Auditing E F G 6
hich of the following is not considered one of the three factors increasing the probability of fraud? Multiple Choice Motive. Lack of training. Opportunity. Rationalization.
B
When an employee embezzles company funds from an electric utility company for the purpose of paying expenses of an anti-nuclear protest organization, the fraudster's motive is said to be: Multiple Choice psychotic. egocentric. ideological. economic.
C
The AICPA has developed sample size tables for attributes sampling that specifically incorporate all of the following factors except for the: Multiple Choice expected population deviation rate. risk of overreliance. tolerable rate of deviation. sample rate of deviation.
D
Which of the following components of the audit risk model is most closely associated with attributes sampling? Multiple Choice a. Detection risk. b.Inherent risk. c. Audit risk. d. Control risk.
D
Which of the following statements is not true regarding variables sampling? Multiple Choice Two approaches to variables sampling are monetary unit sampling and classical variables sampling. Both statistical and nonstatistical approaches to variables sampling can be used under GAAS. The objective of variables sampling is to estimate either the true balance or the extent of misstatement in an account balance or class of transactions. Variables sampling is appropriate when the distribution of the population is binary in nature.
D
Which of the following is the most likely outcome when the upper limit rate of deviation is less than the tolerable rate of deviation? Multiple Choice The auditor would be exposed to the risk of overreliance. The auditor would decide to reduce the planned degree of reliance on internal control. The auditor would increase the extent of further audit procedures. The auditor would be exposed to a potential efficiency loss.
a
Which of the following sampling risks is associated with the use of variables sampling? Multiple Choice Risk of underreliance: No; Risk of incorrect rejection: Yes Risk of underreliance: No; Risk of incorrect rejection: No Risk of underreliance: Yes; Risk of incorrect rejection: Yes Risk of underreliance: Yes; Risk of incorrect rejection: No
a
Which of the following sets of information does an auditor usually confirm on one form? Multiple Choice Accounts payable and purchase commitments. Cash in bank and collateral for loans. Inventory on consignment and contingent liabilities. Accounts receivable and accrued interest receivable.
b
Which of the following represents a major difference in the use of monetary unit sampling (MUS) and classical variables sampling? Multiple Choice MUS is more effective in controlling the auditors' exposure to sampling risk than classical variables sampling. MUS considers both the expected misstatement and tolerable misstatement in the determination of sample size, while classical variables sampling only considers the expected misstatement. MUS defines the sampling unit as a dollar of an account balance while classical variables sampling defines the sampling unit as a component of an account balance. MUS is a nonstatistical sampling method while classical variables sampling is a statistical sampling method.
c
Which of the following selection methods selects individual dollars within an account balance or class of transactions for examination? Multiple Choice Attribute sampling. Classical variables sampling. Monetary unit sampling. Nonstatistical variables sampling.
c
Which of the following set of conditions would provide the auditor with the smallest sample size under monetary unit sampling (RIA = risk of incorrect acceptance, EM = expected misstatement, TM = tolerable misstatement, PS = population size)? RIA = 5 percent, EM = $7,500, TM = $15,000, PS = $150,000. RIA = 5 percent, EM = $5,000, TM = $10,000, PS = $200,000. RIA = 5 percent, EM = $2,000, TM = $10,000, PS = $100,000. Correct RIA = 5 percent, EM = $7,500, TM = $15,000, PS = $300,000.
c
While selecting a sample of sales invoices for a test of internal controls, the auditor was unable to locate one invoice and classified this invoice as non-deviation. This is an example of Multiple Choice sampling risk. incorrect acceptance. nonsampling risk. deviation risk.
c
Your client is in the process of acquiring another company. You have been requested to verify that cash for the company being acquired is properly stated. The audit technique that will yield the most persuasive evidence is: Multiple Choice examination of the company's escrow account. interview with the company's treasurer and cash manager. preparation and review of standard bank confirmation inquiries. analytical computations comparing current cash in the bank with previous accounting periods.
c
The process of subdividing a population into more homogeneous subgroups is known as: Multiple Choice classification. identification. sampling. stratification.
d
he sampling plan for nonstatistical sampling is the same as statistical sampling except for which of the following steps? Multiple Choice Define the characteristic of interest. Define the population. Measure the sample items. Evaluate the sample results.
d
An auditor is considering whether the omission of the confirmation of investments impairs the auditor's ability to support a previously expressed unmodified opinion. The auditor need not perform this omitted procedure if: Multiple Choice the results of alternative procedures that were performed compensate for the omission. the auditor's assessed level of detection risk is low. the omission is documented in a communication with the audit committee. no individual investment is material to the financial statements taken as a whole.
A
Which of the following situations most likely represents the highest risk of a misstatement arising from misappropriation of assets? Multiple Choice A large number of bearer bonds on hand. A large number of inventory items with low sales prices. A large number of transactions processed in a short period of time. A large number of fixed assets with easily identifiable serial numbers.
A
Which of the following management policies would increase the probability of fraud in a company? Multiple Choice Diversifying authority throughout divisions and subsidiaries in the organization. Measuring performance and awarding bonuses based on short-term operating results. Giving employees performance feedback that considers positive and constructive praise along with critical and negative observations on their work. Establishing work teams that share responsibilities, performance, and bonuses based on collective efforts.
B
Which of the following would be the most likely situation in which an auditor would use variables sampling? Multiple Choice Comparing the recorded balance in accounts receivable to expected balances or prior-years' balances. Selecting customer balances in accounts receivable for confirmation. Evaluating sales invoices for evidence of authorization by client personnel. Mathematically evaluating the client's provision for the allowance for doubtful accounts.
B
How does the auditor typically determine the appropriate level of the risk of incorrect rejection when using classical variables sampling? -----
Based on the anticipated cost of conducting additional substantive procedures.
An auditor has identified the controller's review of the bank reconciliation as a control to test. In connection with this test, the auditor interviews the controller to understand the specific data reviewed on the reconciliation. In addition, the auditor verifies that the bank reconciliation is properly prepared by the accountant and reviewed by the controller as evidenced by their respective sign-offs. Which of the following types of audit procedures do these actions illustrate? Multiple Choice Observation and inspection of records. Confirmation and reperformance. Inquiry and inspection of records. Analytical procedures and reperformance.
C
Auditors consider statistical sampling to be characterized by the following: a. Representative sample selection and nonmathematical evaluation of the results. b. Carefully biased sample selection and mathematical evaluation of the results. c. Representative sample selection and mathematical evaluation of the results. d. Carefully biased sample selection and nonmathematical evaluation of the results.
C
Each of the following is a type of known misstatement, except: Multiple Choice an inaccuracy in processing data. the misapplication of accounting principles. differences between management and the auditor's judgment regarding estimates. a difference between the classification of a reported financial statement element and the classification according to generally accepted accounting principles.
C
As payments are received, one mailroom employee is assigned the responsibility of prelisting receipts and preparing the deposit slip prior to forwarding the receipts, deposit slip, and remittance advices to accounts receivable for posting. Accounts receivable personnel re-foot the deposit slip, stamp a restrictive endorsement on the back of each check, and then forward the receipts and deposit slip to the treasury department. Evaluate the internal control of the described process. Which of the following is a reasonable assessment of internal control in this process? Multiple Choice Adequate internal control. Inadequate internal control because mailroom employees should not have access to cash. Inadequate internal control because treasury employees should prepare the deposit slip. Inadequate internal control because of a lack of separation of duties.
D
When auditing financial statements and finding indications of a possible misappropriation of assets, independent auditors should: Multiple Choice investigate fully to determine the total amount of the misappropriation. determine which accounts are affected and the amount by which they are overstated or understated. determine the methods by which the misappropriation was carried out. identify a person(s) who are likely responsible for the misappropriation and obtain evidence about some other fraud indications in their work. all of these.
E
An audit plan of substantive procedures for cash would not include: Multiple Choice request a cutoff bank statement be mailed to the client. request client to prepare bank reconciliations. prepare a schedule of interbank transfers for a period of ten business days before and after year-end date. obtain a written client representation concerning compensating balance agreements.
a
For which of the following audit tests would an auditor most likely use attributes sampling? Multiple Choice Inspecting purchase orders for proper approval by supervisors. Making an independent estimate of recorded payroll expense. Determining that all payables are recorded at year end. Selecting accounts receivable for confirmation of account balances.
a
In audit sampling applications, sampling risk is Multiple Choice The probability that an audit team's conclusion based on a sample might be different from the conclusion based on an audit of the entire population. The probability that the audit team will fail to recognize erroneous accounting in the client's documentation. A characteristic of statistical sampling applications but not of nonstatistical applications. The probability that accounting misstatements will arise in transactions and enter the accounting system.
a
Tests performed by auditors that examine evidence for both control attributes and monetary misstatements are known as: Multiple Choice dual-purpose tests. multi-function tests. substantive tests. standard-purpose tests.
a
The upper limit on misstatements is: Multiple Choice an adjustment of the sample estimate of misstatement to reflect the desired level of sampling risk. an adjustment of the sample deviation rate to reflect the desired level of sampling risk. the maximum rate of deviation that could exist before auditors would reduce the reliance on an internal control. the maximum misstatement that could exist before auditors would conclude that the account balance is not fairly stated.
a
When conducting variables sampling, auditors typically examine Multiple Choice transactions of components of the account balance or class of transactions. the balances in an account balance or class of transactions from one or more prior years. the separation of duties among client personnel for transactions related to the account balance or class of transactions. minutes from meetings of the client's board of directors
a
When performing attributes sampling, the appropriate AICPA Sample Size Table is initially selected based on the auditors' assessment of the Multiple Choice risk of overreliance. risk of underreliance. tolerable rate of deviation. expected population deviation rate.
a
Which of the following components of the upper limit on misstatements is determined by multiplying the sampling interval by the confidence factor for the acceptable risk of incorrect acceptance? Basic allowance for sampling risk. Correct Incremental allowance for sampling risk. Projected misstatement. Sampling interval.
a
Which of the following components of the upper limit on misstatements will exist in all monetary unit sampling applications, even in those where no misstatements are found? Multiple Choice Basic allowance for sampling risk. Computed allowance for sampling risk. Incremental allowance for sampling risk. Projected misstatement.
a
Which of the following factors is most likely established based on the results of prior audit examinations? Expected misstatement. Population size. Risk of incorrect acceptance. Tolerable misstatement.
a
Which of the following is considered to be an advantage of monetary unit sampling compared to classical variables sampling? Selection of larger Ability to identify components understatements A. Yes No B. No No C. No Yes D. Yes Yes
a
Which of the following is not a correct relationship between a factor and sample size in a monetary unit sampling application? Multiple Choice Expected misstatement; Inverse. Recorded balance of the account; Direct. Risk of incorrect acceptance; Inverse. Tolerable misstatement; Inverse.
a
Which of the following is not true with respect to the use of nonstatistical sampling? Multiple Choice The use of nonstatistical sampling generally results in a smaller sample size. The use of nonstatistical sampling is permissible under generally accepted auditing standards. Auditors may use block and haphazard selection methods when using nonstatistical sampling. The use of nonstatistical sampling does not permit the auditor to control exposure to the risk of overreliance.
a
Which of the following statements is true regarding attributes sampling? Multiple Choice Once the population reaches a certain size, population size has a limited impact on sample size. Auditors should use attributes sampling to evaluate controls, regardless of the degree of reliance being placed upon the controls. When determining the appropriate sample size, the audit team will specifically control its exposure to both the risk of overreliance and the risk of underreliance. Tests of controls should only be applied to transactions occurring at the end of the year under audit because the audit team wants to reach a conclusion about control risk at year end.
a
Which of the following would be consistent with an employee taking cash receipts from customers on account? Multiple Choice The total of the accounts receivable subsidiary ledger balances is less than the accounts receivable control account. The total of the accounts receivable subsidiary ledger balances is greater than the accounts receivable control account. Total cash receipts from customers for the month are less than credit sales for the month. Total cash receipts from customers for the month are greater than credit sales for the month.
a
Why does the risk of incorrect rejection result in an efficiency loss to the auditor? Multiple Choice The auditor typically expands the sample to examine additional components or transactions of the account balance. The auditor typically extends the study of internal control to attempt to obtain a reduction in the level of risk of material misstatement. More detailed audit procedures are performed on sample items already examined by the auditor. Additional time is necessary to propose adjustments to the client's account balances.
a
A proof of cash: Multiple Choice is required by GAAS. can be used to test the transactions process. is most helpful when control risk for cash is low. always detects lapping.
b
An auditor discovers that an account balance believed not to be materially misstated based on an audit sample was materially misstated based on the total population of the account balance. This is an example of which of the following types of sampling risks? Multiple Choice Incorrect rejection. Incorrect acceptance. Assessing control risk too low. Assessing control risk too high.
b
An auditor is examining an important internal control in his audit of ABC Company. Because the account balance affected by this control is highly susceptible to fraud, she will reject the sample if even one deviation is discovered. What type of sampling plan should she use? Multiple Choice Attributes sampling. Discovery sampling. Sequential sampling. Statistical sampling.
b
An auditor who discovers that client employees have committed an illegal act that has a material effect on the client's financial statements most likely would withdraw from the engagement if: Multiple Choice the illegal act is a violation of generally accepted accounting principles. the client does not take the remedial action that the auditor considers necessary. the illegal act was committed during a prior year that was not audited. the auditor has already assessed control risk at the maximum level.
b
An auditor wishes to perform tests of controls on a client's cash disbursements procedures. If the control activities leave no audit trail of documentary evidence, the auditor most likely will test the activities by: Multiple Choice confirmation and observation. observation and inquiry. analytical procedures and confirmation. inquiry and analytical procedures.
b
An auditor would least likely initiate a discussion with a client's audit committee concerning: Multiple Choice the methods used to account for significant unusual transactions. the maximum dollar amount of misstatements that could exist without causing the financial statements to be materially misstated. indications of fraud and illegal acts committed by a corporate officer that were discovered by the auditor. disagreements with management as to accounting principles that were resolved during the current year's audit.
b
An increase in which of the following would cause the sample size in a test of controls to decrease? Multiple Choice Expected population deviation rate Risk of overreliance Risk of underreliance Population size
b
An unrecorded check issued during the last week of the year would most likely be discovered by the auditor when the: Multiple Choice check register for the last month is reviewed. cutoff bank statement is reconciled. bank confirmation is reviewed. search for unrecorded liabilities is performed
b
As the auditors' assessments of control risk and analytical procedures risk decrease, which of the following statements is true? Multiple Choice The sample size will not be affected. The allowable risk of incorrect acceptance will increase. The sample size will increase. The allowable risk of incorrect acceptance will decrease.
b
Auditors are evaluating an account with a recorded balance of $500,000 using mean-per-unit estimation. This account is comprised of 1,000 individual components. The auditors sampled 100 items and determined a total audited value of $52,500. Using a risk of incorrect acceptance of 10 percent, the auditors determined a precision of $40,000. If the tolerable misstatement is $50,000, which of the following is not true? Multiple Choice The estimated recorded balance of this account is $525,000. A 90 percent probability exists that the true population value falls between $460,000 and $540,000. The auditors would conclude that the account balance is fairly stated. The probability that the auditors will incorrectly accept a materially misstated account balance is 10 percent.
b
How does the auditor establish the level of tolerable misstatement in a variables sampling application? Based on prior assessments of audit risk, risk of material misstatement, and analytical procedures risk. Based on the recorded amount of the account balance as well as the relationship of the account balance with important financial statement subtotals. Correct Based on the findings in prior audits or based on a small sample taken during the current year. Based on the anticipated cost of conducting additional substantive procedures.
b
If the amount of a check is altered by an employee after it has cleared the bank, the change can be detected by: Multiple Choice comparing the amount written on the check face to the amount written in the cash disbursements journal. comparing the magnetic imprint of the amount paid to the amount written on the check face. examining the endorsement on the back of the check. comparing the check number on the face of the check to the check number in the cash disbursements journal.
b
Law, CPA, is using nonstatistical sampling in his examination of Jye Company's accounts receivable. The recorded balance of Jye's accounts receivable was $750,000. Law selected a sample of customer accounts for examination, which were recorded at $50,000. Based on the responses received from accounts receivable confirmations, Law determined an audited value of $45,000 for the accounts receivable. If tolerable misstatement is $60,000, which of the following statements is not true? Multiple Choice The actual misstatement identified by Law is $5,000. The estimated account balance would be $825,000. Law would conclude that the account balance is not fairly stated, since the expected misstatement is greater than the tolerable misstatement. Law is not able to provide a quantitative conclusion as to the exposure to the risk of incorrect acceptance.
b
Narbona, CPA, is reviewing controls over cash received through a bank night depository. Which controls would she find most important? Multiple Choice Responsibilities are rotated for processing night depository receipts among employees of the various departments. Dual control (joint custody) is established over the contents of the night depository box from the time of removal until initial recording is completed. Vacations are required for all employees engaged in night depository activities. All deposit tickets related to night deposits are numbered.
b
SCA is auditing a client's accounts receivable balance recorded at $10 million using MUS. The following parameters have been established for this account: Tolerable misstatement = $500,000 Expected misstatement = $100,000 Risk of incorrect acceptance = 10 percent Which of the following statements would not be true with respect to the sample size in this situation? Multiple Choice The correct sample size is 69 customer accounts. Decreasing tolerable misstatement from $500,000 to $200,000 (holding all other factors constant) will reduce the sample size by 331 accounts. If SCA wishes to reduce its exposure to the risk of incorrect acceptance to 5 percent (holding all other factors constant), sample size will be increased by 24 accounts. Increasing expected misstatement to $200,000 (holding all other factors constant) will increase the sample size to 115 customer accounts.
b
The amount by which a projected misstatement in an account balance or class of transactions differs from an actual misstatement as a result of the sample not being representative of the population would typically arise from: Multiple Choice a misunderstanding of accounting principles. sampling risk. management override of an internal control policy or procedure. risk of incorrect acceptance.
b
To gather evidence regarding the bank's balance in a bank reconciliation, an auditor would examine all of the following except the: Multiple Choice cutoff bank statement. general ledger. bank confirmation. year-end bank statement.
b
To provide assurance that each voucher is submitted and paid only once, an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is: Multiple Choice supported by a vendor's invoice. stamped "paid" by the check signer. prenumbered and accounted for. approved for authorized purchases.
b
Under monetary unit sampling, the sampling interval is determined by dividing the _____ by the _____. sample size; population size population size; sample size tolerable misstatement; population size population size; tolerable misstatement
b
What is an auditor's evaluation of a statistical sample for attributes when a test of 100 documents results in 4 deviations if the tolerable rate of deviation is 5%, the expected population deviation rate is 3%, and the allowance for sampling risk is 2%? Multiple Choice Accept the sample results as support for planned reliance on the control because the tolerable rate of deviation less than allowance for sampling risk equals the expected population deviation rate. Modify planned reliance on the control because the sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate of deviation. Modify planned reliance on the control because the tolerable rate of deviation plus the allowance for sampling risk exceeds the expected population deviation rate. Accept the sample results as support for planned reliance on the control because the sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate of deviation.
b
What is the auditor's normal course of action if a "logical unit" is selected twice in monetary unit sampling? The auditor should count the logical unit as a single selection and proceed as normal. The auditor should count the logical unit as two selections and proceed as normal. The auditor should not include the logical unit as a selection, since the dollar amount of this unit is excessively large. The auditor should replicate the sample using an alternative random start.
b
Which of the following components of the upper limit on misstatements is based on the possibility that the sampling interval contains a greater degree of misstatement than the item examined by the auditor? Multiple Choice Basic allowance for sampling risk. Incremental allowance for sampling risk. Projected misstatement. Risk of incorrect acceptance.
b
Which of the following expresses the relationship between changes in the factors and changes in sample size in variables sampling? Tolerable misstatement: Direct; Expected misstatement: Inverse; Risk of incorrect rejection: Direct Tolerable misstatement: Inverse; Expected misstatement: Direct; Risk of incorrect rejection: Inverse Correct Tolerable misstatement: Inverse; Expected misstatement: Inverse; Risk of incorrect rejection: Inverse Tolerable misstatement: Inverse; Expected misstatement: Inverse; Risk of incorrect rejection: Direct
b
Which of the following factors has a direct relationship with sample size in a variables sampling application? Tolerable misstatement: Yes; Expected misstatement: Yes Tolerable misstatement: No; Expected misstatement: Yes Correct Tolerable misstatement: Yes; Expected misstatement: No Tolerable misstatement: No; Expected misstatement: No
b
Which of the following is not true with respect to the use of monetary unit sampling (MUS)? Multiple Choice MUS selects individual dollars from an account balance for verification. Compared to classical variables sampling, MUS allows the auditors to more effectively control their exposure to sampling risk. MUS estimates the extent of misstatement in an account balance or class of transactions. MUS provides the auditor with a more conservative estimate of the misstatement than classical variables sampling.
b
Which of the following is the audit team's primary objective in selecting an attributes sampling selection method? Multiple Choice To provide a high probability of selecting at least one item containing a deviation. To select a sample that is representative of the population from which it is drawn. To select controls applied to larger dollar transactions for examination. To select controls applied to transactions that are more likely to contain deviations.
b
Which of the following risks expose the auditor to effectiveness losses? Multiple Choice a. Risk of overreliance, risk of in correct rejection. b. Risk of overreliance, risk of incorrect acceptance. c. Risk of underreliance, risk of incorrect rejection. d. Risk of underreliance, risk of incorrect acceptance.
b
Why does the risk of overreliance have an inverse relationship with sample size? Multiple Choice As the audit team expects fewer deviations from the control policy or procedure, the audit team can appropriately examine fewer items. As the audit team is less concerned with making an incorrect conclusion with respect to reliance on the client's internal control, the audit team can appropriately examine fewer items. As the level of control risk increases, the audit team is placing less reliance on internal control and can appropriately examine fewer items. As the audit team requires greater compliance with the control policy or procedure, the audit team must examine a greater number of items.
b
A sampling plan in which an initial sample is selected and the audit team either draws a final conclusion or selects additional items before drawing a final conclusion is called Multiple Choice attributes sampling. discovery sampling. sequential sampling. statistical sampling.
c
All other factors being equal, as the risk of incorrect acceptance and tolerable misstatement increase, the sample size will: not be affected increase decrease can not be determine
c
As the expected misstatement is large relative to the tolerable misstatement, the audit team would most likely Multiple Choice increase their degree of reliance on internal controls. consider the possibility of an increased level of tolerable misstatement. increase the sample size. decrease the sample size.
c
Assume that the audit team wishes to determine the extent to which a particular control policy was functioning as intended. Identifying applications of the control throughout the period under audit would be most closely related to which of the following steps in sampling? Multiple Choice Determining the objective of sampling. Defining the characteristic of interest. Defining the population. Determining the sample size.
c
Brown, CPA, was using monetary unit sampling to audit an inventory of $3,000,000 that was comprised of 6,000 items. A sample size of 500 was determined and a tolerable misstatement of $20,000 was established. The sampling interval would be: $500. $5,000. $6,000. Correct $20,000.
c
Lincoln, CPA, selected a sample of 100 items by dividing the population of 100,000 sales invoices by 100. With a random start, she then selected every 1,000th invoice. This selection process is referred to as: Multiple Choice unrestricted random selection. nonstatistical selection. systematic random selection. judgmental selection.
c
Mary Todd is auditing White House Furniture. In selecting a sample of purchases, she finds that a purchase order is missing. She should: Multiple Choice select another purchase to test. have the client recreate the purchase order. consider the sample item a deviation. ask the client if the purchase was authorized.
c
Samantha, CPA, decided to stratify the population in her statistical sampling plan. Which of the following is the most likely reason she used this approach? Multiple Choice It eliminates the need for random selection. The population is relatively homogenous in terms of the dollar amount of components or transactions. It reduces her expected sample size. It eliminates the need for calculating the projected
c
Summitt, CPA, performed a nonstatistical sampling plan to examine the inventory balances of Hero Inc. Which of the following methods of sample selection are available to her? Multiple Choice Random and systematic only. Block and haphazard only. Any method she believes will result in a representative sample. Any method where the results can be probabilistically estimated.
c
The maximum rate of deviation that may exist in the operation of a control policy or procedure before the auditors would reduce reliance on internal control is referred to as: Multiple Choice acceptable rate of deviation. control risk. tolerable rate of deviation. upper limit rate of deviation.
c
What is one of the primary benefits of stratifying a population? Multiple Choice Stratifying the population allows different types of audit procedures to be performed on larger and smaller transactions or components. Stratifying the population allows the auditor to have a higher likelihood of reaching a favorable conclusion with respect to the client's financial statements. Stratifying the population allows the auditor to reduce the necessary sample size. Stratifying the population reduces the auditor's exposure to nonsampling risk.
c
When an auditor increases the assessed level of control risk because certain control procedures were determined to be ineffective, the auditor would most likely increase the: Multiple Choice extent of tests of controls. level of detection risk. level of inherent risk.
c
When counting cash on hand the auditor must exercise simultaneous control over all cash and other negotiable assets to prevent: Multiple Choice theft. irregular endorsement. replacement or substitution of stolen assets. deposits in transit.
c
When testing internal controls, which of the following statements is not true with respect to the use of nonstatistical sampling? Multiple Choice Nonstatistical sampling is permitted in the audits of both public and nonpublic entities. Nonstatistical sampling does not require the use of random selection techniques. When using nonstatistical sampling, auditors are required to quantify the parameters used to determine sample size. Auditors are required to use professional judgment in evaluating the sample results in a nonstatistical sampling application.
c
Which of the following is ordinarily considered an "extended procedure" during the independent audit of financial statements? Multiple Choice Send positive confirmations on recorded customer accounts receivable balances. Perform physical observation and test count during the client's inventory taking. Measure the time lag between the date of recording cash receipts in the books to the date of deposit credit in the bank. Conduct interviews with the client's sales billing personnel to learn about sales recording control activities.
c
Which of the following is the audit team's primary objective in selecting an attributes sampling selection method? Multiple Choice To provide a high probability of selecting at least one item containing a deviation. To select a sample that is representative of the population from which it is drawn. To select controls applied to larger dollar transactions for examination. To select controls applied to transactions that are more likely to contain deviations.
c
A number of factors influence the sample size for a variables sampling application. All other factors held constant, which of the following would lead to a larger sample size? A lower assessed level of risk of material misstatement. Increased use of analytical procedures to obtain evidence about particular assertions. Lower frequency and magnitude of misstatements. Lower levels of tolerable misstatement.
d
An audit team would be most likely to use attributes sampling in which of the following situations? Multiple Choice Performing analytical procedures during the planning stages of the audit. Evaluating management's integrity during the client acceptance process. Determining the effectiveness of the audit committee in evaluating the entity's control environment. Examining purchase requisitions for proper authorization.
d
An auditor who uses statistical sampling for attributes in testing internal controls should reduce the planned reliance on a prescribed control when the: Multiple Choice sample rate of deviation plus the allowance for sampling risk equals the tolerable rate of deviation. sample rate of deviation is less than the expected rate of deviation used in planning the sample. tolerable rate less the allowance for sampling risk exceeds the sample rate of deviation. sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate of deviation.
d
An entity with a large volume of customer remittances by mail could most likely reduce the risk of employee misappropriation of cash by using: Multiple Choice employee fidelity bonds. independently prepared mailroom prelists. daily check summaries. a bank lockbox system.
d
As a result of tests of controls, an auditor assessed control risk too low and decreased the effectiveness of her substantive procedures. This assessment occurred because the true deviation rate in the population was: Multiple Choice less than the risk of overreliance, based on the auditor's sample. less than the deviation rate in the auditor's sample. greater than the risk of overreliance, based on the auditor's sample. greater than the deviation rate in the auditor's sample.
d
Auditors are evaluating an account with a recorded balance of $600,000 using classical variables sampling. Based on an allowable risk of incorrect acceptance of 5 percent, the auditors have determined the following: Estimated account balance = $680,000 Precision = $20,000 Tolerable misstatement = $50,000 Which of the following best describes the auditors' decision and rationale for that decision? Multiple Choice The auditors would accept the account balance as fairly stated, since the sample estimate falls outside of the precision interval. The auditors would conclude that the account balance is not fairly stated, since the sample estimate falls outside of the precision interval. The auditors would accept the account balance as fairly stated, since the difference between the lower bound of the precision interval and recorded balance exceeds the tolerable misstatement. The auditors would conclude that the account balance is not fairly stated, since the difference between the lower bound of the precision interval and recorded balance exceeds the tolerable misstatement. Correct Next Visit question mapQuestion 73 of 133 Total 7
d
Auditors ordinarily send a standard confirmation request to all banks with which the client has done business during the year under audit, regardless of the year-end balances. A purpose of this procedure is to: Multiple Choice provide the data necessary to prepare a proof of cash. request that a cutoff bank statement and related checks be sent to the audit. detect questionable bank activities that may otherwise not be discovered. seek information about contingent liabilities and security agreements.
d
In a classical variables sampling application, the sample size will be smaller when the: risk of incorrect acceptance is lower. risk of incorrect rejection is lower. tolerable misstatement is lower. population variability is lower.
d
In order for auditors to be able to recognize potential fraud, they must be aware of the basic characteristics of fraud. Which of the following is not a characteristic of fraud? Multiple Choice Intentional deception. Taking unfair or dishonest advantage of other people. Perpetration for the benefit or detriment of the organization. Negligence on the part of executive management.
d
In the audit of cash the auditor obtains a bank cutoff statement primarily to: Multiple Choice identify old outstanding checks that the client may exclude from the year-end bank reconciliation in order to misappropriate cash. obtain sufficient information to reconcile the client's bank account as of year-end. obtain direct confirmation of the client's bank balances as of year-end. test the propriety of items appearing on the client's year-end bank reconciliation.
d
In which of the following circumstances would the auditor most likely use variables sampling? Multiple Choice Identifying the susceptibility of the account balance to misstatement. Evaluating the operating effectiveness of specific control procedures. Evaluating the operating design of specific control procedures. Determining whether the client's accounts receivable balance is correctly recorded.
d
On the basis of attributes sampling, an auditor decided to increase the assessed level of control risk from the level originally planned. To achieve an overall audit risk level that is substantially the same as the original planned level of audit risk, the auditor would: Multiple Choice increase inherent risk. increase overall materiality levels. decrease substantive procedures. decrease detection risk.
d
The audit team decided to reduce planned reliance on internal controls based on the results of attributes sampling. However, the actual rate of deviation in the population is lower than the tolerable rate of deviation. Which type of risk and loss is the audit team exposed to? Multiple Choice Risk of overreliance; effectiveness loss. Risk of overreliance; efficiency loss. Risk of underreliance; effectiveness loss. Risk of underreliance; efficiency loss.
d
When considering the results of an attributes sampling application, the auditor compares which of the following two measures? Multiple Choice Upper limit rate of deviation; sample rate of deviation. Tolerable rate of deviation; sample rate of deviation. Expected rate of deviation; upper limit rate of deviation. Upper limit rate of deviation; tolerable rate of deviation.
d
Which of the following factors that affect sample size can be determined by considering the recorded account balance of the account or class of transactions as well as the relationship between the recorded account balance or class of transactions with important financial statement subtotals? Expected misstatement. Population size. Risk of incorrect acceptance. Tolerable misstatement.
d
Which of the following is not considered in establishing the sample size in a monetary unit sampling application? Expected misstatement. Population size. Risk of incorrect acceptance. All of these are considered
d
Which of the following is the least likely outcome when the upper limit on misstatements exceeds the tolerable misstatement? Multiple Choice The auditor would be exposed to the risk of incorrect rejection. The auditor would be exposed to an efficiency loss. The auditor would consider expanding the sample to evaluate additional transactions or components of the account balance. The auditor would conclude that the account balance is fairly stated.
d
Which of the following statements is generally correct about the sample size in statistical sampling when testing internal controls? Multiple Choice As the population size doubles, the sample size should increase by about 67%. The sample size is inversely proportional to the expected population deviation rate. There is no relationship between the tolerable rate of deviation and the sample size. When evaluation very large populations, the population size has little or no effect on the sample size.
d
Which of the following statements is true regarding performance materiality in a monetary unit sampling application? Multiple Choice Performance materiality replaces the overall level of financial statement materiality. Expected misstatement is the application of performance materiality to a particular sampling procedure. Performance materiality addresses the risk that the aggregate of individually material misstatements may not cause the financial statements to be materially misstated. Performance materiality provides auditors with a conservative measure that considers the presence of undetected misstatements.
d
Which of the following would typically result in nonsampling risk? Multiple Choice Selecting a nonrepresentative sample. None of these result in nonsampling risk. Intentionally omitting several items in the population from examination. Making a mistake in recording sample results.
d
hich of the following is found by dividing the amount of misstatement noted in a logical unit by the recorded amount of that logical unit? Sample size. Sampling interval. Projected misstatement. Tainting percentage.
d
Which of the following statements is correct with respect to the elements of the "fraud triangle"? Multiple Choice Motive is a cause that pressures people into action. Opportunity refers to a situation that allows someone with motive to carry out fraud. A lack of integrity describes a person who does not stick to the social or organizational ethical code. Fraud is most common when these three factors exist together. All of these statements are correct.
e