Audit 3.1

A company sells a particular product only in the last month of its fiscal year. The company uses commission agents for such sales and pays them 6% of their net sales 30 days after the sales are made. The agents' sales were $10,000,000. Experience indicates that 10% of the sales are usually not collected and 2% are returned in the first month of the new year. The auditor would expect the year-end balance in the accrued commissions payable account to be $600,000 $540,000 $588,000 $528,000

$588,000

3 conditions of contingent liability

1. potential future pmt to an outsie party or the impairment of an asset that resulted from an existing condition 2. uncertainty about the amoutn of the future pmt or impairment 3. outcome will be resolved by some future event or events.

Which of the following cash transfers results in a misstatement of cash at December 31, Year 1? Bank Transfer Schedule Disbursement Receipt Recordedin Books Paid byBank Recordedin Books Receivedby Bank Bank Transfer Schedule Disbursement Recordedin Books 1/4/Yr 2 Receipt Paid byBank 1/5/Yr 2 Recordedin Books 12/31/Yr 1 Receivedby Bank 1/4/Yr 2 Bank Transfer Schedule Disbursement Recordedin Books 12/31/Yr 1 Receipt Paid byBank 1/5/Yr 2 Recordedin Books 12/31/Yr 1 Receivedby Bank 1/4/Yr 2 Bank Transfer Schedule Disbursement Recordedin Books 1/4/Yr 2 Receipt Paid byBank 1/11/Yr 2 Recordedin Books 1/4/Yr 2 Receivedby Bank 1/4/Yr 2 Bank Transfer Schedule Disbursement Recordedin Books 12/31/Yr 1 Receipt Paid byBank 1/4/Yr 2 Recordedin Books 12/31/Yr 1 Receivedby Bank 12/31/Yr 1

1/4/yr2 1/5/yr2 12/31yr1 1/4yr2

How would increases in tolerable misstatement and assessed level of control risk affect the sample size in substantive tests of details? Increase in Tolerable Misstatement Increase in Assessed Level of Control Risk 1 Increase sample size Increase sample size 2 Increase sample size Decrease sample size 3 Decrease sample size Increase sample size 4 Decrease sample size Decrease sample size

3 Decrease sample size Increase sample size

Which of the following internal controls most likely would reduce the risk of diversion of customer receipts by an entity's employees? Prenumbered remittance advices. Daily deposit of cash receipts. A bank lockbox system. Monthly bank reconciliations.

A bank lockbox system

Which of the following best illustrates the concept of sampling risk? A randomly chosen sample may not be representative of the population as a whole for the characteristic of interest. The documents related to the chosen sample may not be available to the auditor for inspection. An auditor may fail to recognize errors in the documents from the sample. An auditor may select audit procedures that are not appropriate to achieve the specific objective.

A randomly chosen sample may not be representative of the population as a whole for the characteristic of interest.

If the objective of a test of details is to detect overstatements of sales, the auditor should compare transactions in the Cash receipts journal with the sales journal. Sales journal with the cash receipts journal. Source documents with the accounting records. Accounting records with the source documents.

Accounting records with the source documents.

Which of the following departments should not come into contact with the remittance listing to uphold an effective segregation of duties in a cash sale environment? Mail Room. General Ledger. Cash Receipts. Accounts Receivable.

Accounts Receivable

An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning relevant assertions about Rights and obligations. Accuracy, valuation, and allocation. Existence. Classification.

Accuracy, valuation and allocation.

A common audit procedure in the audit of payroll transactions involves tracing selected items from the payroll journal to employee time cards that have been approved by supervisory personnel. This procedure is designed to provide evidence in support of the audit proposition that: All employees worked the number of hours for which their pay was computed. Only proper employees worked and their pay was correctly computed. Jobs on which employees worked were charged with the appropriate labor cost. Internal controls over payroll disbursements are operating effectively.

All employees worked the number of hours for which their pay was computed.

The tests, in order, from the lowest to highest in terms of their cost are: Analytical procedures Risk assessment procedures & internal control Tests of controls Substantive tests of transactions Tests of details of balances

Analytical procedures Risk assessment procedures & internal control Tests of controls Substantive tests of transactions Tests of details of balances

Which of the following most likely would give the most assurance concerning the valuation assertion about accounts receivable? Assessing the allowance for uncollectible accounts for reasonableness. Comparing receivable turnover ratios with industry statistics for reasonableness. Vouching amounts in the subsidiary ledger to details on shipping documents. Inquiring about receivables pledged under loan agreements.

Assessing the allowance for uncollectable accounts for reasonableness.

Which of the following statements is correct? Auditors are required to obtain bank confirmations under international auditing standards. Auditors must obtain bank confirmations for audits of non-public entities. Auditing standards do not address specific requirements regarding bank confirmations. Auditing standards do not require bank confirmations.

Auditing standards do not require bank confirmations.

The purpose of segregating the duties of hiring personnel and distributing payroll checks is to segregate the Human resources function from the controllership function. Administrative controls from the internal accounting controls. Operational responsibility from the record-keeping responsibility. Authorization of transactions from the custody of related assets.

Authorization of transactions from the custody of related assets.

An auditor most likely would assess the risks of material misstatement as unacceptable if the payroll department supervisor is responsible for Hiring all subordinate payroll department employees. Examining authorization forms for new employees. Authorizing payroll rate changes for all employees. Comparing payroll registers with original batch transmittal data.

Authorizing payroll rate changes for all employees.

Which of the following human resources department procedures reduces the risk of payroll fraud and represents an appropriate responsibility for the department? Collection and retention of unclaimed paychecks. Authorizing the addition or deletion of employees from the payroll. Authorizing overtime hours. Distributing paychecks.

Authorizing the addition or deletion of employees from the payroll.

Subsequent events for reporting purposes are defined as events that occur subsequent to the: Date of the auditor's report. Balance sheet date. Date of the auditor's report and concern contingencies that are not reflected in the financial statements. Balance sheet date but before the date of the auditor's report.

Balance sheet date but before the date of the auditor's report.

The best evidence regarding year-end bank balances is documented in the Interbank transfer schedule. Bank reconciliations. Bank deposit lead schedule. Cutoff bank statement.

Bank reconciliations.

Which of the following sample planning factors will influence the sample size for a test of details of balances for a specific account? i. Expected Amount of Misstatements ii. Measure of Tolerable Misstatement

Both Expected amount of misstatements and Measure of tolerable misstatement.

An auditor most likely would limit substantive audit tests of sales transactions when the risks of material misstatement are assessed as low for the existence and occurrence assertions concerning sales transactions and the auditor has already gathered evidence supporting Cash receipts and accounts receivable. Shipping and receiving activities. Opening and closing inventory balances. Cutoffs of sales and purchases.

Cash receipts and accounts receivable.

Which of the following is likely to be detected as part of the audit of the bank reconciliation? Cash received by the client after year end, but included in cash receipts in the current year Duplicate payment of a vendor invoice An embezzlement of cash by intercepting cash receipts from customers before they are recorded Failure to bill a customer

Cash received by the client after year end, but included in cash receipts in the current year

AO for final phase

Complete the audit and issue an audit report

An auditor traces the daily remittance list to the last validated deposit ticket for the period. Which of the following assertions is being tested? Completeness. Accuracy, valuation, and allocation. Rights and obligations. Existence.

Completeness

The auditor should control and verify all liquid assets simultaneously to prevent: Unauthorized disbursements Embezzlement Unrecorded disbursements Conversion of assets to conceal a shortage

Conversion of assets to conceal a shortage

The primary purpose of sending a standard confirmation request to financial institutions with which the client has done business during the year is to Detect kiting activities that may otherwise not be discovered. Provide the data necessary to prepare a proof of cash. Request information about contingent liabilities and secured transactions. Corroborate information regarding deposit and loan balances.

Corroborate information regarding deposit and loan balances.

Vouching selected items from the payroll journal to employee time cards that have been approved by supervisory personnel provides evidence that Internal controls relevant to assertions about payroll disbursements were operating effectively. Payroll checks were signed by an appropriate officer independent of the payroll preparation process. Employees worked the number of hours for which their pay was computed. Only bona fide employees worked and their pay was properly computed.

D) employees worked the number of hours for which their pay was computed.

An example of an event occurring in the period of the auditor's field work subsequent to the end of the year being audited that normally will not require disclosure in the financial statements or auditor's report is: Settlement of a large liability for considerably less than the amount recorded. Issuance of a widely advertised capital stock issue with restrictive covenants. Decreased sales volume resulting from a general business recession. Serious damage to the company's plant from a widespread flood.

Decreased sales volume resulting from a general business recession.

Tests of which balance-related audit objective are normally performed first in an audit of the sales and collection? Accuracy Detail tie-in Completeness Rights

Detail tie-in

Effective control over the cash payroll function would mandate which of the following? A separate checking account for payroll should be maintained. Each employee should be asked to sign a receipt. Unclaimed pay envelopes should be retained by the paymaster. The payroll clerk should fill the envelopes with cash and a computation of the net wages.

Each employee should be asked to sign a receipt.

An auditor found that employee time records in one department are not properly approved by the supervisor. Which of the following could result? The wrong hourly rate could be used to calculate gross pay. Employees might be paid for hours they did not work. Duplicate paychecks might be issued. Payroll checks might not be distributed to the appropriate employees.

Employees might be paid for hours they did not work.

Attorney

Evaluate litigation Auditor send letter to atty on client letterhead signed by client Atty - description/update on progress, planned action, likelihood of unfavorable outcome, estimate of potential loss, identify unlisted claimes IF atty refuses, audiotr must modify report to reflect lack of available evidence - cope limitation, qualified or disclaimer of opinion.

Most substantive audit procedures performed on cash are directed toward which assertion? Accuracy, valuation, and allocation. Existence. Accuracy. Completeness.

Exisstence

Which of the following departments most likely would approve changes in pay rates and deductions from employee salaries? Payroll. Human resources. Controller. CFO.

Human Resources

An auditor reviews the reconciliation of payroll tax forms that a client is responsible for filing to: Determine whether internal control activities are operating effectively. Verify that payroll taxes are deducted from employees' gross pay. Uncover fictitious employees who are receiving payroll checks. Identify potential liabilities for unpaid payroll taxes.

Identify potential liabilities for unpaid payroll taxes.

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: Incorrect rejection. Assessing control risk too high. Incorrect acceptance. Assessing control risk too low.

Incorrect rejection.

If all other factors specified in a sampling plan remain constant, changing the tolerable exception rate (TER) from 9% to 6% will cause the required sample size to: Remain the same Decrease Become indeterminate Increase

Increase

What if the auditor cannot perform or rely on extensive tests of controls? How would this affect their level of substantive tests of transactions and/or tests of details of balances?

Increase STOT and TDB

How do we reduce sampling risk?

Increase evidence

How do we reduce our TER?

Increase evidence.

How do we reduce our ARIA?

Increase sample size

The risk of underreliance is the risk that the sample selected to test controls Contains proportionately fewer deviations from prescribed internal controls than exist in the balance or class as a whole. Does not support the tolerable misstatement for some or all financial statement assertions. Indicates that the controls are less effective than they actually are. Contains misstatements that could be material to the financial statements when aggregated with misstatements in other account balances or transactions classes.

Indicates that the controls are less effective than they actually are.

In confirming a client's accounts receivable in prior years, an auditor discovered many differences between recorded account balances and confirmation replies. These differences were resolved and were not misstatements. In defining the sampling unit for the current year's audit, the auditor most likely would choose Customers with credit balances. Small account balances. Individual invoices. Individual overdue balances.

Individual invoices

In addition to evaluating the frequency of deviations in the tests of controls, an auditor should also consider certain qualitative aspects of the deviations. The auditor most likely would give additional consideration to the implications of a deviation if it was: The only deviation discovered in the sample. Identical to a deviation discovered during the prior year's audit. Initially concealed by a forged document. Caused by an employee's misunderstanding of instructions.

Initially concealed by a forged document.

Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests? Intensify the study of internal control concerning the revenue cycle. Increase the assessed level of detection risk for the existence assertion. Inspect the shipping records documenting the merchandise sold to the customers. Review the cash receipts journal for the month prior to year end.

Inspect the shipping records documenting the merchandise sold to the customers.

TER is ___ related to sample size.

Inversely

In general, if the auditor can perform and rely on extensive tests of controls (TOC), would they perform more or less substantive tests of transactions (STOT)?

Less

Which of the following is an operating control over the staffing function? Making background checks on all new hires. Encouraging new hires to participate in professional organizations. Requiring personnel to participate in firm-sponsored external activities. Maintaining records of the department's accomplishments.

Making background checks on all new employees.

An auditor is required to confirm accounts receivable if the accounts receivable balances are Subject to valuation estimates. Smaller than expected. Older than the prior year. Material to the financial statements.

Material to the financial statements.

The client's bookkeeper perpetrated a theft by preparing erroneous W-2 forms. The bookkeeper's FICA withheld was overstated by $2,000 and the FICA withheld from all other employees was understated by the same amount. Which of the following is an audit procedure that would detect such a fraud? Utilizing Form W-4 and withholding charts to determine whether deductions authorized per pay period agree with amounts deducted per pay period. Multiplication of the applicable FICA rate by each individual's gross annual taxable earnings. Footing and crossfooting of the payroll register followed by tracing postings to the general ledger. Vouching canceled checks to the appropriate federal tax form.

Multiplication of the applicable FICA rate by each individual's gross annual taxable earnings.

Does an exception in a test of controls (TOC) indicate a FS misstatement? Why?

No, only indicative of a likely misstatement. Control can fail but balances can still be correct.

In determining the effectiveness of an entity's policies and procedures relating to the occurrence assertion for payroll transactions, an auditor most likely would inquire about and Observe the segregation of duties concerning human resources responsibilities and payroll disbursement. Verify the preparation of the monthly payroll account bank reconciliation. Inspect evidence of accounting for prenumbered payroll checks. Recompute the payroll deductions for employee fringe benefits.

Observe the separation of duties concerning personnel responsibilities and payroll disbursement.

An auditor selects a sample of recorded cash receipts and vouches them to accounts receivable and customer orders. This procedure is relevant to which assertion? Existence. Occurrence. Cutoff. Completeness.

Occurrence

An auditor is testing the valuation and allocation assertion about cash. For this purpose, the auditor should Determine whether the ending balance reflects all transactions. Compare general ledger balances with the financial statement balances. Count all cash and negotiable securities. Ordinarily assign a lower inherent risk to U.S. currency than foreign currency.

Ordinarily assign a lower inherent risk to U.S. currency than foreign currency.

An auditor most likely increases substantive tests of payroll when Employees complain to management about too much overtime. Payroll expense is substantially higher than in the prior year. Payroll is extensively audited by the state government. Overpayments are discovered in performing tests of details.

Overpayments are discovered in performing tests of details.

Which of the following situations represents an internal control weakness in the payroll department? The timekeeping function is independent of the payroll department. Payroll department personnel are rotated in their duties. Paychecks are distributed by the employees' immediate supervisors. Payroll records are reconciled with quarterly tax reports.

Paychecks are distributed by the employees' immediate supervisors.

In a payroll computer system, data from what file is matched periodically with wage rate and other information to calculate payroll? Production schedule. Production order master file. Personnel master file. Payroll master file.

Payroll Master File

Which of the following procedures would an auditor most likely perform to identify unusual sales transactions? Examining duplicate sales invoices for credit approval by the credit manager. Tracing credits in the accounts receivable ledger to source documentation. Performing a trend analysis of quarterly sales. Tracing cash receipt entries to the bank statement deposit for amount and date.

Performing a trend analysis of quarterly sales.

Of the four factors that determine the initial sample size in attributes sampling, which factor has the least effect on sample size? Population size Tolerable exception rate Expected population exception rate Acceptable risk of overreliance

Population size

An advantage of statistical over nonstatistical sampling methods in tests of controls is that the statistical methods Can more easily convert the sample into a dual-purpose test useful for substantive testing. Eliminate the need to use judgment in determining appropriate sample sizes. Afford greater assurance than a nonstatistical sample of equal size. Provide an objective basis for quantitatively evaluating sample risks.

Provide an objective basis for quantitatively evaluating sample risks

The five types of tests that auditors can use to determine if financial statements are fairly presented include: 1)Risk assessment procedures 2)Tests of controls (TOC) 3)Substantive tests of transactions (STOT) 4)Analytical procedures (AP) 5)Tests of details of balances (TDB)

RAP TOC STOT AP TDB

An auditor is performing a credit analysis of customers with balances over 60 days due. She is most likely obtaining evidence for which audit related objective? Existence Completeness Occurrence Realizable value

Realizable value

Which of the following procedures would an auditor most likely perform in auditing the statement of cash flows? Confirm the amounts included in the statement of cash flows with the entity's financial institution. Reconcile the amounts included in the statement of cash flows to the other financial statements' amounts. Reconcile the cutoff bank statement to the proof of cash to verify the accuracy of the year-end cash balance. Vouch a sample of cash receipts and disbursements for the last few days of the current year.

Reconcile the amounts included in the statement of cash flows to the other financial statements' amounts.

The auditing standards define external confirmation as "a direct written response to the auditor from a third party (the confirming party), either in paper form or by electronic or other medium." The assertions for which confirmation of accounts receivable balances provides primary evidence are Rights and obligations and existence. Completeness and presentation. Existence and completeness. Classification and rights and obligations.

Rights and obligations and existence

The auditor is most likely to verify accrued commissions payable in conjunction with the Examination of trade accounts payable. Review of post balance sheet date disbursements. Verification of contingent liabilities. Sales cutoff test.

Sales cutoff test

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. A purpose of this procedure is to Seek information about other deposit and loan amounts that come to the attention of the institution in the process of completing the confirmation. Detect kiting activities that may otherwise not be discovered. Provide the data necessary to prepare a proof of cash. Request that a cutoff bank statement and related checks be sent to the auditor.

Seek information about other deposit and loan amounts that come to the attention of the institution in the process of completing the confirmation.

Organizational independence in the processing of payroll is achieved by functional segregations that are built into the system. Which one of the following functional segregations is not required for internal control purposes? Segregation of human resources function from payroll preparation. Segregation of payroll preparation and maintenance of year-to-date records. Segregation of payroll preparation and paycheck distribution. Segregation of timekeeping from payroll preparation.

Segregation of payroll preparation and maintenance of year-to-date records.

Imperest payroll account

Separate acct used for payroll, helps to mitigate pr frau

In a retail cash sales environment, which of the following controls is often absent? Supervision. Asset access limited to authorized personnel. Competent personnel. Separation of functions.

Separation of functions

sampling

Testing less than 100% of a population for the purpose of making inferences about that population

Which of the following procedures would most likely be performed in response to the auditor's assessment of the risk of monetary misstatements in the financial statements? Tests of controls Risk assessment procedures Tests of details of balances Ratio analysis

Tests of details of balances

Which of the following is true? Tests of details of balances focus on the ending general ledger balances for both balance sheet and income statement accounts. Tests of details of balances focus on the transactions during the period for both balance sheet and income statement accounts. Tests of details of balances focus on the auditor's understanding of internal controls. Tests of details of balances focus on comparisons of recorded amounts to expectations developed by the auditor.

Tests of details of balances focus on the ending general ledger balances for both balance sheet and income statement accounts.

If an auditor concludes that internal controls are likely to be effective, the preliminary assessment of control risk can be reduced, leading to which of the following impacts on the acceptable risk of incorrect acceptance? The acceptable risk of incorrect acceptance will be reduced. The acceptable risk of incorrect acceptance will be eliminated. The acceptable risk of incorrect acceptance will be increased. The acceptable risk of incorrect acceptance will not be impacted.

The acceptable risk of incorrect acceptance will be increased.

commitment

The agreement to commit the firm to a set of fixed conditions in the future, regardless of what happens to profits or the economy as a whole.

A bank confirmation request should be authorized and sent by whom? The client should authorize the request and the auditor should send it. The client should both authorize and send the bank confirmation request. The auditor should authorize the request and the client should send it. The auditor should both authorize and send the bank confirmation request.

The client should authorize the request and the auditor should send it.

The accounts receivable turnover ratio increased significantly over a two-year period. This trend could indicate that Customer sales have substantially decreased. The company has eliminated its discount policy. The accounts receivable aging has deteriorated. The company is more aggressively collecting customer accounts.

The company is more aggressively collecting customer accounts.

The auditor should ordinarily send confirmation requests to all banks with which the client has conducted any business during the year, regardless of the year-end balance, because: The confirmation form also seeks information about indebtedness to the bank. The sending of confirmation requests to all such banks is required by auditing standards. This procedure will detect kiting activities that would otherwise not be detected. This procedure relieves the auditor of any responsibility with respect to non-detection of forged checks.

The confirmation form also seeks information about indebtedness to the ban

Which of the following activities most likely would be considered a weakness in an entity's internal control over payroll? Payroll checks are prepared by the accounts payable department and signed by the CFO. The human resources department sends employees' termination notices to the payroll department. A voucher for the amount of the payroll is prepared in the general accounting department based on the payroll department's payroll summary. The employee who distributes payroll checks returns unclaimed payroll checks to the payroll department.

The employee who distributes payroll checks returns unclaimed payroll checks to the payroll department.

An independent auditor asked a client's internal auditor to assist in preparing a standard financial institution confirmation request for a payroll account that had been closed during the year under audit. After the internal auditor prepared the form, the controller signed it and mailed it to the bank. What was the major flaw in this procedure? The form was mailed by the controller. The internal auditor did not sign the form. The form was prepared by the internal auditor. The account was closed, so the balance was zero.

The form was mailed by the controller.

Which of the following is a control activity that most likely could help prevent employee payroll fraud? The human resources department promptly sends employee termination notices to the payroll supervisor. Total hours used for determination of gross pay are calculated by the payroll supervisor. Salary rates resulting from new hires are approved by the payroll supervisor. Employees who distribute payroll checks forward unclaimed payroll checks to the absent employees' supervisors.

The human resources department promptly sends employee termination notices to the payroll supervisor.

Which of the following procedures represents a weakness in internal control for payroll? The payroll clerk distributes signed payroll checks. Undistributed checks are returned to the payroll department. The payroll department prepares checks using a signature plate. The CFO supervises the process before payroll checks are distributed. The payroll department prepares checks. The CFO signs the payroll checks. The accounting department prepares the electronic transfer of funds to the payroll bank account. The transfer is based on totals from the payroll department summary.

The payroll clerk distributes signed payroll checks. Undistributed checks are returned to the payroll department.

ARIA (Acceptable risk of incorrect acceptance)

The risk that the sample supports the conclusion that the recorded account balance is not materially misstated when it is materially misstated. The risk that the auditor is willing to take of accepting a balance as correct when the true misstatement in the balance exceeds tolerable misstatement. How many exceptions are we allowing?

Auditors are often concerned with the possibility of overstatement of sales and receivables. However, management may also have reasons for understating these balances. Which of the following would explain understatement of sales and receivables? To avoid paying taxes. To meet budgets and forecasts. To window-dress the financial statements. All of the answers are correct.

To avoid paying taxes.

In performing tests concerning the granting of stock options, an auditor should: Confirm the transaction with the Secretary of State in the state of incorporation. Determine that sufficient treasury stock is available to cover any new stock issued. Verify the existence of option holders in the entity's payroll records or stock ledgers. Trace the authorization for the transaction to a vote of the board of directors.

Trace the authorization for the transaction to a vote of the board of directors.

A CPA obtains a January 10 cutoff bank statement for a client directly from the bank. Very few of the outstanding checks listed on the client's December 31 bank reconciliation cleared during the cutoff period. A probably cause for this is that the client: Is engaged in lapping. Is engaged in kiting. Has overstated its year-end bank balance. Transmitted the checks to the payees after year-end.

Transmitted the checks to the payees after year-end.

Favorable results from analytical procedures may reduce the extent to which the auditor needs to test details of balances. True False

True

It is generally more difficult for the auditor to detect payment of fraudulent hours than payment of fictitious employees. True False

True

Negative confirmations are less expensive, and less reliable, than positive confirmations. True False

True

Stock-based compensation plans may increase the inherent risks related to the accounting and disclosure requirements. True False

True

The results of the tests of controls determine whether assessed control risk for sales and cash receipts needs to be revised. True False

True

An auditor noted that the accounts receivable department is separate from other accounting activities. Credit is approved by a separate credit department. Control accounts and subsidiary ledgers are balanced monthly. Similarly, accounts are aged monthly. The accounts receivable manager writes off delinquent accounts after 1 year, or sooner if a bankruptcy or other unusual circumstances are involved. Credit memoranda are prenumbered and must correlate with receiving reports. Which of the following areas could be viewed as an internal control deficiency of the above organization? Handling of credit memos. Monthly aging of receivables. Credit approvals. Write-offs of delinquent accounts.

Write-offs of delinquent accounts.

Which of the following sample planning factors would influence the sample size for a substantive test of details for a specific account? Expected Amount of Misstatements Measure of Tolerable Misstatement Expected Amount of Misstatements No Measure of Tolerable Misstatement No Expected Amount of Misstatements Yes Measure of Tolerable Misstatement Yes Expected Amount of Misstatements Yes Measure of Tolerable Misstatement No Expected Amount of Misstatements No Measure of Tolerable Misstatement Yes

Yes, Yes

Does a material exception in a test of details of balances indicate a FS misstatement? Why?

Yes, it directly affects the FS.

Contingent liability

a potential future obligation to an outsie party for an unknown amt resulting from activities that have already taken place. Material disclosed in footnotes.

Representative sample

a sample with characteristics the same as those of the population

Substantive testing of cash addresses assertions related to which of the financial statements? Income statement. Statement of retained earnings. Profit and loss statement. Balance sheet.

balance sheet

You are reviewing sales to discover cutoff problems. If the client's policy is to record sales when title to the merchandise passes to the buyer, then the books and records would contain errors if the December 31 entries were for sales recorded: before the merchandise was shipped. at a time after the point at which title passed. several days subsequent to shipment. at the time the merchandise was shipped.

before the merchandise was shipped.

An auditor most likely would perform substantive tests of details on payroll transactions and balances when The assessed risk of material misstatement relative to payroll transactions is low. Analytical procedures indicate unusual fluctuations in recurring payroll entries. Cutoff tests indicate a substantial amount of accrued payroll expense. Accrued payroll expense consists primarily of unpaid commissions.

c) analytical procedures indicate unusual fluctuations in recurring payroll expenses

You are auditing Rodgers and Company. After performing substantive analytical procedures you conclude that, for the accounts tested, the client's balance appears reasonable. This may indicate that: details test of balances can be eliminated for those accounts. control tests may be reduced for those accounts. certain tests of details of balances may be eliminated for those accounts. control tests may be eliminated for those accounts.

certain tests of details of balances may be eliminated for those accounts.

Generally, the most important (frequently required) substantive test of details of balances for accounts receivable is: comparing the expected sales turnover ratio to the actual sales turnover. tracing credit memos for returned merchandise to receiving room reports. confirmations tracing from shipping documents to journals to the accounts receivable ledger.

confirmations

At 12:01 a.m. on the first day of the new year, the cash receipts journal for the year just ended is electronically locked down. The new year's cash receipts journal can only be opened by a manager, and the manager notes the time and amount of the first receipt of the new year. This control would best alleviate concerns regarding which assertion? Cutoff. Accuracy, valuation, and allocation. Classification. Existence.

cutoff

Tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management's assertion of Existence. Classification. Rights and obligations. Cutoff.

cutoff

An auditor would consider a cashier's job description to contain compatible duties if the cashier receives remittances from the mail room and also prepares the Monthly bank reconciliation. Prelist of individual checks. Daily deposit slip. Remittance advices.

daily deposit slip

An auditor initially planned to use unrestricted random sampling with replacement in the audit of accounts receivable. Later, the auditor decided to use unrestricted random sampling without replacement. As a result of this decision, the sample size should Decrease. Increase. Either increase or decrease, but the direction cannot be determined. Remain the same.

decrease

The test of details of balances procedure that requires the auditor to trace the book balance on the reconciliation to the general ledger is an attempt to satisfy the audit objective of: completeness. detail tie-in. accuracy. existence.

detail tie-in.

direct subsequent event

direct effect on FS & require an adjustment, if amts material: Ex: Dec of bankruptcy by a customer w/ an os AR balance Settlement of litigation at an amt diff from recorded Not all subseq events incorporated directly in FS - if chgs occurred after year-end don't record.

indirect subsequent event

do not have direct effect on FS but require disclosure Provide evidence abt conditions taht did not exist at bs date but arose after, sign enough to require disclosure. EX: decline in mkt value of inventory as conseq of gvt action barring further sale of a product uninsured loss of inventoreis as a result of fire merger or acquisition require disclosure if they are significant and FS would be misleading w/o

subsequent events

events after the balane sehet date, up to the audit report date

Once a CPA has determined that accounts receivable have increased because of slow collections in a tight money environment, the CPA is likely to Review the credit and collection policy. Review the going concern ramifications. Increase the balance in the allowance for credit losses account. Expand tests of collectibility.

expand tests of collectibility

Types of cash

imprest payroll, imprest pc fund, branch bank acct, cash equiv, general cash

While performing a 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 Overreliance. Underreliance. Incorrect rejection. Incorrect acceptance.

incorrect rejection

Tolerable misstatement is ___ related to sample size

inversely

If an auditor desires a greater level of assurance in auditing a balance, the acceptable risk of incorrect acceptance: is not changed. may be reduced or increased depending upon other circumstances. is reduced is increased.

is reduced

An increased extent of tests of controls is most likely to occur when: controls are effective and the preliminary control risk assessment is low. controls are ineffective and the preliminary control risk assessment is high. it is a first-year audit. the auditor is doing a "fraud audit."

it is a first-year audit.

When auditing payroll transactions, an auditor is primarily concerned with the possibility of Misfooting of employee time records. Excess withholding of amounts required to be withheld. Posting of gross payroll amounts to incorrect salary expense accounts. Overpayments and unauthorized payments.

overpayments and unauthorized payments

When auditors wish to evaluate a sample statistically, the only acceptable selection method is: probabilistic selection. block sample selection. haphazard selection. judgmental selection.

probabilistic selection.

Analytical procedures are substantive tests and, if the results of the analytical procedures are favorable, the auditor would normally: reduce the tests of transactions. reduce the extent of tests of controls. reduce the extent of tests of details of balances. reduce all of the other tests

reduce the extent of tests of details of balances.

A sample in which the characteristics of the sample are approximately the same as those of the population is a(n): block sample. attributes sample. variables sample. representative sample.

representative sample.

In the confirmation of accounts receivable, the auditor would most likely Request confirmation of a sample of the inactive accounts. Require that confirmation requests be sent within 1 month of the fiscal year end. Require confirmation of all receivables from agencies of the federal government. Seek to obtain positive confirmations for at least 50% of the total dollar amount of the receivables.

request confirmation of a sample of the inactive accounts

sampling risk

risk of reaching an incorrect conclusion inherent in tests of less than the entire population because the sample is not representative of the population; sampling risk may be reduced by using an increased sample size and an appropriate method of selecting sample items from the population. Ex. AP a common control needs to be 2 sigs for cks over $10k; sample risk we choose a ck under $10k and there will be errors bc we chose the wrong sample.

To establish illegal "slush funds," corporations may divert cash received in normal business operations. An auditor would encounter the greatest difficulty in detecting the diversion of proceeds from Scrap sales. C.O.D. sales. Dividends. Purchase returns.

scrap sales

An effective procedure to test for unrecorded shipments is to trace from the: sales journal to the general ledger sales account. sales journal to the sales invoice. sales journal to the accounts receivable ledger. shipping documents to the sales journal.

shipping documents to the sales journal.

When counting cash on hand, the auditor must exercise control over all cash and other negotiable assets to prevent Substitution. Deposits in transit. Irregular endorsement. Theft.

substitution

Tolerable misstatement

the application of performance materiality to a particular sampling procedure.

Tolerable exception rate (TER)

the exception rate that the auditor will permit in the population and still be willing to conclude the control is operating effectively and/or the amount of monetary misstatements in the transactions established during planning is acceptable.

A company issued bonds for cash during the year under audit. To ascertain that this transaction was properly recorded, the auditor's best course of action is to Trace the cash received from the issuance to the accounting records. Verify that the net cash received is credited to an account entitled "bonds payable." Request a statement from the bond trustee as to the amount of the bonds issued and outstanding. Confirm the results of the issuance with the underwriter or investment banker.

trace the cash received from the issuance to the accounting records.