

are not accurately described by any of these answers.

Which of the following combinations results in the greatest decrease in sample size in an attribute sample for a test of controls?

c

In audit sampling, the risk of incorrect rejection is best described as concluding that an internal control that is properly designed and operating effectively cannot be relied upon. reliance on an internal control when a material error exists. the sample not being representative of the population from which it was drawn. a mistake or failure of the auditor in the application of the sampling plan or in the analysis of sample results.

concluding that an internal control that is properly designed and operating effectively cannot be relied upon.

The design, operation, and monitoring of internal controls within an entity is primarily the responsibility of the internal auditors. audit committee of the board of directors. independent auditor. entity's management.

entity's management.

The auditor noted a significant increase in sales from year 1 to year 2 while there was no corresponding increase in accounts receivable. Based on this discovery it is most likely that there were unrecorded cash receipts from customers in year 2. fictitious sales recorded in year 2. uncollected credit sales in year 2. more liberal credit terms offered to the client's customers in year 2.

fictitious sales recorded in year 2.

ABC Corporation's accounts receivable clerk receives payments from customers and records the payments in the accounts receivable subsidiary ledger. This scenario protects the accounts receivable clerk in case an error is made. may result in a kiting scheme. provides good internal controls over accounts receivable. increases the risk of lapping by the accounts receivable clerk.

increases the risk of lapping by the accounts receivable clerk.

Monitoring within a client's internal control system includes establishing a "tone at the top" which encourages high ethical conduct and performance. informing the appropriate individuals of ethical standards of behavior, risks, and non-compliance with internal controls. internal auditor review of compliance with internal controls. evaluating the risks within an organization and developing policies and procedures to reduce those risks.

internal auditor review of compliance with internal controls.

The practice of using written confirmations to test the reported balance in an audit client's accounts receivable account is correctly described by all of these statements. is not required when accounts receivable are immaterial. is a required audit procedure in most audits. may be replaced with other reliable substantive tests if the auditor has reason to believe that confirmations will be ineffective.

is correctly described by all of these statements.

A properly organized and effective audit committee of a publicly held company is described by all of these. is composed of outside members of the board of directors. engages an independent auditor to perform financial audits. regularly communicates with the internal audit department.

is described by all of these.

Confirmation of at least a sample of recorded accounts payable balances during an independent audit of the financial statements is the most effective way to test accounts payable for understatement. primarily a test for completeness of the accounts payable account. not a required audit procedure but may be used at the auditor's discretion. a required audit procedure on all audits unless the auditor can properly justify the departure.

not a required audit procedure but may be used at the auditor's discretion.

An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor to reduce audit risk and materiality to a relatively low level. eliminate the risk of nonsampling errors. objectively measure the sufficiency of the evidential matter obtained. minimize the failure to detect errors and fraud.

objectively measure the sufficiency of the evidential matter obtained.

Internal controls over financial reporting are designed to insure efficiency and effectiveness of operations. prevent or detect and correct potential material misstatements on the financial statements. insure that management's operational policies and procedures are followed. prevent or detect and correct all potential misstatements on the financial statements.

prevent or detect and correct potential material misstatements on the financial statements.

In an audit of a non-public client, when the auditor observes a large number of deviations early in the test of an internal control the best option for the auditor is to stop the test as soon as it is clear that the results of the test will not support the planned level of control risk. revise the tolerable deviation rate upward to achieve a better match with the observed deviation rate in the sample. complete the test of internal controls by examining every item in the sample. stop the test and resign from the audit engagement.

stop the test as soon as it is clear that the results of the test will not support the planned level of control risk.

Substantive audit procedures are those procedures which provide substantial evidence to the auditor. relate to the planning of the audit engagement. test the transactions and balances reported by the client. test the substantial internal controls of the entity.

test the transactions and balances reported by the client.

Samples designed to test internal controls are intended to provide a basis for an auditor to conclude whether the risk of incorrect acceptance is too low. the controls are operating effectively. the financial statements are materially misstated. materiality for planning purposes is at a sufficiently low level.

the controls are operating effectively.

The concept of reasonable assurance as it applies to the design and implementation of internal controls is that the public requires the auditor to act as a reasonable person when providing assurance. the cost of the control should not exceed the benefit derived. auditors will have limited liability for their actions. management may override virtually all internal controls.

the cost of the control should not exceed the benefit derived.

In evaluating the results of an attribute sample, the auditor can conclude that there are no material weaknesses in internal controls only when the expected error is equal to or less than the tolerable error. no internal control deviations were found in the sample. the confidence level is greater than or equal to 90%. the tolerable error is equal to or greater than the computed upper deviation rate.

the tolerable error is equal to or greater than the computed upper deviation rate.

To enhance the efficiency and increase the effectiveness of their audits, CPAs typically organize their audits of financial statements to complete testing of internal controls before beginning substantive tests of transactions and balances. to match the business processes or cycles as they are defined by the client's operations. according to the preferences of the audit client. by account in the order that the accounts appear on the client's trial balance.

to match the business processes or cycles as they are defined by the client's operations.

Part 4 of 4 (1 of 3 questions) The following general question does not directly relate to the previous scenarios. If an auditor is unable to properly examine one sample item because it is missing, mutilated, or otherwise unavailable, the auditor should replace the missing item in the sample with another item from the population. ignore the missing item and base the sample results on the smaller sample size. not place reliance on the internal control being tested due to lack of evidence. treat the missing, mutilated, or unavailable item as an internal control deviation for purposes of evaluating the sample results.

treat the missing, mutilated, or unavailable item as an internal control deviation for purposes of evaluating the sample results.