Audit Final

An example of an event occurring in the period between the end of the year being audited and the date of the auditor's report that normally will not require disclosure in the financial statements or auditor's report is A. decreased sales volume resulting from a general business recession. B. serious damage to the company's plant from a widespread flood. C. issuance of a widely advertised capital stock issue with restrictive covenants. D. settlement of a large liability for considerably less than the amount recorded.

A. decreased sales volume resulting from a general business recession.

The purposes of the letter of representation are to (select all that apply): A. report to shareholders the need for an audit on the financial statements B. document responses from management to inquiries about various aspects of the audit C. remind management of potential misstatments or omissions in the financial statements D. impress upon management its responsibility for the fianancial statements E. formalize the agreement between the auditor and the client

B,C,D

Which of the following statements is correct about an auditor's required communication with those charged with governance? A. Any matters communicated with those charged with governance are also required to be communicated to the entity's management. B. The auditor is required to inform those charged with governance about significant misstatements discovered by the auditor and subsequently corrected by management. C. Disagreements with management about the application of accounting principles must be communicated in writing to those charged with governance. D. The auditor should not communicate frequently recurring misstatements unless they are material.

B. The auditor is required to inform those charged with governance about significant misstatements discovered by the auditor and subsequently corrected by management.

Management of Thurman Corporation included additional supplementary information in documents that include the audited financial statements for the year ended December 31, 2019. Management has asked its audit firm, Wally, CPAs, whether they can report on the supplementary information. Which of the following conditions would preclude Wally, CPAs, from conducting this engagement? A. The supplementary information is derived from the accounting records used to generate the basic financial statements. B. The supplementary information covers the period January 1, 2019, through February 15, 2020. C. Wally's opinion on the basic financial statements was unmodified. D. When evaluating supplementary information, Wally plans to use the same materiality threshold as that used in the audit of the basic financial statements.

B. The supplementary information covers the period January 1, 2019, through February 15, 2020.

Which of the following discovered by the auditor would be a weakness in the client's internal control over its investments? A. the internal auditor performs a periodic count of the actual securities and reconciles the securities counted to the investment subsidiary ledger. B. investments not held by an independent third-party custodian are kept in the Treasurer's office. C. a designated accounting individual that has no custody or authorization responsibilities maintains the detailed records of the investment subsidiary ledger. D. the client's board of directors authorizes all purchases and sales of investment securities.

B. investments not held by an independent third-party custodian are kept in the Treasurer's office.

All of the following are effective ways to prevent and/or detect lapping, except for A. comparing the dollar amounts and dates on the bank deposit slips with customer remittance credits entered into the accounts receivable ledger. B. preparing a bank transfer schedule. C. requiring that customers send their payments directly to a lockbox. D. independently comparing the recorded cash receipts with funds actually deposited in the bank.

B. preparing a bank transfer schedule.

When a contingency is resolved subsequent to the issuance of audited financial statements, which correctly contained disclosure of the contingency in the footnotes based on information available at the date of issuance, the auditor should A. inform the appropriate authorities that the report cannot be relied on. B. take no action regarding the event. C. insist that the client issue revised financial statements. D. inform the audit committee that the report cannot be relied on.

B. take no action regarding the event.

A commitment is best described as A. a potential future obligation to an outside party for an as yet to be determine amount. B. an agreement to commit the firm to a set of fixed conditions in the future that depends on company profitability. C. an agreement to commit the firm to a set of fixed conditions in the future. D. an agreement to commit the firm to a set of fixed conditions in the futuer that depends on curent market conditions.

C. an agreement to commit the firm to a set of fixed conditions in the future.

With which of the following client personnel would it generally not be appropriate to inquire about commitments or contingent liabilities? A. controller B. vice president of sales C. resident D. accounts receivable clerk

D. accounts receivable clerk

As a result of analytical procedures, the auditor determines that the gross profit percentage has declined from 30 percent in the preceding year to 20 percent in the current year. The auditor should A. express a qualified opinion due to inability of the client company to continue as a going concern. B. evaluate management's performance in causing this decline. C. require footnote disclosure. D. consider the possibility of a misstatement in the financial statements.

D. consider the possibility of a misstatement in the financial statements.

The negative form of accounts receivable confirmation request is useful except when A. internal control surrounding accounts receivable is considered to be effective. B. a large number of small balances is involved. C. the auditor has reason to believe the persons receiving the requests are likely to give them consideration. D. individual account balances are relatively large.

D. individual account balances are relatively large.

Which of the following is one of the better auditing techniques to detect kiting? A. review composition of authenticated deposit slips B. review subsequent bank statements and cancelled checks received directly from the banks C. prepare year-end bank reconciliations D. prepare a schedule of bank transfers from the client's books

D. prepare a schedule of bank transfers from the client's books

Smith Manufacturing Company's accounts receivable clerk has a friend who is also a Smith's customer. The accounts receivable clerk has issued fictitious credit memos to his friend for goods supposedly returned. The most effective procedure for preventing this activity is to: A. prenumber and account for all credit memorandums B. mail monthly statments to customers C. have independent sales and accounts receivable departments D. require receiving reports that provide evidence of returned inventory items to support all credit memorandoms

D. require receiving reports that provide evidence of returned inventory items to support all credit memorandoms

The confirmatiions must be mailed by the auditor, but should contain the return address of the client. True/False

False

The preparation of a sales invoice is the final step in the sales and collection cycle. True or False

False

Common tests of internal controls related to financial statement presentation and footnote disclosures include observing or examining an indication of management's review and approval of information presented and disclosed in the financial statements. True/False

True

Computer programs or independent personnel should check that the processing and recording of sales transactions fulfill each transaction-related audit objective. Examples include reviewing financial statements and footnote disclosures for proper aggregation, relevance, and understandability. True/False

True

Confirmation is the most common test of details of balances for the accuracy of accounts receivable. True/False

True

Which type of subsequent event requires consideration by management and evaluation by the auditor? 1. subsequent events with direct effects on FS Yes/No 2. subsequent events without direct effect on FS Yes/No

Yes/Yes

The two primary classes of transactions in the sales and collection cycle are A. sales and sales discounts. B. sales and accounts receivable. C. sales and cash receipts. D. sales and sales returns.

C. sales and cash receipts

When analytical procedures in the sales and collection cycle uncover unusual fluctuations, the auditor should make additional inquiries of management. True/False

True

When auditing sales returns and allowances, the emphasis is normally on testing the completeness objective. True/False

True

What types of information are normally included in the letter? (select all that apply) A. acknowledgement that management has adjusted or disclosed in the FS all subsequent events that impact fair presentation B. management's acknowledgment of its responsibility for the preparation and fair preentation of the FS C. statement from managmenet about its belief that the effects of any uncorrected financial statement misstatements are immaterial to the FS D. acknowledgement that management has disclosed to the auditor the identity of the entity's related-part relationships and transactions of which management is aware and that management has appropriately accounted for and disclosed such relationships and transactions E. Acknowledgement from managment that they have disclosed to the auditor information about actual or possible litigation and unasseted claims or assements probable and disclosed in accordance to accounting standards F. statement from managment about its belief that significant assumptions used by managment in making accounting estimates are reasonable G. Management's acknowledgment of its responsiblity for the design, implementation, and maintenance of internal controls H. Acknowledgment of managment's responsibility for evaluting the company as going-concern I. Acknowledgement of management's responsibility for the preventaion and detection of fraud J. Management's acknowledgment of its responsibility to provide the auditor access to all relevant information needed for the audit K. representations about management's acknowledgement of their knowledge and disclosure of noncompliance with laws and regulations L. statement from managment regarding the level of materiality that they used in forming an opinion on the basic financial statement

A,B,C,D,E,F,G,I,J,K

In assessing sampling risk, the risk of underreliance (i.e., the risk of assessing control risk too high) relates to the A. efficiency of the audit. B. effectiveness of the audit. C. selection of the items in the sample. D. audit quality controls.

A. efficiency of the audit.

Auditors will generally send a standard inquiry to the client's attorney letter to A. every attorney that the client has been involved with in the current or preceding year, plus any attorney the client engages on occasion. B. every attorney whose legal fees for the year exceed a materiality threshold. C. only the attorney who represents the client in proceeding where the client is defendant. D. only those attorneys who have devoted substantial time to client matters during the year.

A. every attorney that the client has been involved with in the current or preceding year, plus any attorney the client engages on occasion.

If a potential loss on a contingent liability is remote, the liability usually is A. neither accrued nor disclosed in the footnotes. B. disclosed in the auditor's report but not disclosed on the financial statements. C. accrued and indicated in the body of the financial statements. D. disclosed in footnotes, but not accrued.

A. neither accrued nor disclosed in the footnotes.

If the auditor concludes that there are contingent liabilities, he or she must evaluate the significance of the potential liability and the nature of the disclosure needed in the financial statements. Which of the following statements is not true? A. the client's attorneys must remain independent when evaluating the likelihood of losing the lawsuit. B. the potential liability is sufficiently well known in some instances to be included in the financial statements as an actual liability. C. disclosure may be unecessary if the contingency is highly remote or immaterial. D. a CPA firm often obtains a separate evaluation of the potential liability from its own legal counsel rather than relying on mangement or mangement's attorneys

A. the client's attorneys must remain independent when evaluating the likelihood of losing the lawsuit.

An auditor is reconciling the amounts included in the long-term debt footnotes to the information examined and supported in the audit files for long-term debt. Which audit objective is being satisfied? A. occurrence and rights and obligations B. accuracy and valuation C. classification and understandability D. completeness

B. accuracy and valuation

Describe client letter of representation. A. a letter of representation is a letter the client obtains from the auditor prior to the issuance of the financial statements stating the client agrees with the report. B. a letter of representation is a letter to the auditor which formalizes the agreement between the auditor and the client about the engagement. C. A letter of representation is a written communication from the client to the auditor which formalizes statements that the client has made about matters pertinent to the audit. D. None of the above.

C. A letter of representation is a written communication from the client to the auditor which formalizes statements that the client has made about matters pertinent to the audit.

Confirmation of accounts receivable selected from the trial balance is the most common test of details of balances for the _________ of accounts receivable. A. detail tie-in B. presentation C. accuracy D. valuation

C. accuracy

Which of the following subsequent events is most likely to result in an adjustment to a company's financial statements? A. issuance of common stock B. an uninsured loss of inventories due to a fire C. bankruptcy (due to deteriorating financial condition) of a customer with an outstanding accounts receivable balance D. merger or acquisition activities

C. bankruptcy (due to deteriorating financial condition) of a customer with an outstanding accounts receivable balance

The auditor's primary concern relative to presentation and disclosure-related objectives is A. accuracy. B. existence. C. completeness. D. occurence.

C. completeness.

You are auditing Rodgers and Company. You are aware of a potential loss due to non-compliance with environmental regulations. Management has assessed that there is a 40% chance that a $10M payment could result from the non-compliance. The appropriate financial statement treatment is to: A. accrue a $4 million liability. B. since there is greater that a remote chance of occurrence, accrue the $10 million. C. disclose a liability and provide a range of outcomes. D. since ther is less than 50% chance of occurrence, ignore.

C. disclose a liability and provide a range of outcomes.

Investment and property schedules are presented for purposes of additional analysis in a document outside the basic financial statements. The schedules are not required supplementary information. When the auditor is engaged to report on whether the supplementary information is fairly stated in relation to the audited financial statements as a whole, the measurement of materiality is the A. greater of the individual schedule of investments or schedule of property by itself. B. lesser of the individual schedule of investments or schedule of property by itself. C. same as that used in forming an opinion on the basic financial statements as a whole. D. combined total of both the individual schedules of investments and property as a whole.

C. same as that used in forming an opinion on the basic financial statements as a whole.

Written management representations obtained by the auditor in connection with a financial statement audit should include a A. summary of all corrected misstatements. B. statement of management's belief that any uncorrected misstatements are in fact not misstatements. C. statement of management's belief that the effects of uncorrected misstatements are not material. D. summary of all uncorrected misstatements.

C. statement of management's belief that the effects of uncorrected misstatements are not material.

The Form 10-K filed by management of a public company includes a section on management's discussion and analysis (MD&A) in addition to the annual financial statements. Which of the following best describes the auditor's responsibility for the MD&A information? A. the auditor must perform sufficient appropriate audit procedures to opine on the MD&A information. B. the auditor has no responsibilities related to the MD&A disclosures. C. the auditor must read the MD&A information to determine whether there is any material inconsistency with the audited financial statements. D. the auditor must provide a disclaimer of opinion related to the MD&A information.

C. the auditor must read the MD&A information to determine whether there is any material inconsistency with the audited financial statements.

Which of the following would be least likely to be included in a standard inquiry to the client's attorney? A. a list provided by the client of pending litigation or asserted or unasserted claims with which the attorney has had some involvement B. a request that the attorney provide information about the status of pending litigation C. a request for the attorney to identify any pending litigation or threatened legal action not identified on a list provided by the client D. a request for the attorney to opine on the correct accounting treatment associated with an outstanding claim or pending lawsuit outcome

D. a request for the attorney to opine on the correct accounting treatment associated with an outstanding claim or pending lawsuit outcome

A client acquired 25 percent of its outstanding capital stock after year end but prior to the date of the auditor's report. The auditor should A. disclose the acquisition in the opinion paragraph of the auditor's report. B. advise management to adjust the balance sheet to reflect the acquisition. C. issue pro forma financial statements giving effect to the acquisition as if it had occurred at year end. D. advise management to disclose the acquisition in the notes to the financial statements.

D. advise management to disclose the acquisition in the notes to the financial statements.

Which of the following is not considered a commitment? A. agreements to lease facilities at set prices B. pension plans C. agreements to purchase raw materials D. all of the above

D. all of the above

A management letter A. is the auditor's report on significant deficiencies and material weaknesses in internal control. B. is mandatory in all audits and must be dated the same date as the audit report. C. contains management's representations to the auditor documenting statements made by management to the auditor during the audit about matters affecting the financial statements. D. contains recommendations from the auditor designed to help the client improve the efficiency and effectiveness of its business.

D. contains recommendations from the auditor designed to help the client improve the efficiency and effectiveness of its business.

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

D. initially concealed by a forged document.

Which of the following controls would most likely detect a kiting scheme? A. preparing a bank reconciliation B. using a lockbox system for customer receipts C. comparing the details of deposit tickets and recorded remittance advices D. preparing a bank transfer schedule

D. preparing a bank transfer schedule

Which of the following is not a required item to be communicated by the auditor to the audit committee or others charged with governance? A. information about the auditor's responsibility in an audit of financial statements B. information about the overall scope and timing of the audit C. significant findings arising from the audit D. recommendations for improving the client's business

D. recommendations for improving the client's business

The auditor has a responsibility to review transactions and activities occurring after the balance sheet date to determine whether anything occurred that might affect the statements being audited. The procedures required to verify these transactions are comonly referred to as the review for A. contingent liabilities. B. subsequent year's transactions C. late unusual occurrences. D. subsequent events.

D. subsequent events.

Three conditions are required for a contingent liablity to exist. Which of the following is not one of those conditions? A. there is uncertainty about the amount of the future payment or impairment B. there is a potential future payment to an outside party or the impairment of an asset that resulted from an existing condition C. the outcome will be resolved by some future event or events D. the outcome must be resolved by a third-party

D. the outcome must be resovled by a third-party

The theft of cash can occur before receipts are entered in the records or after they are entered in the records. True/False

True

Which of the following methdos of sample selection is appropriately used when selecting a random sample? Auditor's judgmental selection of items Yes/No Use of random number generators Yes/No Generalized audit software Yes/No

No Yes Yes

For sales, the completeness transaction-related audit objective affects which of the following balance-related audit objectives? True/False

True

Auditors often integrate procedures for presentation and disclosure objectives with 1. tests for transaction-related objectives Yes/No 2. tests for balance-related objectives Yes/No

Yes/Yes

Cutoff misstatements can occur for 1. Sales Yes/No 2. Sales returns and allowances Yes/No

Yes/Yes

If an auditor concludes ther are contingent liabilities, then he or she must evaluate the 1. Materiality of the potential libality Yes/No 2. Nature of the disclosure to be included in the financial statements Yes/No

Yes/Yes

Which of the following procedures most likely represents an internal control designed to reduce the risk of errors in the billing process? A. comparing control totals for shipping documents with corresponding totals for sales invoices. B. matching receiving documents with approved sales orders before invoice preparation. C. reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger. D. requiring customers that purchase on account to be approved by the credit department.

A. comparing control totals for shipping documents with corresponding totals for sales invoices.

What critical event must take place before goods can be shipped in order to assure payment can be reasonably expected? A. credit approval B. determination of correct delivery address C. receipt of sales order from the customer D. matching of shipping document with sales invoice

A. credit approval

The confirmation of customers' accounts receivable rarely provides reliable evidence about the completeness assertion because A. customers may not be inclined to report understatement errors in their accounts. B. recipients usually respond only if they disagree with the information on the request. C. many customers merely sign and return the confirmation without verifying details. D. there is likely to be reliable third-party evidence available.

A. customers may not be inclined to report understatement errors in their accounts.

Tests of which balance-related audit objective are normally performed first in an audit of the sales and collection? A. detail tie-in B. accuracy C. completeness D. rights

A. detail tie-in

After a CPA has determined that accounts receivable have increased as a result of slow collections in a "tight money" environment, the CPA will be likely to A. expand tests of collectibility. B. review the going concern ramifications. C. review the credit and collection policy. D. increase the balance in the allowance for bad debt account.

A. expand tests of collectibility.

Of the four factors that determine the initial sample size in attributes sampling (population size, tolerable exception rate, acceptable risk of overreliance, and expected population exception rate), which factor has the least effect on sample size? A. population size B. expected population exception rate C. tolerable exception rate D. acceptable risk of overreliance

A. population size

A sales invoice for $5,200 was computed correctly but, by mistake, was entered as $2,500 to the sales journal and posted to the accounts receivable master file. The customer remitted only $2,500, the amount on his monthly statement. A. prelistings and predetermined totals are used to control postings. B. the customers' monthly statements are verified and mailed by a responsible person other than the bookkeeper who prepared them. C. sales invoice numbers, prices, discounts, extensions, and footings are independently checked. D. unauthorized remittance deductions made by customers or other matters in dispute are investigated promptly by a person independent of the accounts receivable function.

A. prelistings and predetermined totals are used to control postings.

A sample in which the characteristics of the sample are the same as those of the population is a(n) A. representative sample. B. attributes sample. C. random sample. D. computerized sample selection.

A. representative sample

An auditor wishes to test the completeness assertion for sales. Which of the following audit tests would most likely accomplish this objective? A. select a sample of shipments occurring during the year and trace each one to inclusion in the sales journal. B. compare accounts receivable turnover (net credit sales/average gross receivables) in the current year to that achieved in the prior year. C. use common size analysis to compare recorded sales to sales recorded by other companies in the same industry. D. select large individual sales recorded during the year and review supporting documentation.

A. select a sample of shipments occurring during the year and trace each one to inclusion in the sales journal.

An auditor who is auditing accounts receivable would least likely perform which of the following tests? A. select cash disbursements made shortly after year end and examine the supporting documentation such as receiving reports and vendor invoices. B. confirm a sample of accounts receivables with the customers that owe the balances. C. vouch cash receipts to the accounts receivables transactions. D. obtain an aged trial balance of accounts receivable and trace the total to the general ledger control account.

A. select cash disbursements made shortly after year end and examine the supporting documentation such as receiving reports and vendor invoices.

The process which requires the calculation of an interval and then selects the items based on the size of the interval is A. systematic sample selection. B. statistical sampling. C. random sample selection. D. computerized sample selection.

A. systematic sample selection.

Which of the following statements is correct when dealing with sampling for exception rates? A. the term exception refers to both deviations from the client's control procedures and amounts that are not monetarily correct. B. in using audit sampling for exception rates, the auditor is most concerned with the confidence interval. C. when used with sampling, the term deviation is synonymous with the term exception. D. The actual population exception rate is the same as the sample exception rate.

A. the term exception refers to both deviations from the client's control procedures and amounts that are not monetarily correct.

Which of the following will likely provide the most assurance concerning the accuracy balance-related objective for accounts receivable? A. vouch amounts in the subsidiary ledger to details on shipping documents. B. compare receivable turnover ratios with industry statistics for reasonableness. C. inquire about receivables pledged under loan agreements. D. assess the allowance for uncollectible accounts for reasonableness.

A. vouch amounts in the subsidiary ledger to details on shipping documents.

For which of the following tests would an auditor most likely use attributes sampling? A. Selecting accounts receivable for confirmation of account balances. B. Inspecting employee time cards for proper approval by supervisors. C. Making an independent estimate of the amount of a LIFO inventory. D. Examining invoices in support of the valuation of fixed asset additions.

B. Inspecting employee time cards for proper approval by supervisors.

Which of the following is the most likely cause of the decrease in accounts receivable turnover? A. increase in the cash discount offered B. liberalization of credit policy C. shortening of due date terms D. increased cash sales

B. Liberalization of credit policy

What is an auditor's evaluation of a statistical sample for attributes when a test of 50 documents results in two exceptions if the tolerable exception rate is 7 percent, the expected population exception rate is 5 percent, and the allowance for sampling risk is 2 percent? A. modify the assessed level of control risk because the tolerable exception rate plus the allowance for sampling risk exceeds the population exception rate. B. accept the sample results as support for the assessed level of control risk because the sample exception rate plus the allowance for sampling risk is less than the tolerable exception rate. C. accept the sample results as support for the assessed level of control risk because the tolerable exception rate minus the allowance for sampling risk equals the expected population exception rate. D. modify the assessed level of control risk because the sample exception rate plus the allowance for sampling risk exceeds the tolerable exception rate.

B. accept the sample results as support for the assessed level of control risk because the sample exception rate plus the allowance for sampling risk is less than the tolerable exception rate.

Shipments occurring in December 2019 did not get recorded until the first few days of January 2020. A. the system automatically assigns bill of lading numbers and ensures no duplicates are issued. B. as goods leave the shipping dock, the system generates a bill of lading and associated sales invoice, which is automatically recorded in the sales journal. C. the accounting system requires entry of a valid bill of lading number provided by the shipping department before a sales transaction is accepted for entry. D. the system prevents the creation of a bill of lading without a customer order dated prior to the shipping date.

B. as goods leave the shipping dock, the system generates a bill of lading and associated sales invoice, which is automatically recorded in the sales journal.

An auditor seelcts a sample from the file of shipping documents to determine whether invoices were prepared. This test is to satisfy the audit objective of A. control. B. completeness. C. accuracy. D. existence.

B. completeness.

The auditor should control and verify all liquid assets simultaneously to prevent A. unrecorded disbursements. B. conversion of assets to conceal a shortage. C. unauthorized disbursements. D. embezzlement.

B. conversion of assets to conceal a shortage.

When do most companies record sales returns and allowances? A. during the month after the sale occurs B. during the accounting period in which the return occurs C. during the month in which the sale occurs D. whenever the customer contacts the company regarding the credit

B. during the accounting period in which the return occurs

Which of the following controls most likely will be effective in offsetting the tendency of sales personnel to maximize sales volume at the expense of high bad-debt write-offs? A. employees responsible for authorizing sales and bad-debt write-offs are denied access to cash. B. employees involved in the credit-granting function are separated from the sales function. C. shipping documents and sales invoices are matched by an employee who does not have the authority to write off bad debts. D. subsidiary accounts receivable records are reconciled to the control account by an employee independent of the authorization of credit.

B. employees involved in the credit-granting function are separated from the sales function.

If the auditor decides to assess control risk at the moderate level in a private company audit, when in previous years the auditor set control risk at the maximum level, then tests of controls for the current year would be A. unchanged from prior planned settings. B. increased in number. C. reduced in number. D. not performed.

B. increased in number.

One of the casues of nonsampling risk is A. inadequate sample size. B. ineffective audit procedures. C. exceptions being found in the sample. D. choosing the wrong sample size.

B. ineffective audit procedures.

The most serious shortcoming of the haphazard sample selection method is A. it is costly to use. B. it is difficult to remain completely unbiased in the selection. C. it is not subject to statistical sampling methods. D. it is time consuming to use.

B. it is difficult to remain completely unbiased in the selection.

Which of the following statements is most correct with respect to the evaluation of nonprobabilistic sample results? A. it is acceptable to make nonprobabilistic evaluations only when probabilistic sample selection is used. B. it is never acceptable to evaluate a nonprobabilistic smaple using statistical methods. C. it is acceptable to make nonprobabilistic evaluations only if the auditor cannot quantify sampling risk. D. all of the aboce are correct.

B. it is never acceptable to evaluate a nonprobabilistic sample using statistical methods.

In performing a review of a client's cash disbursements, an auditor uses systematic sample selection with a random start. The primary disadvantage of this technique is population items A. may occur twice in the sample. B. may occur in a systematic pattern, thus negating the randomness of the sample. C. must be replaced in the population after sampling to permit valid statistical inference. D. must be reordered in a systematic pattern before the sample can be drawn.

B. may occur in a systematic pattern, thus negating the randomness of the sample.

The accounting system will not post a sales transaction to the sales journal without a valid bill of lading number. This control is most relevant to which transaction-related objective for sales? A. accuracy B. occurrence C. completeness D. posting and summarization

B. occurence

An advantage of using statistical sampling techniques is that such techniques A. define the values of precision and reliability requried to provide audit satisfaction. B. quantify sampling risk. C. have been established in the courts to be superior to judgmental sampling. D. eliminate the need for judgemental decisions.

B. quantify sampling risk.

Which one of the following statements is true? In deciding on substantive tests of transactions, A. all procedures are dependent on the adequacy of the controls and the results of the tests of controls B. some procedures are commonly employed on every audit regardless of the circumstances C. results obtained in the prior year's audit will not affect the procedures used this year D. the materiality of the item will not infuence the choice of procedures used

B. some procedures are commonly employed on every audit regardless of the circumstances

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

B. the confirmation form also seeks information about indebtedness to the bank.

In determining the sample size for a test of controls, an auditor should consider the likely rate of exception, the acceptable risk of overreliance, and the A. risk of incorrect acceptance. B. tolerable exception rate. C. nature and cause of exceptions. D. population size.

B. tolerable exception rate.

Which audit procedure is most effective in testing credit sales for overstatement? A. trace a sample of postings from the sales journal to the sales account in the general ledger. B. vouch a sample of recorded sales from the sales journal to shipping documents. C. prepare an aging of accounts receivable. D. trace a sample of initial sales orders to sales recorded in the sales journal.

B. vouch a sample of recorded sales from the sales journal to shipping documents.

Which of the following procedures will an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests? A. review the cash receipts journal for the month prior to year end. B. intensify the study of internal control concerning the revenue cycle. C. inspect the shipping records documenting the merchandise sold to the debtors. D. increase the assessed level of detection risk for the existence assertion.

C. Inspect the shipping records documenting the merchandise sold to the debtors.

When positive confirmations are used, auditing standards require alternative procedures for confirmations not returned by the customer. Which of the following would not be considered an alternative procedure? A. examine shipping documents to verify that the merchandise was shipped. B. examine subsequent cash receipts to determine if the receivable has been paid. C. Send a second confirmation request. D. examine sales invoice to verify the actual issuance of a sales invoice and the actual date of the billing.

C. Send a second confirmation request.

As a result of tests of controls, the auditor assesses control risk too low and thereby decreases substantive testing. This is illustrated by which situation? A. True Exception Rate Is Less Than TER, CUER is less than TER B. True Exception Rate Is Less Than TER, CUER exceeds TER C. True Exception Rate Exceeds TER, CUER is less than TER D. True Exception Rate Exceeds TER, CUER exceeds TER

C. True Exception Rate Exceeds TER, CUER is less than TER

If the client's internal control for recording sales returns and allowances is evaluated as ineffective, A. all sales returns must be confirmed with the customer. B. sampling is not appropriate. C. a larger sample may be needed to verify cutoff. D. all sales returns must be traced to supporting documentation.

C. a larger sample may be needed to verify cutoff.

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

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

The upper precision limit (CUER) in statistical sampling is A. the percentage of items in a sample that possess a particular attribute. B. the percentage of items in a population that possess a particular attribute. C. a statistical measure, at a specified confidence level, of the maximum rate of occurrence of an attribute. D. the maximum rate of exception that the auditor would be willing to accept in the population without altering the planned reliance on the attribute.

C. a statistical measure, at a specified confidence level, of the maximum rate of occurrence of an attribute.

One type of shipping document is the ____, which is a written contract between the carrier and the seller of the receipt and shipment of goods. A. customer order B. sales invoice C. bill of lading D. sales order

C. bill of lading

One of the shortcomings in evaluating the allowance for uncollectible accounts by reviewing individual noncurrent balances on the aged trail balance is I. it is difficult to compare the results of the current year with those of the previous year. II. current accounts are ignored in establishing the adequacy of the allowance. A. I only B. II only C. both I and II D. neither I nor II

C. both I and II

In many audits, no substantive tests of transactions are made for the ________ assertion on the grounds that understatement of sales is not a concern. A. accuracy B. existence C. completeness D. none of the above

C. completeness

The upper limit of the probable population exception rate is the A. upper exception rate. B. estimated population exception rate. C. computed upper exception rate. D. tolerable exception rate.

C. computed upper exception rate.

In establishing the existence and ownership of an investment held by a corporation in the form of publicly traded stock, an auditor should inspect the securities or A. obtain written representations from management confirming that the securities are properly classified as trading securities. B. inspect the audited financial statements of the investee company. C. confirm the number of shares owned that are held by an independent custodian. D. determine that the investment is carried at the lower of cost or market.

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

Auditors are especially concerned with three aspects of internal control for the sales and collection cycle. Which of the following is not one of their major concerns? A. controls over cutoff B. controls related to the allowance for uncollectible accounts C. controls over sales discounts D. controls that prevent or detect embezzlements

C. controls over sales discounts

If all other factors specified in a sampling plan remain constant, changing the ARO from 5 percent to 10 percent will cause the required sample size to A. increase. B. remain the same. C. decrease. D. become indeterminate.

C. decrease.

The auditor's primary concern in performing audit procedures of the write-off of uncollectible accounts relates to the risk that the client writes off customer accounts that have already been collected. The primary control for preventing this fraud is A. examining debit memos B. examining the vouchers payable register C. examining the uncollectible account authorization form D. examining authorized credit memos

C. examining the uncollectible account authorization form

Which of the following tests of controls is useful to test the transaction-related audit objective of posting and summarization? A. observe whether the accountant reconciles the bank account B. observe unrecorded cash at a point in time C. Observe whether monthly statements are sent D. Observe endorsement of incoming checks

C. examining the uncollectible account authorization form

Which of the following controls would be most effective in detecting a failure to record cash received from customers paying on their accounts? A. a person in accounting reconciles the bank deposit to the cash receipts journal. B. transactions recorded in the cash receipts journal are posted on a real-time basis to the accounts receivable master file. C. monthly statements are sent to customers and any discrepancies are resolved by someone independent of cash handling and accounting. D. deposits of cash received are made daily.

C. monthly statements are sent to customers and any discrepancies are resolved by someone independent of cash handling and accounting.

Which of the folowing is the risk that audit tests will not uncover existing exceptijons in a sample? A. sampling risk B. detection risk C. nonsampling risk D. audit risk

C. nonsampling risk

An advantage of using statistical over nonstatistical sampling methods in tests of controls is that the statistical methods A. eliminate the need to apply professional judgment in determining appropriate sample sizes. B. affords greater assurance than a nonstatistical sample of equal size. C. provides an objective basis for quantitatively evaluating sample risk. D. emphasizes qualitative evaluation of results as opposed to quantitative evaluations.

C. provides an objective basis for quantitatively evaluating sample risk.

The auditor sends out positive accounts receivable confirmations for a client. Assuming a second confirmation is sent out to a major customer who still fails to respond, which action should the auditor take? A. consider the nonresponse as a minor audit finding and use responding confirmations as a basis for test results. B. issue a qualified opinion due to the lack of sufficient audit evidence. C. send out a third confirmation request and, if no response, perform alternative procedures. D. provide the client a copy of the accounts receivable confirmation and request that they obtain the information from the customer.

C. send out a third confirmation request and, if no response, perform alternative procedures.

To determine whether internal control relative to the revenue cycle of a wholesaling entity is operating effectively in minimizing the failure to prepare sales invoices, an auditor would most likely select a sample of transactions from the population represented by the A. sales order file. B. customer order file. C. shipping document file. D. sales invoice file.

C. shippign document file.

When a population is divided into subpopulations, usually by dollar size, and larger samples are taken from the subpopulation with larger sizes, ______ is being used. A. block sampling B. sampling with probability proportional to size C. stratified sampling D. haphazard sampling

C. stratified sampling

Which of the following audit procedures will best uncover an understatement of sales and accounts receivable? A. confirm accounts receivable. B. test a sample of sales transactions, selecting the sample from sales invoices recorded in the sales journal. C. test a sample of sales transactions, selecting the sample from prenumbered shipping documents. D. review the aged accounts receivable trial balance.

C. test a sample of sales transactions, selecting the sample from prenumbered shipping documents.

The most significant effect of the results of the tests of controls and substantive tests of transactions in the sales and collection cycle is on A. the impact of processing cash receipts B. bad debt expense C. the confirmation of accounts receivable D. the analytical test to be performed.

C. the confirmation of accounts receivable

The exception rate the auditor will permit in the population and still be willing to conclude that the control is operating effectively is the A. estimated population exception rate. B. sample exception rate. C. tolerable exception rate. D. acceptable risk of overreliance.

C. tolerable exception rate.

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

C. transmitted the checks to the payees after year end.

The audit procedure referred to as proof of cash receipts is particularly useful to test A. whether there are cash receipts that have not been recorded in the journals B. time lags in making deposits C. whether all recorded cash receipts have been deposited in the bank D the client's reconciliation between cash receipts and bank deposits

C. whether all recorded cash receipts have been deposited in the bank

Which of the following is an accurate statment relating to separation of duties? A. the credit granting function should be separate from the sales function B. mangement should deny cash access to anyone responsible for entering sales and cash receipts transactions C. all disagreements on the monthly statements should be directed to a designated person who has no responsibility D. all the above are accurate statements

D. All the above are accurate statements

The accounting system automatically obtains the unit price based on scans of bar codes for merchandise sold. This control is most relevant to which transaction-related objective for sales? A. posting and summarization B. occurrence C. completeness D. accuracy

D. accuracy

The return of a positive confirmation of accounts receivable without an exception attests to the A. collectibility of the receivable balance. B. accuracy of the allowance for uncollectible accounts. C. accuracy of the aging of accounts receivable. D. accuracy of the receivable balance.

D. accuracy of the receivable balance.

A listing of the balances in the accounts receivable master file at the balance sheet date, including individual customer balances outstanding and a breakdown of each balance by the time passed between the date of the sale and the balance sheet date, is the A. accounts receivable ledger. B. customer list. C. schedule of accounts receivable. D. aged trial balance.

D. aged trial blance.

Realizable value is an essential balance-related audit objective for accounts receivable because collectibility of receivables is often a significant concern. Which of the following is not an internal control the auditor should evaluate to reduce the likelihood of uncollectible accounts? A. a written policy of writing off uncollectable receivables B. preparation of an aged trial balance reviewed and followed up by appropriate mangement personnel C. customer credit approval by appropriate personnel D. all of the above are internal controls the auditor should evaluate

D. all of the above

Which of the following is an accurate statement regarding sampling? A. a 95% confidence level provides a 5% sampling risk. B. the purpose of planning the sample is to make sure that the audit tests are performed in a manner that provides the desired sampling risk and minimizes the likelihood of nonsampling errors. C. the auditor can perform the aduit tests only after the sample items are selected. D. all of the above

D. all of the above

Which of the following is least likely to be a reasonable explanation for an increase in accounts receivable turnover? A. early payment incentives for customers B. tightening of credit policy C. implementation of more aggressive collection policies D. allowance of a new grace period for customer payments

D. allowance of a new grace period for customer payments

What event initiates a transaction in the sales and collection cycle? A. delivery of product to a customer B. identification of a new customer C. receipt of cash D. customer request for goods or services

D. customer request for goods and services

An auditor is performing substantive tests of transactions for sales. One step is to trace a sample of debit entries from the accounts receivable master file back to the supporting duplicate sales invoices. What will the auditor intend to establish by this step? A. sales invoices represent existing sales. B. all sales have been recorded. C. all sales invoices have been correctly posted to customer accounts. D. debit entries in the accounts receivable master file are correctly supported by sales invoices.

D. debit entries in the accounts receivable master file are correctly supported by sales invoices.

Which of the following occurrences would be least likely to warrant further audit attention for the auditor? A. monetary misstatements in populations of account balance details B. monetary misstatments in popuations of transaction data C. deviations from client's established control procedures D. deviations from client's budgeted values

D. deviations from client's budgeted values

For sales, the occurrence transaction-related audit objective affects which of the following balance-related audit objectives? A. detail tie-in B. completeness C. rights D. existence

D. existence

An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor A. minimize the failure to detect errors and fraud. B. eliminate the risk of nonsampling errors. C. design more effective audit procedures. D. measure the sufficiency of the audit evidence by quantifying sampling risk.

D. measure the sufficiency of the audit evidence by quantifying sampling risk.

An auditor is comparing the write-off of uncollectible accounts as a percentage of total accounts receivable with previous years. A possible misstatement this procedure could uncover is A. overstatement or understatement of sales returns and allowances. B. overstatement or understatement of sales. C. overstatement or understatement of accounts receivable. D. overstatement or understatement of bad debt expense.

D. overstatement or understatement of bad debt expense.

A sample in which every possible combination of items in the population has an equal chance of constituting the sample is a A. judgement sample. B. representative sample. C. statistical sample. D. random sample.

D. random sample

When the computed upper exception rate (CUER) is greater than the tolerable exception rate (TER), it is necessary for the auditor to take specific action. Which of the following courses of action would be most difficult to justify? A. revise the assessed control risk upward B. write a letter to management which outlines the control deficiencies C. expand the sample size and perform more tests D. reduce the tolerable exception rate so as to accept the sample results

D. reduce the tolerable exception rate so as to accept the sample results

Tracing shipping documents to sales invoices provides evidence that A. sales billed to customers were actually shipped. B. all goods ordered by customers were shipped. C. shipments to customers were recorded as sales. D. shipments to customers were properly invoiced.

D. shipments to customers were properly invoiced.

When dealing with the processing and recording of cash receipts, A. theft can occur before the receipts are entered into the records B. cash receipts should be deposited at least monthly C. the monthly statement is used to prepare the cash receipts journal D. the msot important concern is the theft of cash

D. the most important concern is the theft of cash

You are determining he significance of the following: you set a 5% risk of assessing control risk too low and your computation of the upper deviation risk is 7%. What could you conclude? A. there is a 95% chance the deviation rate in the population exceeds 95%. B. there is a 95% chance the deviation rate in the population is less than 5%. C. there is a 5% chance the deviation rate in the population is less than 7%. D. there is a 5% chance the deviation rate in the population exceeds 7%.

D. there is a 5% chance the deviation rate in the population exceeds 7%.

Cash receipts from sales on accont have been misappropriated. Which of the following acts would conceal this fraud and be least likely to be detected by an auditor? A. overstating the accounts receivable control account by intentionally misstating prices charged for goods B. understating the cash receipts journal by purposely recording incorrect amounts C. overstating the accounts receivable subsidiary ledger by not recording payments made by customers D. understating the sales journal by not recording cash sales

D. understating the sales journal by not recording cash sales

When should auditors not perform alternative procedures in testing the accounts receivable balance? A. when customers dod not return positive confirmation requests B. when confirmations are deemed to be ineffective as an audit procedure C. when confirmations are too costly to use D. when customers do not return negative confirmation requests

D. when customers do not return negative confirmation requests

Blank confirmations are considered less reliable than standard postivie confirmations True/False

False

One of the most important aspects of billing is ensuring all shipments made are billed (completeness); inaccurate billing can always be corrected at a later date. True/False

False

An auditor can increase the likelihood that a sample is representative by using care in Desigining the sampling process Yes/No Designing the sample selection Yes/No

Yes/Yes

Testing the information on the aged trial balance for detail tie-in is a necessary audit procedure, which would normally include 1. Test-footing the total column and the columns depicting the aging Yes/No 2. Comparing the total of aged trail balance with the general ledger accounts receivable account Yes/No

Yes/Yes