Audit 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 1 2 3 4

2

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

Authorization of transactions from the custody-related assets.

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.

A review of loan agreements and minutes of the meetings of the board of directors would be most appropriate for testing which of the following assertions related to merchandise inventory? Valuation. Ownership. Existence. Quantity.

Ownership.

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.

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? None of the above. Weaknesses need only be reported to management. Only material weaknesses in internal controls. All weaknesses existing in the client's internal controls. Significant deficiencies and material weaknesses in internal controls.

Significant deficiencies and material weaknesses in internal controls.

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.

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.

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.

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.

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

test the transactions and balances reported by 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. The planned allowance for sampling risk was 5 ½ percent. 4 ½ percent. 3 ½ percent. 1 percent.

4 ½ percent.

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.

When auditing merchandise inventory at year-end, the auditor performs a purchase cutoff test to obtain evidence that All goods purchased before year-end are received before the physical inventory count. No goods held on consignment for customers are included in the inventory balance. Goods observed during the physical count are pledged or sold. All goods owned at year-end are included in the inventory balance.

All goods owned at year-end are included in the inventory balance.

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? All of the above internal control weaknesses could have contributed to the fraud. Paying invoices without collecting appropriate supporting documentation. Lack of separation of duties. Not requiring authorizations for all purchases.

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

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. An unrecorded payable that existed at year end. An overstatement of accounts payable at year end. Duplicate recording of a purchase prior to year end.

An unrecorded payable that existed at year end.

Independent internal verification of inventory (i.e., proper segregation of duties) occurs when employees who Issue raw materials obtain materials requisition for each issue and prepare daily totals of materials issued. Compare records of goods on hand with physical quantities do not maintain the records or have custody of the inventory. Obtain receipts for the transfer of completed work to finished goods prepare a completed production report. Are independent of issuing production orders update records from completed job cost sheets and production cost reports on a timely basis.

Compare records of goods on hand with physical quantities do not maintain the records or have custody of the inventory.

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.

Which of the following audit procedures would provide the auditor with the greatest assurance regarding the adequacy of internal controls over cash on hand? You Answered Performing a walk through of a purchase transaction. Conducting a surprise count of cash on hand and reconciling it with the accounting records. Testing the year-end bank reconciliations. 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? Footing individual accounts payable account balances and comparing the total with the accounts payable account. Noting a shortage of inventory during the test counts of inventory at year end. 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.

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.

The objectives of internal control for an inventory management process are to provide assurance that transactions are properly authorized and recorded and that Independent internal verification of activity reports is established. Transfers to the finished goods department are documented by a completed production report and a quality control report. Production orders are prenumbered and signed by a supervisor. Custody of work in process and finished goods is properly maintained.

Custody of work in process and finished goods is properly maintained.

Which of the following combinations results in the greatest decrease in sample size in an attribute sample for a test of controls? Desired Confidence Level Tolerable Deviation Rate Expected Population Deviation Rate

Desired Confidence Level - decrease Tolerable Deviation Rate - increase Expected Population Deviation Rate - decrease

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.

Which of the following audit procedures would probably provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventory? Tracing of test counts noted during the entity's physical count to the entity's summarization of quantities. Inquiry of management to determine whether there are significant purchase commitments that should be considered for disclosure. Selection of the last few shipping advices used before the physical count and determination of whether the shipments were recorded as sales. During physical observation of inventory verify that "bill-and-hold" inventory is segregated and not included in the ending inventory count.

During physical observation of inventory verify that "bill-and-hold" inventory is segregated and not included in the ending inventory count.

An auditor would probably be least interested in which of the following fields in an electronic perpetual inventory file? Economic re-order quantity. Warehouse location. Date of last purchase. Quantity sold.

Economic re-order quantity.

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.

An auditor's test of controls over the issuance of raw materials to production would most likely include Reconciliation of raw materials and work-in-progress perpetual inventory records to general ledger balances. Inquiry of the custodian about the procedures followed when defective materials are received from vendors. Observation that raw materials are stored in secure areas and that storeroom security is supervised by a responsible individual. Examination of materials requisitions and reperformance of client controls designed to process and record issuances.

Examination of materials requisitions and reperformance of client controls designed to process and record issuances.

Of the following, which best describes a test of internal controls that might be employed by an independent auditor? Observing a client's count of inventory at year end. 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.

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.

For an appropriate segregation of duties, journalizing and posting summary payroll transactions should be assigned to The treasurer's department. General accounting. Payroll accounting. The timekeeping department.

General accounting.

Which of the following would most likely be an internal control activity designed to detect errors and fraud concerning the custody of inventory? Periodic reconciliation of work in process with job cost sheets. Segregation of functions between general accounting and cost accounting. Independent comparisons of finished goods records with counts of goods on hand. Approval of inventory journal entries by the storekeeper.

Independent comparisons of finished goods records with counts of goods on hand.

Which of the following control activities would be most likely to assist in reducing the control risk related to the occurrence of inventory transactions? Inventory manager does not have ability to record inventory transactions. Summary of the receiving reports is independently compared to the inventory status report. Inventory is periodically reviewed for slow-moving or obsolete items, which may require a write-down. Subsidiary ledgers are periodically reconciled with inventory control accounts.

Inventory manager does not have ability to record inventory transactions.

The negative request form of accounts receivable confirmation is useful particularly when

Low, High, Likely

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.

Periodic or cycle counts of selected inventory items are made at various times during the year rather than via a single inventory count at year-end. Which of the following is necessary if the auditor plans to observe inventory at interim dates? Complete recounts are performed by independent teams. Perpetual inventory records are maintained. Unit cost records are integrated with production-accounting records. Inventory balances are rarely at low levels.

Perpetual inventory records are maintained.

It would be appropriate for the payroll department to be responsible for which of the following functions? Approval of employee time records. Preparation of periodic governmental reports as to employees' earnings and withholding taxes. Maintenance of records of employment, discharges, and pay increases. Distribution of paychecks to employees.

Preparation of periodic governmental reports as to employees' earnings and withholding taxes.

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

Prevention of fraud.

Of the following four documents, which document most likely would be used to initiate a purchase transaction in a large corporation? Purchase requisition. Voucher. Receiving report. 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? Analytical procedures. Vouching, retracing, and recalculation. Questionnaires, flowcharts, narrative descriptions, and organizational charts. Analyst's reports, recalculation, and external confirmation.

Questionnaires, flowcharts, narrative descriptions, and organizational charts.

Which of the following internal control activities is most likely to address the completeness assertion for inventory? The work-in-process account is periodically reconciled with subsidiary records. Employees responsible for custody of finished goods do not perform the receiving function. Receiving reports are prenumbered and periodically reconciled. There is a separation of duties between payroll department and inventory accounting personnel.

Receiving reports are prenumbered and periodically reconciled.

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.

Which of the following substantive tests provides the best support for management's assertion regarding completeness as it relates to recorded inventory quantities at year end? Examination of inventory purchase documentation. Review of the client's inventory production schedules. Reconciliation of the auditor's physical test counts of inventory with the client's general ledger balances. Recomputation of inventory values using the method reported by the audit client.

Reconciliation of the auditor's physical test counts of inventory with the client's general ledger balances.

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: Revise the estimate of inherent risk to compensate for the weakness in internal controls. Reduce detection risk by increasing substantive tests of balances. Require management to improve the internal controls prior to completing the audit of the financial statements. Issue a qualified or adverse opinion on the financial statements taken as a whole.

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? Rendering an opinion on internal controls. Assuring compliance with internal controls. All of these. Designing and implementing internal controls.

Rendering an opinion on internal controls.

After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the physical inventory listing to obtain evidence that all items Included in the listing have been counted. Represented by inventory tags are included in the listing. Included in the listing are represented by inventory tags. Represented by inventory tags are bona fide.

Represented by inventory tags are included in the listing.

A client maintains perpetual inventory records in both quantities and dollars. If the level of control risk were set at high, an auditor would probably Insist that the client perform physical counts of inventory items several times during the year. Apply gross profit tests to ascertain the reasonableness of the physical counts. Increase the extent of tests of controls of the inventory system. Request that the client schedule the physical inventory count at the end of the year.

Request that the client schedule the physical inventory count at the end of the year.

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.

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.

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.

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.

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.

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. They have no direct impact on the audit of transactions and balances. Strong internal controls increase the amount of substantive testing required in the audit. Strong internal controls may be relied upon to reduce substantive testing.

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

An auditor is most likely to perform substantive tests of details on payroll transactions and balances when Cutoff tests indicate a substantial amount of accrued payroll expense. The level of control risk relative to payroll transactions is set at low. Substantive analytical procedures indicate unusual fluctuations in recurring payroll entries. Accrued payroll expense consists primarily of unpaid commissions.

Substantive analytical procedures indicate unusual fluctuations in recurring payroll entries.

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.

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 procedures would most likely be considered a weakness in an entity's internal controls over payroll? A voucher for the amount of the payroll is prepared in the general accounting department based on the payroll department's payroll summary. Payroll checks are prepared by the payroll department and signed by the treasurer. The employee who distributes payroll checks returns unclaimed payroll checks to the payroll department. The personnel department sends employees' termination notices to the payroll department.

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

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.

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 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.

An auditor who is testing IT controls in a payroll system whould most likely use test data (discussed in Advanced Module 2 in Chapter 7) that contain conditions such as Deductions not authorized by employees. Overtime not approved by supervisors. Time cards with invalid job numbers. Payroll checks which unauthorized signatures.

Time cards with invalid job numbers.

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).

Which of the following audit tests would most likely be used to test the occurrence assertion for payroll transactions? Trace a sample of time sheets to the payroll register. Recompute the mathematical accuracy of a sample of payroll checks. Trace a sample of payroll checks to the approved time sheet summary and the master employee list to verify validity. Test a sample of time sheets for the presence of authorization.

Trace a sample of payroll checks to the approved time sheet summary and the master employee list to verify validity.

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.

In meeting the control objective of safeguarding of assets, which department should be responsible for the following? Distribution of Paychecks Custody of Unclaimed Paychecks

Treasurer, Treasurer

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.

Custody of unclaimed payroll checks should be the responsibility of which individual or function within the organization? Employee's direct supervisor. Human Resources. Payroll. Treasury.

Treasury.

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? Payroll. Accounts payable. Purchasing. Treasury.

Treasury.

In order to enhance internal controls the paymaster who physically delivers payroll checks to employees at the end of the pay period should be associated with which of the following departments? Payroll. Treasury. Information Technology. Accounting.

Treasury.

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.

Inquires of warehouse personnel concerning possibly obsolete or slow-moving inventory items provide assurance about management's assertion of Completeness. Existence. Presentation. Valuation.

Valuation.

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.

Effective control activities over the payroll function may include Reconciliation of totals on job time cards with job reports by employees responsible for those specific jobs. Verification of agreement of job time cards with employee clock card hours by a payroll department employee. Preparation of payroll transaction journal entries by an employee who reports to the supervisor of the personnel department. Custody of rate authorization records by the supervisor of the payroll department.

Verification of agreement of job time cards with employee clock card hours by a payroll department employee.

During the year being audited, the Matthews Corporation changed from a system of recording time worked on clock cards to an IT payroll system in which employees record time in and out with magnetic cards. The IT system automatically updates all payroll records. Because of this change A generalized computer audit program must be used. Without paper clock cards, part of the audit trail is altered. The potential for payroll-related fraud is diminished. Transactions must be processed in batches.

Without paper clock cards, part of the audit trail is altered.

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

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 an inconsequential weakness in the internal controls. a substantial weakness in internal controls that is less than material. a material weakness in the internal controls. none of these.

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

To achieve good internal control which of the following functions should NOT be performed by the payroll department? approval of time worked by employees each pay period. maintaining information regarding the salary or wage rates of each employee. mailing birthday cards to recognize employee birthdays. collecting personal information from employees that is required for determining taxes and benefits.

approval of time worked by employees each pay period.

Negative confirmation letters used by the auditor provide stronger audit evidence than all other types of confirmation letters. 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 most appropriately used when auditing one or a few material accounts. are not accurately described by any of these answers.

are not accurately described by any of these answers.

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 uncollected credit sales in year 2. fictitious sales recorded in year 2. unrecorded cash receipts from customers 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 may result in a kiting scheme. provides good internal controls over accounts receivable. protects the accounts receivable clerk in case an error is made. 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 evaluating the risks within an organization and developing policies and procedures to reduce those risks. internal auditor review of compliance with internal controls. informing the appropriate individuals of ethical standards of behavior, risks, and non-compliance with internal controls. establishing a "tone at the top" which encourages high ethical conduct and performance.

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 a required audit procedure in most audits. is correctly described by all of these statements. is not required when accounts receivable are immaterial. 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 regularly communicates with the internal audit department. engages an independent auditor to perform financial audits. is composed of outside members of the board of directors. is described by all of these.

is described by all of these.

The timing of the auditor's observation of a client's count of merchandise inventory should coincide with the client's normal counts without input from the auditor. must be at the close of business on the last day of the client's fiscal year. may be influenced by the strength of the client's internal controls over inventory. should be scheduled solely at the auditor's convenience.

may be influenced by the strength of the client's internal controls over inventory.

The best supporting evidence for determining the proper salaries, bonuses, and benefits of the CEO and other key officers of an audit client would be obtained from the CEO and other key officers. recent tax returns filed by the CEO and other key officers. payroll records in the payroll department. minutes of the meetings of the board of directors and committees of the board.

minutes of the meetings of the board of directors and committees of the board.

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

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

Substantive tests of details related to payroll transactions and balances are most likely to be increased when the auditor determines that, due to automation of the client's activities, payroll expenses are immaterial. noted unusual trends in payroll while performing preliminary analytical procedures. assesses control risk to be low. determines that payroll expense is primarily related to fixed salaries as opposed to commissions.

noted unusual trends in payroll while performing preliminary analytical procedures.

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.

Assuming that the auditor has determined that control risk related to inventory of an audit client is high the auditor most likely would perform analytical procedures to assure accuracy of the recorded inventory quantity. require the client to schedule a physical inventory count at year end. ask the audit client to perform inventory counts throughout the year. increase the extent of internal controls over the client's inventory.

perform analytical procedures to assure accuracy of the recorded inventory quantity.

Internal controls over financial reporting are designed to insure efficiency and effectiveness of operations. prevent or detect and correct all potential misstatements on the financial statements. 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 potential material misstatements on the financial statements.

Assuming that the auditor has determined that control risk related to inventory of an audit client is high the auditor most likely would perform analytical procedures to assure accuracy of the recorded inventory quantity. require the client to schedule a physical inventory count at year end. ask the audit client to perform inventory counts throughout the year. increase the extent of internal controls over the client's inventory.

require the client to schedule a physical inventory count at year end.

The most appropriate audit procedure to verify that the cost of inventory has been properly recorded in the accounting records is to test the client's internal controls over recording of inventory. examine current vendor inventory price lists. trace test counts of inventory to the accounting records for those inventory items. select a sample of recorded inventory items and compare recorded costs with vendor invoices.

select a sample of recorded inventory items and compare recorded costs with vendor invoices.

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.

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 cost of the control should not exceed the benefit derived. auditors will have limited liability for their actions. the public requires the auditor to act as a reasonable person when providing assurance. 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. 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.

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