ACCT 323 Exam 2
mean-per-unit estimation sampling
A classical variables sampling plan enabling the auditors to estimate the average dollar value (or other variable) of items in a population by determining the average value of items in a sample.
Which of the following is least likely to result in inclusion of an additional paragraph being added to an audit report?
A decision not to confirm accounts receivable.
Which of the following is not correct relating to representation letters?
They often serve as a substitute for the application of other procedures.
Type 1 or Type 2: A lawsuit that was in progress as of year-end was settled shortly thereafter
Type 1
Type 1 or Type 2: During the audit, a customer with a large A/R balance at year-end declares bankruptcy
Type 1
Type 1 or Type 2: A flood damages a significant portion of the operating facility after year-end
Type 2
Material fluctuations revealed by analytical procedures should be investigated to determine whether they are indicative of material __________ in the financial statements.
misstatements
Strata may be ______to provide an estimate of the population as a whole.
combined
Adjustment or disclosure: On January 25, 20X4, the company agreed to purchase for cash the outstanding stock of Porter Electrical Co. The business combination is likely to double the sales volume of Flowmeter, Inc.
consider disclosure
Adjustment or disclosure: On January 28, 20X4, a famous analyst who followed the industry provided a negative report on his expectations concerning the short and intermediate term for the industry.
consider disclosure
Changes in accounting estimates ______ result in an explanatory paragraph.
do not
An emphasis-of-matter paragraph always _______ the opinion paragraph.
follows
Financial statements that _______ the results almost never lead to legal action by financial statement users.
understate
How do type 1 events come into existence?
due to new evidence becoming available
Using difference estimation, an auditor has taken a sample of 150 from a population's 50,000 items; that population has a book value of $250,000. She found that in her sample the average audited value was $4.50, while the average book value was $5.20. What is the estimated total audited value of the population?
$215,000.
Sample Size equation
(population value x reliability factor) / tolerable misstatement (population size (incorrect rejection coefficient + incorrect acceptance coefficient) x estimated std deviation)/tolerable misstatement) squared
Which of the following is a correct statement with respect to evaluating results when using nonstatistical sampling for substantive tests?
B - The closer the projected misstatement is to the tolerable misstatement, the higher the risk of material misstatement
Use of the ratio estimation sampling technique to estimate dollar amounts is inappropriate when:
B - a book value for each sample item is unknown
When the auditors have decided to use statistical rather than nonstatistical sampling, a disadvantage is that:
B - the costs of training staff may be higher
The client has elected to not follow GAAP
adverse opinion
Type 2 subsequent events come into existence _____ the balance sheet date.
after
Auditors may add an emphasis-of-matter paragraph that refers to a matter that is _________ presented or disclosed.
appropriately
difference method estimated audited value
total book value - projected misstatement
The auditors have sampled 25 accounts from a population of 500 accounts receivable. The sample items have a mean book value of $206 and a mean audited value of $208. The book value in the population is $101,000. What is the estimated total audited value of the population using the difference method?
$102,000.
The 4,000 accounts receivable of Miller Company have a total book value of $150,000. A CPA has selected and audited a sample of 100 accounts with a total book value of $3,700 and an audited value of $3,800. Using the difference estimation technique, estimated total audited value of the population is:
$154,000.
Subsequent events need to be disclosed in the financial statements; otherwise, the financial statements would be_______.
misleading
Which of the following accounting changes requires an emphasis-of-matter paragraph regarding consistency in a nonpublic company auditors' report?
A change from the straight-line method of depreciation to an accelerated method for a class of fixed assets.
Analytical procedures for the verification of revenue
1. Compare current year revenue to preceding year revenue 2. Compare current year revenue increments month by month or quarter 3. Compare current year budget to the actual revenue for every month 4. Compare the revenue of each month of the current year with the preceding year's comparable months 5. Compare the sales or production revenue in units of products
Division of duties among independent departments (payroll)
1. Employment (human resources) 2. Timekeeping 3. Payroll preparation and record keeping 4. Distribution of pay to employees 5. Output of the payroll department?
difference estimation
A classical method that uses both the audited and book values of items in the sample to obtain an estimated total audited value.
What happens when there is a material misstatement subsequent to the audit reoprt? (Arthur Ward)
1. Investigate the accounts payable 2. If there is a liability, notify shareholders and creditors who received the audit report and annual report 3. If no report is sent out, auditor needs to notify the members of the board of directors and potentially might have to report to the government/regulatory authority (PCOAB and SEC)
What affects audit efficiency?
1. assessing control risk too high 2. performing more testing than necessary
Equation problems
16, 15 , 14, 7, 6, 5, 3, 2,
The most likely amount of the misstatement is equal to:
A - $100,000
The average audited value in the sample is equal to:
A - $785
When performing tests of controls over authorization of cash receipts, which of the following sampling methods would be most appropriate?
A - Attributes
When the auditors have chosen to test a control, what relationship will the tolerable rate normally have when compared to the expected rate of deviations in the sample?
A - Exceed
When using sampling for tests of controls, which of the following audit consequences may follow?
A - If sample results indicate that the control is operating effectively, but in fact it is not, control risk will be assessed too low
If all other factors specified in an attributes sampling plan remain constant, changing the specified tolerable rate from 8% to 6%, and changing the specified risk of assessing control risk too low from 7% to 3% would cause the required sample size to:
A - Increase
If all other factors specified in an attributes sampling plan remain constant, decreasing the tolerable rate and decreasing the risk of assessing control risk too low would have what effect on sample size?
A - Increase
A decrease in the tolerable misstatement has what effect on the required sample size?
A - Increases
An audit client has refused to allow the auditors to perform an auditing procedure and there are no other effective alternate procedures available. The circumstance would normally result in the issuance of:
A disclaimer of opinion.
Which of the following subsequent events might require an adjustment to the client's financial statements?
A major customer declares bankruptcy causing a material receivable to be uncollectible.
probability-proportional-to-size sampling
A method that defines the sampling unit as each individual dollar.
discovery sampling
A method that is most effective in circumstances in which auditors expect a very low rate of occurrence of some critical deviation (e.g., a fraudulent cash disbursement).
Contingent Liability
A possible liability, stemming from past events, that will be resolved as to existence and amount by some future event.
When an adverse opinion is expressed on the financial statements of a nonpublic company, the opinion paragraph should include a direct reference to:
A separate basis for modification paragraph (section).
Ray, an independent auditor, was engaged to perform an audit of the financial statements of Zena Incorporated one month after its fiscal year had ended. Although the inventory count was not observed by Ray, the auditors were able to obtain sufficient appropriate audit evidence by applying alternative auditing procedures. Rays audit report will probably contain:
A standard unmodified opinion.
In assessing sampling risk, the risk of incorrect rejection and the risk of assessing control risk too high relate to the:
A) Efficiency of the audit
An advantage of using statistical sampling techniques is that such techniques:
A) Mathematically measure risk.
Which of the following best illustrates the concept of sampling risk?
A-A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest.
Due to recurring operating losses and working capital deficiencies, an auditor has substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. The notes to the financial statements do not adequately disclose the substantial doubt situation, and the auditor believes the omission fundamentally affects the users' understanding of the financial statements.
Adverse
The client has changed from LIFO to FIFO for inventory valuation purposes; the auditors do not concur with this change. The effect is considered material and pervasive.
Adverse
iron curtain approach
An approach to making materiality judgments that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting all misstatements (including projecting misstatements where appropriate) existing in the balance sheet at the end of the current year, irrespective of whether the misstatements occurred in the current year or previous years.
General risk contingency
An element of the business environment that involves some risk of a future loss. Examples include the risk of accident, strike, price fluctuations, or natural catastrophe. General risk contingencies should not be disclosed in financial statements.
The auditors who wish to draw reader attention to a financial statement note disclosure on significant transactions with related parties should disclose this fact in:
An emphasis-of-matter paragraph to the auditors' report.
The "high" end of the confidence interval around the projected misstatement is equal to an overstatement of:
C - $320,000
If group auditors make no reference to component auditors whose work they have relied on as a part of the basis for their report, the group auditors:
Are assuming responsibility for the work of the component auditors.
As discussed in Note XX to the financial statements, the Company is a defendant in a lawsuit
Auditor discretionary circumstances
Changing from a sampling plan using random selection without replacement to random selection with replacement has what effect on the required sample size?
B - Decreases
Decreases in the estimated standard deviation have what effect on required sample size?
B - Decreases
What effect does increasing the risk of incorrect acceptance have on sample size?
B - Decreases
A dual purpose test simultaneously:
B - Functions as a substantive test and as a test of controls
Which of the following statistical sampling techniques involves taking samples in a series of stages?
B - Sequential sampling
An important statistic to consider when using a statistical sampling audit plan is the population variability. The population variability is measured by the
B - Standard deviation
The estimated total audited value of the population equals:
C - $7,900,000
When performing a test of a control over cash disbursements, a CPA may use a systematic sampling technique with a start at any randomly selected item. The biggest disadvantage of this type of sampling is that the items in the population:
B) May occur in a systematic pattern and destroy the sample randomness
An auditor plans to examine a sample of 20 checks for counter signatures as prescribed by the client's control procedures. One of the checks in the chosen sample of 20 cannot be found. The auditor should consider the reasons for this limitation and:
B) Treat the missing check as a deviation for the purpose of evaluating the sample.
There are many kinds of statistical estimates that an auditor may find useful, but basically every statistical estimate in auditing is of either a quantity or of an error rate. The statistical terms that roughly correspond to "quantities" and "occurrence rate," respectively, are:
B-variables and attributes
A refusal by a lawyer to furnish information related to litigation included in the letter of inquiry is likely to result in:
Qualification of the audit report.
The 3,000 accounts receivable of DEF Company have a total book value of $60,000. Bob Smith, CPA, has selected and audited a sample of 100 accounts with a total book value of $2,100. Using the difference estimation technique, Smith has properly estimated a projected misstatement of an overstatement of $6,000 for the entire population. The audited value of Smith's sample is:
C - 1900 = (6,000/3,000)*100
Which of the following factors does an auditor need to consider in planning a particular audit sample for a test of control?
C - Acceptable level of risk of assessing control risk too low.
Which of the following may be used to reduce the risk of nonsampling errors?
C - Adequately planning audit samples
To determine sample size in an attribute sampling application, what must be specified?
C - Allowance for sampling risk, risk of assessing control risk too low, expected deviation rate
When using a statistical sampling plan, the auditors would probably require a smaller sample if the:
C - Desired risk of incorrect acceptance increases.
Which of the following statistical selection techniques is least desirable for use by an auditor?
C-Block Selection
Audit reports issued under GAAS ordinarily are signed with the name of the __________.
CPA Firm
Which of the following procedures would an auditor most likely perform while evaluating audit findings at the conclusion of an audit?
Calculate an estimate the total of uncorrected misstatements in the financial statements.
When auditing the statement of cash flows, which of the following would an auditor not expect to be a source of receipts and payments?
Capitalization.
The audit of which of the following balance sheet accounts does not normally result in verification of an income statement account?
Cash
Chapter 16
Chapter 16
Chapter 17
Chapter 17
Chapter 9
Chapter 9
Which of the following is an analytical procedure that should be applied to the income statement?
Compare the actual revenues and expenses with the corresponding figures of the previous year and investigate significant differences.
Which of the following is not a procedure that is designed to provide evidence about the existence of loss contingencies?
Confirming accounts payable.
As a result of analytical procedures, the independent auditors determine that the gross profit percentage has declined from 30 percent in the preceding year to 20 percent in the current year. The auditors should:
Consider the possibility of a misstatement in the financial statements.
Correct or incorrect: The Basis for Opinion section should begin with a statement that the financial statements are the responsibility of management.
Correct
Correct or incorrect: The change in accounting principles should not be referred to in the opinion paragraph—delete that sentence.
Correct
Correct or incorrect: The point should say communicated to the audit committee.
Correct
Correct or incorrect: The report also must be addressed to the board of directors.
Correct
Correct or incorrect: The report should be dated as of February 12, the date on which sufficient appropriate audit evidence was obtained.
Correct
Auditors often request that the audit client send a letter of inquiry to those attorneys who have been consulted with respect to litigation, claims, or assessments. The primary reason for this request is to provide the auditors with:
Corroborative audit evidence.
During the final planning of the accounts receivable plan a CPA specified a tolerable misstatement of $30,000, instead of the $20,000 contained in the preliminary audit plan. What would be the impact of this change?
D - An decrease in the required sample size
The auditors expect a population deviation rate of billing errors of eight percent, and have established a tolerable rate of five percent. The sampling approach most likely to be used is:
D - None, sampling does not seem appropriate in this situation
The auditors' failure to recognize a misstatement in an amount or a deviation in an internal control data processing procedure is described as a:
D - Nonsampling error
In testing accounts receivable, an auditor sends out positive confirmation requests to 100 randomly selected customers. A customer returns the confirmation indicating that the balance is correct when, in fact, the balance is overstated. This is an example of:
D - Nonsampling error.
In variables estimation sampling, the sample standard deviation is used to calculate the:
D) Allowance for sampling risk.
Which of the following is a term used in public company audit reports?
Explanatory paragraph.
The Rotter Company, a nonpublic company, changed accounting principles in 20X4 from those followed in 20X3. The auditor believes that the new principles are not in conformity with GAAP, and therefore that the 20X4 financial statements are misleading due to pervasive misstatements. The change (including its dollar effect) has been described in the notes to the 20X4 statements. Under these circumstances, in reporting on the 20X4 financial statements, the auditor should:
Express an adverse opinion with the basis for modification paragraph disclosing the reason (the accounting change) for the opinion.
An auditor's decision concerning whether or not to "dual-date" the audit report is based upon the auditor's willingness to:
Extend auditing procedures.
What are aggregated misstatements made up of in the financial statements
Factual misstatements + projected misstatements + judgmental misstatements
An auditor accepted an engagement to audit the 20X8 financial statements of EFG Corporation and began the fieldwork on September 30, 20X8. EFG gave the auditor the 20X8 financial statements on January 17, 20X9. The auditor completed the audit on February 10, 20X9, and delivered the report on February 16, 20X9. The client's representation letter normally would be dated:
February 10, 20X9.
Which of the following is a "registration statement" that is filed with the SEC by a company planning to issue securities to the public?
Form S-1
Material loss contingencies should be recorded in the financial statements if available information indicates it is probable that a loss had been sustained prior to the balance sheet date and the amount of such loss can be reasonably estimated. For a public company these considerations will affect the audit report as follows:
If a loss is probable but the amount cannot be reasonably estimated and is disclosed in the notes to the financial statements, the auditor may issue an unqualified opinion.
CPA Firm A has performed most of the audit of Consolidated Company's financial statements and qualifies as the group auditor. CPA Firm B did the remainder of the work. Firm A wishes to assume full responsibility for Firm B's work. Which of the following statements is correct?
In such circumstances, when appropriate requirements have been met, Firm A should issue a standard unmodified opinion on the financial statements.
Correct or incorrect: The Change in Accounting Principles paragraph should include the dollar effect of the change.
Incorrect
Which of the following procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern?
Inquiring of the entity's legal counsel about litigation, claims, and assessments.
Which of the following is a general purpose financial reporting framework?
International Financial Reporting Standards.
What happens when management refuses to give a representation letter
Issue a qualified opinion or disclaimer of opinion or withdraw from audit altogether
With respect to issuance of an audit report which is dual-dated for a subsequent event occurring after the completion of fieldwork but before issuance of the auditors' report, the auditors' responsibility for events occurring subsequent to the date of the audit report is:
Limited to the specific event referred to.
Which of the following is the best way for the auditors to determine that every name on a company's payroll is that of a bona fide employee presently on the job?
Make a surprise observation of the company's regular distribution of paychecks on a test basis.
factual misstatements
Misstatements about which there is no doubt as to amount.
projected misstatements
Misstatements identified by the auditors during the course of the audit that are due to extrapolation of sample results to the entire population.
Which of the following auditing procedures is ordinarily performed last?
Obtaining a management representation letter.
Which of the following procedures is most likely to be included near completion of an audit?
Performing analytical procedures.
A client's financial statements follow GAAP except that they do not include a note on a significant related party transaction.
Qualified or adverse
If the predecessor auditors do not reissue their audit report on comparative financial statements, the successor auditors should:
Refer to the report of the predecessor auditors.
An auditor of financial statements believes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. In evaluating the entity's plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a mitigating factor, the entity's plans to:
Refinance debt to lower loan payments.
Which of the following is least likely to result in a qualification of the auditors' opinion due to a scope limitation?
Reliance placed upon the report of component auditors.
"Sam Best, President"
Replace with "Board of Directors of Keystone"
"Certified Public Accountant's Report"
Replace with "Independent Auditor's Report"
"February 6, 20X6."
Replace with "January 31, 20X6, except for Note 7, as to which the date is February 2, 20X6."
"Adams, Barnes & Co."
Retain the original text.
"Basis for Qualified Opinion: The Company has excluded from property and debt in the accompanying balance sheets certain lease obligations that, in our opinion, should be capitalized in order to conform with accounting principles generally accepted in the United States of America. If these lease obligations were capitalized, property would be increased by $3,500,000, long-term debt by $3,500,000, and retained earnings by $500,000 as of December 31, 20X5. Additionally, net income would be increased by $500,000 and earnings per share would be increased by $1.12 for the year then ended."
Retain the original text.
Which of the following procedures is not a procedure that is completed near the end of the engagement?
Review cash transactions.
Which of the following procedures would an auditor most likely perform prior to the balance sheet date?
Review detail and test significant travel and entertainment expenses.
In auditing the balance sheet, most revenue and expense accounts are also audited. Which accounts are most likely to be audited when auditing Accounts Receivable?
Sales and Bad Debt Expense.
The purpose of segregating the duties of distributing payroll checks and hiring personnel is to:
Separate the authorization of transactions from the custody of related assets.
An audit report for a public client indicates that the audit was performed in accordance with:
Standards of the Public Company Accounting Oversight Board (United States).
Which of the following is least likely to be considered a substantive procedure relating to payroll?
Test whether employee time reports are approved by supervisors.
attributes sampling
The most frequently used general method that arrives at an estimated deviation rate.
Which of the following is not a difference between the audit report of a nonpublic and public company?
The public company report has an additional paragraph referring to the client's fraud prevention procedures.
In which of the following circumstances would an auditor of financial statements be most likely to express an adverse opinion?
The statements are not in conformity with FASB requirements regarding goodwill impairment.
In which of the following circumstances will it be most likely that an adverse opinion is considered appropriate?
The statements are not in conformity with generally accepted accounting principles regarding pension plans.
A material departure from generally accepted accounting principles will result in auditor consideration of:
Whether to issue an adverse opinion rather than a qualified opinion.
Authorization of which of the following is least likely to be found during a review of the minutes of the board of directors?
Write-off of trade accounts receivable.
Type 1 subsequent events require the financial statements to be _______ if needed.
adjusted
Adjustment or disclosure: January 7, 20X4: The mineral content of a shipment of ore en route to Hollis Mfg. Corporation on December 31, 20X3, was determined to be 72 percent. The shipment was recorded at year-end at an estimated content of 50 percent by a debit to Raw Materials Inventory and a credit to Accounts Payable in the amount of $82,400. The final liability to the vendor is based on the actual mineral content of the shipment.
adjustment
Adding and subtracting the __________ to and from the projected misstatement creates an interval within which the true value of the population is likely to lie.
allowance for sampling risk
intangible assets
amortization
Mean-per-unit method estimated audited value
average audited value x # of accounts
Accounts receivable
bad debt
Auditors consider the ______ expense when determining the correct allowance for doubtful accounts.
bad debt
All nonpublic company audit reports that are qualified should contain a(n) __________ explaining the details of the qualification.
basis for modification paragraph (or basis for qualified opinion paragraph)
ratio method estimated audited value
book value - projected overstatement
Adjustment or disclosure: January 15, 20X4: Following a series of personal disagreements between Ray Hollis, the president, and his brother-in-law, the treasurer, the latter resigned, effective immediately, under an agreement whereby the corporation would purchase his 10 percent stock ownership at book value as of December 31, 20X3. Payment is to be made in two equal amounts in cash on April 1 and October 1, 20X4. In December, the treasurer had obtained a divorce from his wife, who is Ray Hollis's sister.
consider disclosure
Adjustment or disclosure: January 16, 20X4: As a result of reduced sales, production was curtailed in mid-January and some workers were laid off.
consider disclosure
Adjustment or disclosure: On February 1, 20X4, a plant owned by Flowmeter, Inc., was damaged by a flood, resulting in an uninsured loss of inventory.
consider disclosure
The audit of inventories may help in the auditor determination of ________.
cost of goods sold
In addition to an emphasis-of-matter paragraph, auditors could issue a(n) _________ in a going concern situation.
disclaimer
The search for unrecorded liabilities for a public company includes procedures usually performed through the:
date of the auditors' report
It is difficult to audit ______without the consideration of the property account.
depreciation
property and equipment
depreciation
Stratifying a population can also allow the auditor to perform ____ procedures to each stratum.
different
Auditors _____ an opinion when they are unable to form an opinion.
disclaim
An audit needs to have the correct balance of efficiency and _________.
effectiveness
Audit _______is affected when too much substantive testing is done.
efficiency
If substantial doubt about a going concern exists, an ______ paragraph is the most common resolution.
emphasis-of-matter
When there is significant doubt as to the ability to continue as a going concern, a(n) _________ paragraph may be added.
emphasis-of-matter
Limitations on the scope of an audit may create a situation in which the auditors are unable to obtain sufficient ________.
evidence
When items are identified that affect the going concern assumption, auditors must gather ________.
evidence
The CPA's opinion on the ______of the financial statements may be changed by subsequent events.
fairness
securities or other investments
gains on sale
When paper paychecks are issued, the company's _____________ should distribute them to the employees of the company.
paymaster
If the variability of a population increases, as measured by the standard deviation, the required sample size for the population will __________.
increase
Amortization relates to ______assets like depreciation relates to property and equipment.
intangible
notes payable
interest
Many subsequent events may involve the settling of ________.
litigation
Auditors must carefully control the risk of assessing risk too high or _____when performing test of controls.
low
Qualified opinions are issued when the financial statements are ________ misstated.
materially
Auditors are _____ required to perform procedures specifically designed to test the going concern assumption.
not
A going concern evaluation should include evaluation of ________ from the balance sheet date.
one year
A going concern is to be evaluated for a period not to exceed _________ beyond the date of the financial statements.
one year
An emphasis-of-matter paragraph always follows the ______ paragraph.
opinion
Financial statements that give effect to a subsequent event as though the event had occurred at the balance sheet date are known as __________ financial statements.
pro forma
If the auditors conclude that the total misstatement in the financial statements is material, they should request management to adjust the financial statements or issue a(n) __________ opinion.
qualified or adverse
Assessing the control risk too low results in an inappropriate _______ of the extent of substantive procedures.
reduction
In performing tests of controls, the auditors are primarily concerned with the critical aspect of sampling risk known as the __________.
risk of assessing control risk too low
sample net misstatement equation
sample x (average book value - average audited value)
Stratified sample results can be used _______or combined.
separately
Stratification is the technique of dividing a population into subgroups called ______.
strata
The term __________ refers to the process of dividing a population into relatively homogeneous subgroups.
stratification
Auditors often ______ a population before computing the required sample size.
stratify
An event occurring after the date of the balance sheet, but prior to completion of the audit, is called a __________
subsequent event
Audit effectiveness is impacted when the auditor doesn't do enough _______.
testing
To use attributes sampling tables, the auditors must stipulate the desired risk of assessing control risk too low, the expected deviation rate in the population, and the desired __________.
tolerable deviation rate
Analytical procedures of selling, general, and administrative expenses
1. Expectation of the account balance (Factors such as budgeted amounts, prior-year audited balances, industry averages, relationships among financial data, relevant non financial data and Budgeting program will reduce risk of material misstatement) 2. Determine the amount of difference from the expectation that can be accepted without investigation 3. Compare account balance to expected account balance 4. Investigate significant deviations
What affects audit effectiveness?
1. assessing control risk too low 2. not performing enough testing
Which of the following situations will result in the auditors concluding that the risk of material misstatement is too high when using nonstatistical sampling for substantive tests?
A - The projected misstatement exceeds the tolerable misstatement
Which of the following types of risk is of critical importance to auditors in performing tests of controls?
A - The risk of assessing control risk too low
In performing a test of a control last year the auditors specified a tolerable deviation rate of X percent. This year the auditors have specified a tolerable rate of less than X percent. Assuming that all other factors remain the same, which of the following is true regarding the relationship between this year's sample size compared to last year's sample size?
A - This year's sample is larger than last year's sample
The auditors expect a population deviation rate of billing errors of two percent, and have established a tolerable rate of five percent. The sampling approach most likely to be used is:
A - attributes sampling
ratio estimation sampling
A classical method that uses both the audited and book values of items in the sample to obtain an estimated total audited value.
Which of the following ordinarily involves the addition of an emphasis-of-matter paragraph to an audit report of a nonpublic company?
A consistency modification.
Commitment
A contractual obligation to carry out a transaction at specified terms in the future. Material commitments should be disclosed in the financial statements.
A scope restriction is least likely to result in a(an):
Adverse opinion
Assume that the opinion paragraph of an auditors' report begins as follows: "With the explanation given in Note 6, . . . the financial statements referred to above present fairly . . ." This is:
An improper type of reporting.
The auditors' report should be dated as of the date the:
Auditors have accumulated sufficient appropriate evidence.
An example of an internal control weakness is to assign the payroll department the responsibility for:
Authorizing increases in pay.
"As discussed in Note 4 to the financial statements, in 20X5 the entity elected to change the estimated life of a number of its plant assets. We concur with this change."
Delete entire paragraph.
"and subject to the accounting change described in the Emphasis of Matter paragraph"
Delete the text.
Client-imposed restrictions significantly limit the scope of the auditors' procedures, and they are unable to obtain sufficient appropriate audit evidence. The possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive.
Disclaimer
Draves Company owns substantial properties that have appreciated significantly in value since the date of purchase. The properties were appraised and are reported in the balance sheet at the appraised values (which materially exceed costs) with related disclosures. The CPAs believe that the appraised values reported in the balance sheet reasonably estimate the assets' current values.
Either qualified or adverse
During the audit of Eagle Company, the CPA firm has encountered a significant scope limitation relating to inventory record availability and is unable to obtain sufficient appropriate audit evidence in that area.
Either qualified or disclaimer
Which of the following types of matters do not generally require disclosure in the financial statements?
General risk contingencies.
An audit report for a public client indicates that the financial statements were prepared in conformity with:
Generally accepted accounting principles (United States).
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, but there is substantial doubt about its ability to continue as a going concern
Going concern opinion
When an auditor of financial statements has substantial doubt about an entity's ability to continue as a going concern, the auditor most likely would express a qualified or adverse opinion if:
Information about the entity's ability to continue as a going concern is not disclosed in the financial statements.
Correct or incorrect: The report's title is incorrect as it should not include the word "independent."
Incorrect
Correct or incorrect: The sentence should state generally accepted auditing standards of the PCAOB.
Incorrect
Correct or incorrect: This disclosure also must include the name of the engagement partner.
Incorrect
Correct or incorrect: When critical matters exist, the two related paragraphs (this and the following paragraph) should immediately follow the opinion paragraph.
Incorrect
While performing a substantive test of details during an audit, the auditor determined that the sample results supported the conclusion that the recorded account balance was materially misstated. It was, in fact, not materially misstated. This situation illustrates the risk of:
Incorrect rejection
After considering an entity's negative trends and financial difficulties, an auditor has substantial doubt about the entity's ability to continue as a going concern. The auditor's considerations relating to management's plans for dealing with the adverse effects of these conditions most likely would include management's plans to:
Increasing ownership equity
When financial statements are affected by a material departure from generally accepted accounting principles, the auditors should:
Issue an "except for" qualification or an adverse opinion.
The review of audit working papers by the audit partner is normally completed:
Near the completion of the audit.
A client is issuing two years of comparative financial statements. The first year was audited by another auditor who is not being asked to reissue her audit report. (Reply as to the successor auditors' report.)
Other
An auditor reporting on group financial statements decides not to take responsibility for the work of a component auditor who audited a 70 percent owned subsidiary and issued an unqualified opinion. The total assets and revenues of the subsidiary are 5 percent and 8 percent, respectively, of the total assets and revenues of the entity being audited.
Other
Which of the following information need not be reported in the auditors' report of a nonpublic company if the information is considered to be properly stated after performing appropriate procedures?
Other information in documents containing audited financial statements.
When a nonpublic audit client has omitted required supplementary information, the audit report should include a(n)?
Other-matter paragraph.
The date the auditor grants the client permission to use the audit report in connection with the financial statements is the:
Report release date.
Which of the following ledger accounts would be least likely to be analyzed in detail by auditors?
Supplies expense.
Auditors must communicate internal control "significant deficiencies" to:
The audit committee.
Under which of the following set of circumstances might the auditors disclaim an opinion?
The auditors cannot observe ending inventory nor confirm accounts receivable and cannot obtain sufficient evidence using alternative procedures.
Which of the following is correct concerning a public company audit report with a disclaimer of opinion?
The paragraph describing the reason for the disclaimer will follow the opinion paragraph and will not include a title.
If the projected misstatement in a nonstatistical sampling is $8,000, while the tolerable misstatement is $9,000, what would an auditor likely conclude?
The risk is high that the account is materially misstated.
A basis for modification paragraph for a nonpublic company is least likely to relate to which of the following types of opinion?
Unmodified.
A client changed the depreciable life of certain assets from 10 years to 12 years. The auditor concurs with the change.
Unmodified -- standard
A client changed the method it uses to calculate postemployment benefits from one acceptable method to another. The effect of the change is immaterial this year but is expected to be material in the future.
Unmodified -- standard
A client changed the salvage value of certain assets from 5 percent to 10 percent of original cost. The auditor concurs with the change.
Unmodified -- standard
Yes or no (emphasis-or-matter): A change from deferring and amortizing preproduction costs to recording such costs as an expense when incurred because future benefits of the costs have become doubtful. The new accounting method was adopted in recognition of the change in estimated future benefits.
Yes
Yes or no (emphasis-or-matter): A change from direct costing to full absorption costing for inventory valuation.
Yes
Type 2 subsequent events
involve events that existed after the balance sheet date but prior to the completion of fieldwork
Mean-per-unit method projected misstatement
total book value - estimated audited value
A(n) __________ opinion is an opinion that the financial statements of a public company fairly present financial position, results of operations, and cash flows, in conformity with generally accepted accounting principles.
unqualified
The auditor using nonstatistical attributes sampling, but who nevertheless has chosen the sample in conformity with random selection procedures:
D - Should compare the deviation rate of the sample to the tolerable rate
The tolerable deviation rate in sampling for tests of controls is:
D - The rate the auditor will tolerate without modifying the planned assessment of control risk.
Which of the following is an advantage of systematic selection over random number selection?
D - it does not require establishment of correspondence between random number and items in the population
Which of the following circumstances generally results in the issuance of a report that includes an opinion that is modified?
The auditor is unable to obtain the financial records of a foreign subsidiary which is material to the client.
A client is issuing two years of comparative financial statements. The first year was audited by another auditor who is being asked to reissue her audit report. (Reply as to the successor auditors' report.)
Unmodified -- standard
A client uses the specific identification method of accounting for valuable items in inventory, and LIFO for less valuable items. The auditor concurs that this is a reasonable practice.
Unmodified -- standard
A company has not followed generally accepted accounting principles in the recording of its leases. The amounts involved are immaterial.
Unmodified -- standard
The 2,000 accounts receivable of ABC Company have a total book value of $40,000. Bob Rotter, CPA, has selected and audited a sample of 100 accounts with a total book value of $1,950. The audited value of the 100 accounts in the sample is $1,875 Using the difference estimation technique, Rotter's estimate (to the nearest dollar) of year-end accounts receivable balance would be:.
$38,500
The auditors have sampled 50 accounts from a population of 250 accounts receivable. The sample items have a mean book value of $198 and a mean audited value of $200. The book value in the population is $49,000. What is the estimated audited value of the population using the mean-per-unit method?
$50,000
ratio method projected misstatement
(sample net misstatement / book value of sample) x total book value
difference method projected misstatement
(sample net misstatement / sample items) x # of accounts
Audit procedures near the date of the audit report
1. Search for unrecorded liabilities 2. Review the minutes of meetings 3. Perform final analytical meetings 4. Perform procedures to identify loss contingencies 5. Perform review of subsequent events 6. Obtain representation letter 7. Communicate misstatements to management 8. Evaluate audit findings
If all other factors specified in an attributes sampling plan remain constant, decreasing the tolerable rate and increasing the estimated population deviation rate would have what effect on sample size?
A - Increase
Which of the following is generally not true about statistical sampling as compared to nonstatistical sampling?
A - Statistical samples are more representative of the population
Which of the following statements is correct about the sample size in statistical sampling when testing internal controls?
A - The auditor should consider the tolerable rate of deviation from the controls being tested in determining sample size.
Which of the following statements is correct concerning statistical sampling in tests of controls?
A - The population size has little effect on determining sample size except for very small populations.
loss contingency
A possible loss, stemming from past events, that will be resolved as to existence and amount by some future event.
rollover approach
An approach to making materiality judgments that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting misstatements (including projecting misstatements where appropriate) only during the current year.
Statistical sampling generally may be applied to test internal control when the client's internal control procedures:
C - Leave an audit trail in the form of evidence of compliance
When using statistical sampling, which of the following need not be known to evaluate the results of an attributes sample?
C - Number of deviations found in the sample
Which of the following is not generally used for selecting samples?
C - Physical representation numbers
An auditor wishes to estimate inventory shrinkage by weighing a sample of inventory items. From experience, the auditor knows that a few specific items are subject to unusually large amounts of shrinkage. In using statistical sampling, the auditor's best course of action is to:
C - Stratify the inventory population so that items subject to unusually large amounts of shrinkage are reviewed separately.
When an auditor of a nonpublic company has concluded there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time beyond the date the financial statements will be released (1/26/X2), the auditor's responsibility includes:
Considering the adequacy of disclosure about the entity's possible inability to continue as a going concern.
Which of the following is most likely to be considered a Type 1 subsequent event?
Customer checks deposited prior to year-end but determined to be uncollectible after year-end.
Which of the following statements is correct concerning the use of nonstatistical sampling for substantive tests?
D - Results will be projected to the population
Various factors influence the sample size for a substantive test of details of an account balance. All other factors being equal, which of the following would lead to a larger sample size?
D) Smaller measure of tolerable misstatement.
Subsequent to the issuance of the auditor's report, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. After determining that the information is reliable, the auditor should next:
Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.
Slade Company has material investments in stocks of subsidiary companies. Stocks of the subsidiary companies are actively traded in the market. Management insists that all investments be carried at original costs, and the CPA firm is satisfied that the original costs are accurate. The CPA firm believes that the client will never ultimately realize a substantial portion of the investments because the market value is much lower than the cost; the client has fully disclosed the facts in notes to the financial statements.
Either qualified or adverse
A common audit procedure in the audit of payroll transactions involves tracing selected items from the payroll journal to employee time cards that have been approved by supervisory personnel. This procedure is designed to provide evidence in support of the audit proposition that:
Employees worked the number of hours for which their pay was computed.
In an audit report on combined financial statements, reference to the fact that a portion of the audit was performed by a component auditor is:
Not to be construed as a qualification, but rather as a division of responsibility between the two CPA firms.
When an auditor does not confirm material accounts receivable, but is satisfied by the application of alternative auditing procedures, she normally should:
Issue an unmodified opinion with no reference to this omission.
A possible loss, stemming from past events that will be resolved as to existence and amount by some future event, is referred to as a(n):
Loss contingency.
A possible loss, stemming from past events that will be resolved as to existence and amounts, is referred to as a(n):
Loss contingency.
An example of an internal control weakness is to assign the human resource department responsibility for:
Maintaining time cards.
Morgan, CPA, is the group auditor for a multinational corporation. Another CPA has examined and reported on the financial statements of a significant subsidiary of the corporation. Morgan is satisfied with the independence and professional reputation of the component auditor, as well as the quality of the component auditor's audit. With respect to Morgan's report on the consolidated financial statements, taken as a whole, Morgan:
May refer to the audit of the component auditor.
Yes or no (emphasis-or-matter): A change in the estimated service lives of previously recorded plant assets based on newly acquired information.
No
Yes or no (emphasis-or-matter): A change to including the employer's share of FICA taxes as "Retirement benefits" on the income statement. This information was previously included with "Other taxes."
No
The auditors have calculated the total uncorrected identified misstatements as $445,000; materiality for the audit is $450,000. The client has declined to record the related journal entries. In this situation it is most likely that the auditors will:
Perform additional audit procedures to reduce audit risk to an appropriately low level.
As discussed in Note XX to the financial statements, the Company adopted SFAS XXX as of December 31, 20XX. Our opinion is not modified with respect to this standard
Principles not consistently applied
Analytical procedures are required as a part of the:
Procedures performed near the end of the audit.
A client changed the depreciable life of certain assets from 10 years to 12 years. The auditor does not concur with the change. Confined to fixed assets and accumulated depreciation, the misstatements involved are not considered pervasive.
Qualified
An auditor discovered that a client made illegal political payoffs to a candidate for president of the United States. The auditor was unable to determine the amounts associated with the payoffs because of the client's inadequate record-retention policies. Although there is no likelihood that the financial statements are pervasively misstated, they may be materially misstated. The client refuses to disclose the payoffs in a note to the financial statements.
Qualified
London Company has material investments in stocks of subsidiary companies. Stocks of the subsidiary companies are not actively traded in the market, and the CPA firm's engagement does not extend to any subsidiary company. The CPA firm is able to determine that all investments are carried at original cost but has no real idea of market value. Although the difference between cost and market could be material, it could not have a pervasive effect on the overall financial statements.
Qualified
The auditors believe that the financial statements have been presented in conformity with generally accepted accounting principles in all respects, except that a loss contingency that should be disclosed through a note to the financial statements is not included. While they consider this a material omission, they do not believe that it pervasively affects the financial statements.
Qualified
A client changed its depreciation method for production equipment from the straight-line to a units-of-production method based on hours of utilization. The auditor does not concur with the change.
Qualified or adverse
A company has not followed generally accepted accounting principles in the recording of its leases.
Qualified or adverse
A company valued its inventory at current replacement cost. Although the auditor believes that the inventory costs do approximate replacement costs, these costs do not approximate any GAAP inventory valuation method.
Qualified or adverse
In auditing the long-term investments account of a new client, an auditor finds that a large contingent liability exists that is material to the consolidated company. It is probable that this contingent liability will be resolved with a material loss in the future, and this amount is reasonably estimable as $2,000,000. Although no adjusting entry has been made, the client has provided a note to the financial statements that describes the matter in detail and includes the $2,000,000 estimate in that note.
Qualified or adverse
An auditor discovered that a client made illegal political payoffs to a candidate for president of the United States. The auditor was unable to determine the amounts associated with the payoffs because of the client's inadequate record-retention policies. The client has added a note to the financial statements to describe the illegal payments and has stated that the amounts of the payments are not determinable.
Qualified or disclaimer
An auditor was hired after year-end and was unable to observe the counting of the year-end inventory. She is unable to apply other procedures to determine whether ending inventory and related information are properly stated.
Qualified or disclaimer
What type or types of audit opinion are appropriate when financial statements are materially and pervasively misstated? Qualified? Adverse?
Qualified: no, Adverse: yes
When the matter is properly disclosed in the financial statements of a nonpublic company, the likely result of substantial doubt about the ability of the client to continue as a going concern is the issuance of which of the following audit opinions? Qualified? Unmodified With Emphasis-of-Matter
Qualified: no, Unmodified with emphasis-of-matter: yes
A nonpublic company's change in accounting principles that the auditors believe is not justified is likely to result in which of the following types of audit opinions? Qualified? Unmodified with emphasis-of-matter?
Qualified: yes, Unmodified with emphasis-of-matter: no
In the past, the auditors have found that the book value of a receivable account has been related to the amount the account is misstated (i.e., large accounts have large misstatements and small accounts have small misstatements). Which of the following techniques is most likely to be efficient?
Ratio estimation
The auditors' best course of action with respect to "other information (not including required supplemental information)" included in an annual report containing the auditors' report is to:
Read and consider the manner of presentation of the "other financial information."
Which of the following events occurring on January 5, 20X2, is most likely to result in an adjusting entry to the 20X1 financial statements?
Settlement of litigation
An auditor reporting on group financial statements decides to take responsibility for the work of a component auditor who audited a 70 percent owned subsidiary and issued an unmodified opinion. The total assets and revenues of the subsidiary are 5 percent and 8 percent, respectively, of the total assets and revenues of the entity being audited.
Unmodified -- standard
An auditor was hired after year-end and was unable to observe the counting of the year-end inventory. However, she was able to apply other procedures and determined that ending inventory and related information are properly stated.
Unmodified -- standard
In auditing the long-term investments account of a new client, an auditor finds that a large contingent liability exists that is material to the consolidated company. It is probable that this contingent liability will be resolved with a material loss in the future, but the amount is not estimable. Although no adjusting entry has been made, the client has provided a note to the financial statements that describes the matter in detail.
Unmodified -- standard
Bowles Company is engaged in a hazardous trade and has obtained insurance coverage related to the hazard. Although the likelihood is remote, a material portion of the company's assets could be destroyed by a serious accident.
Unmodified -- standard report
The client has changed from LIFO to FIFO for inventory valuation purposes; the auditors concur with this change. The effect is considered material to the financial statements, although inventory is not a large part of total assets.
Unmodified -- with an emphasis-of-matter paragraph
The auditors decide not to make reference to the report of a component auditor that audited a portion of group financial statements.
Unmodified --standard
Auditors have obtained sufficiently appropriate evidence to conclude that the financial statements are not materially misstated
Unmodified opinion
A client changed its depreciation method for production equipment from the straight-line method to the units-of-production method based on hours of utilization. The auditor concurs with the change.
Unmodified with an emphasis-of-matter paragraph
A client's financial statements follow GAAP, but the auditor wishes to emphasize in his audit report a significant related party transaction that is adequately described in the notes to the financial statements.
Unmodified with an emphasis-of-matter paragraph
Due to recurring operating losses and working capital deficiencies, an auditor has substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. The notes to the financial statements adequately disclose the situation. The auditor has decided not to issue a disclaimer of opinion.
Unmodified with an emphasis-of-matter paragraph
Auditors have doubt about a company's ability to continue as a going concern
Unqualified opinion with an emphasis-of-matter paragraph
One reason why the independent auditors perform analytical procedures on the client's operations is to identify:
Unusual transactions.
Which of the following is not a procedure normally performed while completing the audit of a public company?
Update internal control questionnaire.
Which of the following is least likely to result in an emphasis-of-matter paragraph being added to an unmodified auditor's report on the financial statements of a nonpublic client that sells jewelry through a retail store?
Use of an unacceptable method to value inventory with results that differ materially from GAAP.
After performing all necessary procedures, the predecessor auditors reissue a prior-period report on financial statements at the request of the client without revising the original wording. The predecessor auditors should:
Use the date of the previous report.
The term "except for" in an audit report is:
Used in a qualified opinion.
Yes or no (emphasis-or-matter): A change from the FIFO method of inventory pricing to the LIFO method of inventory pricing
Yes
Yes or no (emphasis-or-matter): A change from the completed-contract method to the percentage-of-completion method of accounting for long-term construction contracts.
Yes
Yes or no (emphasis-or-matter): Correction of a mathematical error in inventory pricing made in a prior period.
Yes
Adjustment or disclosure: On January 15, 20X4, the company settled and paid a personal injury claim of a former employee as the result of an accident that had occurred in March 20X3. The company had not previously recorded a liability for the claim.
adjustment
Adjustment or disclosure: On January 18, 20X4, a major customer filed for bankruptcy. The customer's financial condition had been degenerating over recent years.
adjustment
Adjustment or disclosure: On January 3, 20X4, Flowmeter, Inc., received a shipment of raw materials from Canada. The materials had been ordered in October 20X3 and shipped FOB shipping point in December 20X3.
adjustment
What do type 1 subsequent events require?
adjustment of the financial statements
A(n) _____ opinion is appropriate if a material misstatement is considered pervasive.
adverse
The auditors issue a qualified opinion or a(n) __________ opinion, if they consider the disclosure in the client's financial statements to be inadequate.
adverse
A material misstatement is considered pervasive
adverse opinion
Adjustment or disclosure: On February 5, 20X4, Flowmeter, Inc., issued to an underwriting syndicate $2 million in convertible bonds.
consider disclosure
Auditors determine that the possible effects on the financial statements of the inability to obtain sufficient evidence (i.e. a scope limitation) could be both material and pervasive
disclaimer of opinion
If a scope limitation is so severe that a qualified opinion is inappropriate, the auditors should issue a(n) __________.
disclaimer of opinion
Type 1 subsequent events
involve events that existed before or on the balance sheet
