Auditing Exam 2
In a monetary unit sample (MUS) with a sampling interval of $10,000, an auditor discovered that a selected account receivable with a recorded amount of $12,000 had an audited amount of $11,000. If this were the only misstatement discovered by the auditor, the projected misstatement of this sample would be -$1,000 -$10,000 -$833 -$960
$1,000
In a monetary unit sample with a sampling interval of $5,000, an auditor discovered that a selected account receivable with a recorded amount of $3,000 had an audit amount of $2,700. If this were the only error discovered by the auditor, the projected error of this sample would be -$800 -$500 -$300 -$2,300
$500
Section 404(b) of the Sarbanes-Oxley Act of 2002, which requires auditors to attest to, and report on, a public company's internal control over financial reporting, applies to public companies with market capitalization meeting or exceeding which of the following thresholds? -$10 million. -$25 million. -$75 million. -$100 million.
$75 million.
For a large population of cash disbursement transactions, Smith, CPA is testing controls by using attribute sampling techniques. Anticipating an expected deviation rate of 3 percent, Smith found from a table that the required sample size is 400 with a tolerable deviation rate of 5 percent and a desired confidence level of 95 percent. If Smith anticipated an expected deviation rate of only 2 percent but wanted to maintain the same tolerable deviation rate and confidence level, the sample size would be closest to -800. -533. -400. -200.
200.
An auditor performs attribute sampling to test for proper cancellation of payment vouchers. In a sample population of 100, two vouchers are missing the proper cancellation, while one simply cannot be located. The error rate of the sample is -4% -2% -3% -Cannot be determined without knowing standard deviation.
3%
Watt, CPA, concludes that, while ABC Co. has properly accounted for and disclosed certain significant related party transactions, an emphasis-of-matter paragraph calling attention to these transactions should be added after Watt's opinion paragraph in the audit report. What should be included in the emphasis-of-matter paragraph? -A detailed description of the transactions, a clear reference to the transactions, and an indication that Watt's audit opinion is not modified in light of these transactions. -A detailed description of the transactions and a clear reference to the transactions. -A clear reference to the transactions and an indication that Watt's audit opinion is not modified in light of these transactions. -A detailed description of the transactions.
A clear reference to the transactions and an indication that Watt's audit opinion is not modified in light of these transactions.
Which of the following would be most likely to cause an auditor to have substantial doubt regarding a company's ability to continue as a going concern? -Failure to obtain positive confirmation of several large receivables. -Negative cash flow from investing activities. -A current ratio of 1.3 and a quick ratio of 0.8. -Management's refusal to sign a management representation letter.
A current ratio of 1.3 and a quick ratio of 0.8.
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 entity 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 entity's internal control relating to financial reporting. What kind of report should AnnaLisa issue on the effectiveness of Lileah's internal control? -An exculpatory opinion. -An unqualified report. -An adverse report. -A disclaimer of opinion.
A disclaimer of opinion.
Which of the following statements are ordinarily not correct about the sample size in statistical sampling when testing controls? -There is a direct relationship between the expected deviation rate and the sample size. -There is an inverse relationship between the amount of tolerable deviation rate and sample size. -A larger population requires a proportionately larger sample size. -There is an inverse relationship between the amount of acceptable risk of assessing the deviation rate too low and sample size.
A larger population requires a proportionately larger sample size.
Which of the following best illustrates the concept of sampling risk? -The documents related to the chosen sample may not be available for inspection. -An auditor may fail to recognize errors in the documents examined for the chosen 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 (regarding the characteristic being tested).
A randomly chosen sample may not be representative of the population as a whole (regarding the characteristic being tested).
When assessing the tolerable deviation rate (TDR), the auditor should consider that while deviations from control procedures increase the risk of material misstatements, such deviations may not necessarily result in errors. This explains why -Deviations would result in dollar errors in the accounting records only when they occurred in different transactions. -Deviations from examined control procedures at a given rate would normally be expected to result in a higher rate of dollar errors. -A recorded disbursement that is properly authorized may nonetheless contain a material dollar error. -A recorded disbursement that is not properly authorized may nonetheless be recorded properly in the cash disbursements journal.
A recorded disbursement that is not properly authorized may nonetheless be recorded properly in the cash disbursements journal.
What objectives of controls are of primary interest to an auditor performing a financial statement audit? -Compliance with applicable laws and regulations. -Effective and efficient operations. -Prevention or detection and timely correction of errors and fraud. -Accurate and reliable financial reporting.
Accurate and reliable financial reporting.
Regarding confidentiality, -An auditor may allow other accountants and the PCAOB to see confidential information in connection with a valid program of peer review. -An auditor may not provide confidential information to members of the auditor's firm who are not on the audit engagement team. -Most states recognize auditor-client privilege. -An auditor will generally refuse a request for confidential information made by the AICPA's professional ethics division.
An auditor may allow other accountants and the PCAOB to see confidential information in connection with a valid program of peer review.
The sample size for a substantive test of details of an account balance is affected by a number of factors. Assuming all other information remains constant, which of the following would lead to a smaller sample size? -Less reliance on substantive analytical procedures. -An increase in the amount of tolerable misstatement. -Larger expected frequency of misstatements. -Less reliance on internal controls.
An increase in the amount of tolerable misstatement.
Identify the correct statement regarding integrated audits. -The AICPA began requiring integrated audits in response to accounting scandals such as Enron. -Evaluating internal controls is often a vital part of an integrated audit. -An integrated audit involves providing an opinion on the financial statements and the internal control effectiveness of a company. -The term "integrated audit" refers to the cooperation between internal and external auditors in preparing audited financial statements.
An integrated audit involves providing an opinion on the financial statements and the internal control effectiveness of a company.
In auditing a public company, Natalie, an auditor for N. M. Neal & Associates, identifies four deficiencies in ICFR. 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 exculpatory opinion. -An unqualified report. -An adverse report. -A disclaimer of opinion.
An unqualified report.
Which of the following types of statistical testing is likely to be used for a test of controls? -Classical variables sampling. -Probability-proportional-to-size sampling. -Attribute sampling. -Monetary-unit sampling.
Attribute sampling.
Vinson, CPA is supervisor to Elkins, CPA. Under Vinson's direction, Elkins signed a document containing materially false and misleading information. Who has committed an act discreditable to the profession? -Both Vinson and Elkins. -Neither Vinson nor Elkins. -Elkins. -Vinson.
Both Vinson and Elkins.
In a situation where there is a justified departure from a promulgated accounting principle that is adequately disclosed, how will the auditor modify the standard report? -By modifying the Auditor's Responsibility paragraph. -By adding an emphasis-of-matter paragraph after the opinion paragraph. -By modifying the Management's Responsibility paragraph. -By adding an other-matter paragraph after the opinion paragraph.
By adding an emphasis-of-matter paragraph after the opinion paragraph.
Which of the following is not one of the seven categories of threats to independence identified by the AICPA in its conceptual framework on independence? -Undue influence threat. -Conflict of interest threat. -Advocacy threat. -Familiarity threat.
Conflict of interest threat.
Which of the following controls would most likely be tested during an interim period? -Controls over the period-end financial reporting process. -Controls over transactions that involve a high degree of subjectivity. -Controls over nonroutine transactions. -Controls that operate on a continuous basis.
Controls that operate on a continuous basis.
Which of the following factors does an auditor generally need to consider in planning a particular audit sample for a test of controls? -Desired confidence level. -Number of items in the population. -Total dollar amount of the items to be sampled. -Risk of assessing control risk too high.
Desired confidence level.
Most of the steps for planning and carrying out a nonstatistical test of controls are the same as those for a statistical test of controls. Which of the following represent the steps that could differ between nonstatistical and statistical sampling as discussed in the text? -Defining the sampling unit, selecting the -sample items, performing the audit procedures. Defining the control deviation conditions, defining the sampling unit, calculating the computed upper deviation rate. -Defining the control deviation conditions, determining the sample size, calculating the upper deviation rate. -Determining the sample size, selecting the sample items, calculating the computed upper deviation rate.
Determining the sample size, selecting the sample items, calculating the computed upper deviation rate.
For which of the following audit tests would an auditor most likely use attribute sampling? -Selected accounts receivable for confirmation of account balances. -Observation of employees who control mailroom receipts. -Examining invoices in support of the valuation of equipment additions. -Examining supporting documentation for purchases for evidence of proper authorization.
Examining supporting documentation for purchases for evidence of proper authorization.
Identify the correct statement regarding analytical procedures used in a final review conducted at the conclusion of an audit. -Analytical procedures used in the review near the conclusion of the audit are not required. -The ultimate purpose of analytical procedures used in a review conducted at the conclusion of the audit is to uncover fraud schemes that may have been missed previously during the audit. -If review analytical procedures suggest the presence of misstated account balances, the auditor may have to perform additional substantive tests of details to satisfactorily complete the audit. -Typically, a junior member of the engagement team will perform the analytical procedures applied at the conclusion of the audit because less precision is required.
If review analytical procedures suggest the presence of misstated account balances, the auditor may have to perform additional substantive tests of details to satisfactorily complete the audit.
Which of the following would most likely be an advantage in using classical variables sampling rather than monetary-unit sampling? -The auditor rarely needs the assistance of a computer program to design an efficient sample. -Inclusion of zero and negative balances generally does not require special design considerations. -An estimate of the standard deviation of the population's recorded amounts is not required. -Any amount that is individually significant is automatically identified and selected.
Inclusion of zero and negative balances generally does not require special design considerations.
An auditor discovers that an account balance believed to be materially misstated based on an audit sample was not materially misstated based on the total population of the account balance. This is an example of which of the following sampling types of risks? -Assessing control risk too high. -Incorrect acceptance. -Incorrect rejection. -Assessing control risk too low.
Incorrect rejection.
An auditor discovers that an account balance believed to be materially misstated based on an audit sample was not materially misstated based on the total population of the account balance. This is an example of which of the following sampling types of risks? -Incorrect rejection. -Assessing control risk too low. -Assessing control risk too high. -Incorrect acceptance.
Incorrect rejection.
Which of the following combinations guarantees a larger sample size? -Decrease the desired confidence level and decrease the tolerable deviation rate. -Decrease the desired confidence level and increase the expected deviation rate. -Increase the desired confidence level and decrease the tolerable deviation rate. -Increase the tolerable deviation rate and increase the expected deviation rate.
Increase the desired confidence level and decrease the tolerable deviation rate.
Which of the following characteristics most likely would be an advantage of using monetary unit sampling (MUS) rather than classical variables sampling? -The selection of negative balances requires no special design considerations. -It is particularly effective for detecting understatements. -The sample size can generally be lower even if many errors are expected. -It is likely to result in a smaller sample size when few errors are expected.
It is likely to result in a smaller sample size when few errors are expected.
Dewey, Needham, & Howe accept an engagement to audit the 2013 financial statements of Syracuse Co. and begin fieldwork in September 2013. Syracuse (December 31st year-end) gives the unaudited financial statements to the auditors on 1/17/2014. The auditors completed the fieldwork on 3/12/2014 and distributed the audit report on 3/23/2014. The entity's letter of representation should be dated ________ and the audit report should be dated __________. -January 17th; March 23rd. -March 23rd; March 12th. -March 23rd; March 23rd. -March 12th; March 12th.
March 12th; March 12th.
What is an auditor's evaluation of a statistical sample for attributes when a test of 150 documents results in 8 deviations if the tolerable rate is 6%, the expected population deviation rate is 4%, and the allowance for sampling risk is 1%? -Accept the sample results as support for the planned assessed level of control risk because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate. -Accept the sample results as support for the planned assessed level of control risk because the tolerable rate less the allowance for sampling risk equals the expected population deviation rate. -Modify the planned assessed level of control risk because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate. -Modify the planned assessed level of control risk because the tolerable rate plus the allowance for sampling risk exceeds the expected population deviation rate.
Modify the planned assessed level of control risk because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate.
What is an auditor's evaluation of a statistical sample for attributes when a test of 150 documents results in 8 deviations if the tolerable rate is 6%, the expected population deviation rate is 4%, and the allowance for sampling risk is 1%? -Accept the sample results as support for the planned assessed level of control risk because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate. -Accept the sample results as support for the planned assessed level of control risk because the tolerable rate less the allowance for sampling risk equals the expected population deviation rate. -Modify the planned assessed level of control risk because the tolerable rate plus the allowance for sampling risk exceeds the expected population deviation rate. -Modify the planned assessed level of control risk because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate.
Modify the planned assessed level of control risk because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate.
Audit sampling is commonly used for which type of audit evidence? -Analytical procedures. -Reperformance. -Observation. -Inquiry.
Reperformance.
Which of the following best illustrates the components that make up the upper deviation rate [UDR]? -Sample deviation rate + risk of assessing control risk too high. -Expected population deviation rate + allowance for sampling risk. -Sample deviation rate + allowance for sampling risk. -Tolerable deviation rate + allowance for sampling risk.
Sample deviation rate + allowance for sampling risk.
Which of the following statements is true regarding nonstatistical sampling? -It quantifies the auditor's exposure to sampling risk. -Sample sizes for non-statistical sampling should be comparable to statistical sampling. -It gives greater assurance than statistical sampling that samples are randomly selected. -Its use is required by the Public Company Accounting Oversight Board for small public company audits.
Sample sizes for non-statistical sampling should be comparable to statistical sampling.
A number of factors influence the sample size for a substantive test of details of an account balance. All other factors being equal, which of the following would lead to a larger sample size? -Small amount of tolerable misstatement. -Smaller expected frequency of misstatements. -Greater reliance on analytical procedures. -Greater reliance on internal controls.
Small amount of tolerable misstatement.
Under the Sarbanes Oxley Act (SOX) of 2002, which of the following nonaudit services is not prohibited from being performed for an audit client by a registered public accounting firm? -Tax compliance services. -Appraisal or valuation services. -Bookkeeping services. -Internal audit services.
Tax compliance services.
Which of the following would impair a CPA's independence? -The CPA's fee is contingent on what the court decides is an appropriate fee in the circumstances. -The CPA has a money market account with a financial institution client; the amount in excess of insured amounts is immaterial to the CPA's net worth. -The CPA prepares routine invoices for the client. -The CPA is a member of the same exclusive country club as the CEO of the client company.
The CPA prepares routine invoices for the client.
An auditor established a $300,000 tolerable misstatement for an audit procedure applied to an asset with an account balance of $7,500,000. The auditor selected a sample of 100 items from the population of 18,300 items that represented the asset account balance and discovered overstatements of $1,200 and understatements of $300. Under these circumstances, the auditor most likely would conclude that -There is an unacceptably high risk that the tolerable misstatement exceeds the sum of actual overstatements and understatements. -The asset account is fairly stated because the tolerable misstatement is less than the net of projected actual overstatements and understatements. -The asset account is fairly stated because the total projected misstatement is less than the tolerable misstatement. -There is an unacceptably high risk that the actual misstatements in the population exceed the tolerable misstatement because the total projected misstatement is more than the tolerable misstatement.
The asset account is fairly stated because the total projected misstatement is less than the tolerable misstatement.
Which of the following statements is true in an attribute sampling plan where the tolerable deviation rate is 7%, the computed upper deviation rate is 6.5%, the sample deviation rate is 2%, and the risk of assessing control risk too low is 5%? -The auditor is likely to decrease control risk because the computed upper deviation rate is less than the risk of assessing control risk too low. -The auditor is likely to increase control risk because the computed upper deviation rate is less than the risk of assessing control risk too low. -The auditor is likely to determine that the results do not support reliance on the control because the computed upper deviation rate plus the sample deviation rate is greater than the tolerable deviation rate. -The auditor is likely to determine that the results do support reliance on the control because the computed upper deviation rate is less than the tolerable deviation rate.
The auditor is likely to determine that the results do support reliance on the control because the computed upper deviation rate is less than the tolerable deviation rate.
Which of the following statements concerning control deficiencies is true? -All control deficiencies are significant deficiencies. -All significant deficiencies are material weaknesses. -The auditor should communicate to management, in writing, all control deficiencies in internal control identified during the audit. -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.
An auditor has established the planned assessed risk of material misstatement for an area of the audit as low because the client has established meaningful controls to prevent a material misstatement. The auditor has performed walkthroughs to determine if the policies have been placed in operation. Next: -The auditor will adjust the nature, timing, and extent of further audit procedures as less additional audit evidence will be required. -The auditor should perform tests of controls and, if results are satisfactory, the nature, timing, and extent of further audit procedures will be adjusted as less additional evidence will be required. -The auditor should perform tests of controls as a basis for determining if there are control deficiencies that should be communicated to those charged with governance. -The auditor will perform substantive tests to determine whether or not the controls have been effective during the period being audited.
The auditor should perform tests of controls and, if results are satisfactory, the nature, timing, and extent of further audit procedures will be adjusted as less additional evidence will be required.
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? -Management's report should state its responsibility for establishing and maintaining an adequate internal control system. -The auditor should evaluate whether internal controls over financial reporting are designed and operating effectively. -The auditor should provide recommendations for improving internal control in the audit report. -Management should identify material weaknesses in its report.
The auditor should provide recommendations for improving internal control in the audit report.
Monetary-unit-sampling [MUS] is less efficient and generally not used if -Statistical conclusions are to be made relating to the sample. -The account contains a large book value and a large number of transactions. -Computerized system account balances are being audited. -The auditor's objective is oriented towards understatements.
The auditor's objective is oriented towards understatements.
Management's written representations should be in the form of a letter addressed to: -The audit committee of the board of directors. -The board of directors. -The stockholders of the entity. -The auditor.
The auditor.
Under which of the following circumstances would a disclaimer of opinion be appropriate? -Management does not provide reasonable justification for a change in accounting principles. -The chief executive officer is unwilling to sign the management representation letter. -The auditor believes management's estimates of the useful lives of key assets are unreasonable, but management refuses to change the estimates. -The auditor believes, with evidence, that the chief executive officer has committed material fraud.
The chief executive officer is unwilling to sign the management representation letter.
Which of the following statements about internal control is correct? -A properly maintained internal control system reasonably ensures that collusion among employees cannot occur. -The establishment and maintenance of internal control is an important responsibility of the internal auditor. -An exceptionally strong internal control system is enough for the auditor to eliminate substantive procedures on a significant account balance. -The cost-benefit relationship is a primary criterion that should be considered in designing an internal control system.
The cost-benefit relationship is a primary criterion that should be considered in designing an internal control system.
As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses control risk (CR) lower than appropriate. The most likely explanation for this situation is that -The deviation/failure rate in the auditor's sample exceeds the TDR, but the deviation/failure rate in the population is less than the TDR. -The deviation/failure rate in the auditor's sample is less than the TDR, but the deviation/failure rate in the population exceeds the TDR. -The deviation/failure rates of both the auditor's sample and the population exceed the tolerable deviation rate [TDR]. -The deviation/failure rates of both the auditor's sample and the population are less than the TDR.
The deviation/failure rate in the auditor's sample is less than the TDR, but the deviation/failure rate in the population exceeds the TDR.
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 interaction or relationship of the control with other controls. -The financial statement amounts exposed to the deficiency. -The susceptibility of the related assets or liability to loss or fraud. -The nature of the financial statement accounts, disclosures, and assertions involved.
The financial statement amounts exposed to the deficiency.
Which of the following would be a potential control deficiency because of a lack of segregation of duties? -The person who reconciles the bank accounts is also responsible for reconciling the accounts receivable subsidiary ledger to the control account in the general ledger. -The person responsible for maintaining the accounts receivable subsidiary ledger is also responsible for maintaining the accounts payable subsidiary ledger. -The person who is responsible for receiving inventory ordered is also responsible for custody of the inventory and releasing it to the factory as authorized requisitions are received. -The person who is responsible for ordering equipment receives the equipment before it is released to the shop floor.
The person who is responsible for ordering equipment receives the equipment before it is released to the shop floor.
The auditor must communicate several items to "those charged with governance" at the conclusion of the audit. Which of the following is not a typical communication? Obtaining information relevant to the audit and communicating the audit Strategy. The planned audit procedures for the audit. Appointment and retention of the auditor. Communicating results of the audit.
The planned audit procedures for the audit.
Which of the following statements is correct concerning statistical sampling for tests of controls? -For a given tolerable deviation rate, a larger sample size should be selected as the expected population deviation rate decreases. -The expected population deviation rate has little or no effect on determining sample size except for very small populations. -As the population size doubles, the sample size also should double. -The population size has little or no effect on determining sample size except for very small populations.
The population size has little or no effect on determining sample size except for very small populations.
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? -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. -Any significant changes that occurred in internal control subsequent to the interim date.
The walkthrough of the control system conducted at interim.
Based on a 5% risk of assessing control risk too low, how would an auditor interpret a computed upper deviation rate of 7%? -There is a 95% chance that the deviation rate in the population equals 7%. -The auditor is willing to accept a deviation rate of 7% before deciding not to rely on the control. -There is a 5% chance that the deviation rate in the population exceeds 7%. -There is a 5% chance that the deviation rate in the population is less than 7%.
There is a 5% chance that the deviation rate in the population exceeds 7%.
Which of the following statements is correct concerning statistical sampling in tests of controls? -The qualitative aspects of deviations are not considered by the auditor. -There is an inverse relationship between the sample size and the tolerable deviation rate. -Deviations from controls at a given rate usually result in misstatements at a higher rate. -As the population size doubles, the sample size should also double.
There is an inverse relationship between the sample size and the tolerable deviation rate.
Which of the following statements is correct concerning statistical sampling in tests of controls? -There is an inverse relationship between the sample size and the tolerable deviation rate. -The qualitative aspects of deviations are not considered by the auditor. -As the population size doubles, the sample size should also double. -Deviations from controls at a given rate usually result in misstatements at a higher rate.
There is an inverse relationship between the sample size and the tolerable deviation rate.
Which of the following best describes why an auditor is always required to document the auditor's understanding of internal controls? -To lower control risk -To avoid performing substantive procedures -To document the basis for risk assessment -To provide complete support the auditor's opinion
To document the basis for risk assessment
In which of the following cases would the auditor determine that statistical sampling should not be performed? -Tolerable deviation is small and expected population deviation is high. -Tolerable deviation is large and expected population deviation is low. -Tolerable deviation is large and expected population deviation is high. -Tolerable deviation is small and expected population deviation is low.
Tolerable deviation is small and expected population deviation is high.
For attributes sampling, of the three factors that enter into sample size determination, which two factors can the auditor adjust to reflect the importance of the control? -Tolerable deviation rate and expected deviation rate. -Population size and tolerable deviation rate. -Expected deviation rate and confidence level. -Tolerable deviation rate and confidence level.
Tolerable deviation rate and confidence level.
Which of the following relationships is correct? -Desired confidence level and sample size are inversely related. -Expected misstatement and sample size are inversely related. -Tolerable misstatement and sample size are inversely related. -Tolerable misstatement and desired confidence level are directly related.
Tolerable misstatement and sample size are inversely related.
An auditor would conclude that an account balance is not fairly stated if the __________________ is less than the __________________. -Tolerable misstatement; Upper misstatement limit. -Projected misstatement; Upper misstatement limit. -Upper misstatement limit; Tolerable misstatement. -Projected misstatement; Expected misstatement.
Tolerable misstatement; Upper misstatement limit.
An auditor plans to examine a sample of 40 accounts payable invoices for proper approval as prescribed by the entity's internal accounting control procedures. One of the invoices in the chosen sample cannot be found, and the auditor is unable to use alternative procedures to determine whether the invoice was properly approved. The auditor should -Consider this compliance test invalid and proceed with substantive tests because internal control cannot be relied upon. -Treat the missing invoice as a deviation for the purpose of evaluating the sample. -Choose another invoice to replace the missing one in the sample. -Select a completely new random set of 40 invoices.
Treat the missing invoice as a deviation for the purpose of evaluating the sample.
A basic assumption that underlies financial reporting is that an entity will continue as a going concern. T/F
True
Weller, CPA is conducting an audit of Wadd, LLC. Weller wishes to independently perform procedures to validate assumptions inherent in certain reserve accounts on Wadd's balance sheet. The CEO of Wadd asks if Weller could rely primarily on Wadd's own internal support for the accounts, citing a pressing need to provide audited financial statements to prospective investors as soon as possible, and as a sign of Wadd's gratitude, presents Weller with valuable tickets to a sporting event. What category of threat to independence is Weller being subjected to? -Adverse interest threat. -Familiarity threat. -Advocacy threat. -Undue influence threat.
Undue influence threat.
Tech Company has disclosed an uncertainty due to pending litigation. The auditor's decision to issue a qualified opinion on Tech's financial statements would most likely result from: -a lack of insurance coverage for possible losses from such litigation. -a lack of sufficient evidence. -the entity's lack of experience with such litigation. -an inability to estimate the amount of loss.
a lack of sufficient evidence.
Eagle Company, a public company, had a computer failure and lost part of its financial data. As a result, the auditor was unable to obtain sufficient audit evidence relating to Eagle's inventory account. Assuming the inventory account is at least material, the auditor would most likely choose either: -a qualified opinion or an adverse opinion. -a qualified opinion with no explanatory paragraph or a qualified opinion with an explanatory paragraph. -an unqualified opinion with no explanatory paragraph or an unqualified opinion with an explanatory paragraph. -a qualified opinion or a disclaimer of opinion.
a qualified opinion or a disclaimer of opinion.
Type 1 subsequent events require the financial statements to be __________ if needed. -reviewed -compiled -reissued -audited -adjusted
adjusted
Type I subsequent events require __________ of the financial statements. -duplication -documentation -adjustment -consideration -disclosure
adjustment
A(n) __________ opinion is appropriate if a material misstatement is considered pervasive. -adverse -unqualified -modified -unmodified -qualified
adverse
An auditor's primary consideration regarding an entity's internal controls is whether they: -affect the financial statement assertions. -reflect management's philosophy and operating style. -relate to the control environment. -prevent management override.
affect the financial statement assertions.
Type 2 subsequent events come into existence __________ the balance sheet date. -after -close to -between -prior to -near -before
after
Auditors may add an emphasis-of-matter paragraph that refers to a matter that is __________ presented or disclosed. -misleadingly -wrongly -unfairly -incorrectly -appropriately
appropriately
Evidence as to the design of internal control and its operating effectiveness should be considered __________ the date specified in the assessment. -before -close to -as of -after -near
as of
The __________ committee is especially important as it exercises oversight responsibility over the financial statements. -social -benefit -audit -investment -human resource
audit
Type I subsequent events involve events that existed __________ the balance sheet date. -near -between -before -close to -after
before
Strata may be __________ to provide an estimate of the population as a whole. -replaced -generated -estimated -divided -blocked -combined
combined
An auditor should request that an audited entity send a letter of inquiry to those attorneys who have been consulted concerning litigation, claims, or assessments. The primary reason for this request is to provide: an objective appraisal of management's policies and procedures adopted for identifying and evaluating legal matters. the opinion of a specialist as to whether loss contingencies are possible, probable, or remote. a description of litigation, claims, and assessments that have a reasonable possibility of unfavorable outcome. corroboration of the information furnished by management concerning litigation, claims, and assessments.
corroboration of the information furnished by management concerning litigation, claims, and assessments.
Reviewers are concerned if immaterial passed misstatements have a __________ material effect. -negative -cumulative -decreasing -individual -positive
cumulative
A control is deemed to be more important than thought at the time that attributes sampling parameters were set. The auditor is most likely to respond by: -decreasing the risk of assessing control risk too high. -increasing population size. -decreasing the tolerable deviation rate. -decreasing the expected deviation rate.
decreasing the tolerable deviation rate.
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 operation. -material weakness. -significant deficiency. -deficiency in design.
deficiency in operation.
Stratifying a population can also allow the auditor to perform __________ procedures to each stratum. -identical -similar -different -duplicate -exact -opposite
different
Auditors __________ an opinion when they are unable to form an opinion. -concur -qualify -disclaim -agree -withdraw
disclaim
An audit needs to have the correct balance of efficiency and __________. -confirmations -deviation -talent -effectiveness -fees -cash
effectiveness
The risk of incorrect acceptance relates to the: -efficiency of the audit. -tolerable misstatement. -preliminary estimates of materiality levels. -effectiveness of the audit.
effectiveness of the audit.
Audit __________ is affected when too much substantive testing is done. -effectiveness -opinion -evaluation -efficiency -staff -timing
efficiency
If substantial doubt about a going concern exists, an __________ paragraph is the most common resolution. -emphasis-of-matter -inappropriate -incorrect -explanatory -unqualified
emphasis-of-matter
When there is significant doubt as to the ability to continue as a going concern, a(n) __________ paragraph may be added. -unqualified -qualified -modified -emphasis-of-matter -disclaimed
emphasis-of-matter
Managers and partners typically review at the __________ of the engagement timeline. end middle commencement planning start
end
Accounting __________ involve management's judgment or assumptions. -errors -estimates -reports -systems -statements
estimates
Working papers are reviewed at __________ supervisory level(s) of a CPA firm. -every -one -most -two -some
every
Limitations on the scope of an audit may create a situation in which the auditors are unable to obtain sufficient __________. -evidence -financial statement -balance sheets -accounting -paragraphs
evidence
To determine the sample size for a test of controls, an auditor should consider the tolerable deviation rate, the desired confidence level, and the: -computed upper precision limit. -expected population deviation rate. -risk of assessing control risk too high. -risk of incorrect rejection.
expected population deviation rate.
The CPA's opinion on the __________ of the financial statements may be changed by subsequent events. -value -fairness -precision -reliability -accuracy
fairness
An underlying feature of random-based selection of items is that each: -stratum of the accounting population be given equal representation in the sample. -item must be systematically selected using replacement. -item in the accounting population should have an opportunity to be selected. -item in the accounting population be randomly ordered.
item in the accounting population should have an opportunity to be selected.
In nonstatistical sampling for tests of controls, increasing the desired confidence level results in a: -higher tolerable deviation rate. -smaller sample size. -lower expected deviation rate. -larger sample size.
larger sample size.
An auditor issued an audit report that was dual dated for a subsequent event occurring after the date on which the auditor has obtained sufficient appropriate audit evidence but before issuance of the financial statements. The auditor's responsibility for events occurring subsequent to the date on which the auditor has obtained sufficient appropriate audit evidence was: -extended to subsequent events occurring through the date of issuance of the report. -limited to events occurring up to the date of the last subsequent event referenced. -limited to the specific event referenced. -extended to include all events occurring since the date on which the auditor has obtained sufficient appropriate audit evidence.
limited to the specific event referenced.
Many subsequent events may involve the settling of __________. -interest -litigation -depreciation -audits -bonds
litigation
Auditors must carefully control the risk of assessing risk too high or __________ when performing test of controls. -extreme -low -accurate -confident -expensive -effective
low
Qualified opinions are issued when the financial statements are __________ misstated. -always -not -materially -consistently -constantly
materially
An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor to: -minimize the failure to detect errors and fraud. -reduce audit risk and materiality to a relatively low level. -measure the sufficiency of the evidential matter obtained. -eliminate the risk of nonsampling errors.
measure the sufficiency of the evidential matter obtained.
Subsequent events need to be disclosed in the financial statements; otherwise, the financial statements would be __________. -fair -audited -precise -accurate -misleading
misleading
Low turnover rates for given inventory items may be indicators of __________. -inventory -employees -obsolescence -consignment -poor cutoff -high purchases
obsolescence
A going concern evaluation should include evaluation of __________ from the balance sheet date. one week one month one day two years one year
one year
Segregation of duties is a control aimed at __________ misstatement. -preventing -finding -correcting -resolving -detecting
preventing
Final analytical procedures are generally intended to: -Retest control activities that appeared to be ineffective during the assessment of control risk. -provide the auditor with a final, overall evaluation of the relationships among financial statement balances. -test transactions to corroborate management's financial statement assertions. -gather evidence concerning account balances that have not yet been investigated.
provide the auditor with a final, overall evaluation of the relationships among financial statement balances.
Routine transactions are for __________ activities. -immaterial -insignificant -rare -nonrecurring -recurring
recurring
Assessing the control risk too low results in an inappropriate __________ of the extent of substantive procedures. -reduction -addition -increase -modification -control -test
reduction
Stratified sample results can be used __________ or combined. -never -separately -once -twice -together -rarely
separately
If the expected deviation rate exceeds the tolerable deviation rate, the auditor is most likely to: -set control risk at the maximum without sampling. -pick a lower risk of assessing control risk too low to increase sample size. -set control risk at the minimum without sampling. -have a large sample size.
set control risk at the maximum without sampling.
Stratification is the technique of dividing a population into subgroups called __________. -blocks -controls -vouchers -strata -systems -groups
strata
Auditors often __________ a population before computing the required sample size. -select -vouch -stratify -generate -combine -block
stratify
Audit effectiveness is impacted when the auditor doesn't do enough __________. -deviations -testing -blocking -population -confidently
testing
Samples to test internal controls are intended to provide a basis for an auditor to conclude whether: -materiality for planning purposes is at a sufficiently low level. -the risk of incorrect acceptance is too high. -the controls are operating effectively. -the financial statements are materially misstated.
the controls are operating effectively.
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 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 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 is less than the tolerable deviation rate, but the deviation rate in the population exceeds the tolerable deviation rate.
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 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 rates of both the auditor's sample and the population exceed 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.
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 2½ 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: -expected population deviation rate (7 percent) was more than the percentage of errors in the sample (3½ percent). -computed upper deviation rate (8 percent) was more than the percentage of errors in the sample (3½ percent). -expected population deviation rate (2½ 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).
tolerable deviation rate (7 percent) was less than the computed upper deviation rate (8 percent).
In determining the sample size for a test of controls, an auditor should consider the expected population deviation rate, desired confidence level, and the: -nature and cause of deviations. -population size. -risk of incorrect acceptance. -tolerable deviation rate.
tolerable deviation rate.
King, CPA, was engaged to audit the financial statements of Chang Company, a private company, after its fiscal year had ended. King neither observed the inventory count nor confirmed the receivables by direct communication with debtors but was satisfied that both were fairly stated after applying appropriate alternative procedures. King's financial statement audit report most likely contained a(n): -unmodified opinion. -disclaimer of opinion. -qualified opinion. -unmodified opinion with an emphasis-of-matter paragraph.
unmodified opinion.
A public entity changed from the straight-line method to the declining balance method of depreciation for all newly acquired assets. This change has no material effect on the current year's financial statements but is reasonably certain to have a substantial effect in later years. The client's financial statements contain no material misstatements and the auditor concurs with this change. If the change is disclosed in the notes to the financial statements, the auditor should issue a report with a(n): -"except for" qualified opinion. -consistency modification. -explanatory paragraph. -unqualified opinion.
unqualified opinion.