ACCY 131 Ch. 6-12

An auditor is testing accounts receivable for a client that has 1,000 customers with customer balances that range from $150 to $185,000. The auditor subdivided the receivables into three groups: group 1 has all customers with receivable balances between $185,000 and $100,000, group 2 has all customers with receivable balances between $100,000 and $25,000, and group 3 has all customers with receivable balances less than $25,000. The auditor then randomly selects customers out of each group. This is known as:

stratified sampling.

The auditor decides which controls to test by considering:

the points at which fraud or error can occur. the nature of controls implemented by management. the significance of each control in achieving its control objective.

The critical difference between statistical and nonstatistical sampling is:

the use of the laws of probability in statistical sampling to determine sample size and develop a confidence interval around the results of the sample.

Which of the following ultimately determines the sufficiency and appropriateness of audit evidence to support the auditor's conclusions?

Professional judgment. Professional judgement is required to determine when sufficient appropriate audit evidence has been obtained as a reasonable basis for the auditor's conclusions.

A primary objective of procedures performed to obtain an understanding of internal control is to provide an auditor with

Knowledge necessary to assess the risk of misstatement.

Immediately upon receipt of cash, a responsible employee should

Prepare a remittance listing. The immediate preparation of a remittance listing upon receipt of cash ensures that a control over cash received is established.

An auditor uses nonstatistical ratio estimation to evaluate the results of a sample. The population book value was $2,000,000 and contained 350 items. The auditor selected 100 items with a book value of $500,000. The audited value of the sample was $480,000. The estimated audited value of the population is:

$1,920,000.

Which of the following represent a common categorization of control activities?

Authorization controls, performance reviews, information-processing controls, physical controls, and segregation of duties.

Which of the following would require the auditor to increase the level of control testing for a particular control?

A high degree of reliance is to be placed on the control to limit the amount of substantive testing required.

Which of the following best illustrates the concept of sampling risk?

A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest. This answer is correct because sampling risk arises from the possibility that an auditor's conclusions based upon a sample would differ from the conclusions drawn when examining the entire population (i.e., the risk that the sample examined is not representative of the population).

Which of the following client computer systems generally can be audited without examining or directly testing computer programs of the system?

A system that performs relatively uncomplicated processes and produces detailed output. This answer is correct because auditing around the system is possible if the system performs uncomplicated processes and produces detailed output.

Which of the following situations could most likely lead to an embezzlement scheme?

Access to blank checks and signature plates is restricted to the cash disbursements bookkeeper who personally reconciles the monthly bank statement. Allowing the bookkeeper to have access to the accounting records and to the signature plates, which effectively enables the bookkeeper to initiate unauthorized transactions, while also having responsibility for preparing the monthly bank reconciliations is an improper segregation of duties.

If the objective of a test of details is to detect overstatements of sales, the auditor should trace transactions from the

Accounting records to the source documents. This answer is correct because tracing from accounting records to source documents tests for overstatements (the existence assertion). For example, an auditor might trace from the sales journal to support such as sales invoices, shipping documents and customers' orders.

For the fiscal year ending December 31, previous year and the current year, Justin Co. has net sales of $1,000,000 and $2,000,000; average gross receivables of $100,000 and $300,000; and allowance for uncollectible accounts receivable of $30,000 and $50,000 respectively. If the accounts receivable turnover and the ratio of allowance for uncollectible accounts receivable to gross accounts receivable are calculated, which of the following best represents the conclusions drawn?

Accounts receivable turnovers are 10.0 and 6.7 and the ratios of uncollectible accounts receivable to gross accounts receivable are 0.43 and 0.20, respectively. Examine allowance for possible understatement of the allowance. This answer is correct because it includes the proper quantitative amounts and conclusion. Using the following formula: Receivable turnover = Net (credit) sales/Average trade receivable (net), turnover ratios are: $1,000,000/$100,000 = 10.0 and $2,000,000/$300,000 = 6.7; ratios of uncollectible accounts to gross accounts receivable are: $30,000/$70,000 = .43 and $50,000/ $250,000 = .20. Also, this answer correctly suggests a possible understatement of the allowance—it is lower than the preceding year.

In an audit of a nonissuer's financial statements, projected misstatement is

An auditor's best estimate of misstatements in a population extrapolated from misstatements identified in an audit sample.

Holding all other factors constant, which of the following factors results in an increase in sample size for substantive tests?

An increase in the desired level of assurance that the tolerable misstatement is not exceeded by the actual amount of misstatement in the population.

If an auditor of an issuer examines purchase orders obtained from the issuer to verify proper authorization of transactions, then the auditor is conducting

An inspection. AICPA Professional Standards (specifically, AU-C 500, Audit Evidence) identifies seven types of audit procedures: (1) inspection; (2) observation; (3) external confirmation; (4) recalculation; (5) reperformance; (6) inquiry; and (7) analytical procedures. The AICPA describes examining accounting records as "inspection."

Which of the following procedures would provide the most reliable audit evidence?

Audit evidence obtained from knowledgeable independent sources outside the client company is more reliable than audit evidence obtained from nonindependent sources. Audit evidence obtained from knowledgeable independent sources outside the client company is more reliable than audit evidence obtained from nonindependent sources (e.g., company sources who may be biased).

Which of the following fraudulent activities could most likely be perpetrated due to the lack of effective internal controls in the revenue cycle?

Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash. Effective internal controls include adequate segregation of duties. The failure to separate authorization of credit memos from cash handling is a segregation of duties failure in the revenue cycle.

In a good system of segregation of duties, which of the following duties should be segregated?

Authorization of transactions, physical access to assets, and recording transactions.

An auditor most likely would assess control risk at a high level if the payroll department supervisor is responsible for

Authorizing payroll rate changes for all employees. The payroll department, which is essentially a record keeping function, should not also authorize payroll rate changes. Under strong internal control record keeping, authorization, and custody over assets should be segregated.

After obtaining an understanding of an entity's internal control structure, an auditor may assess control risk at the maximum level for some assertions because the auditor

Believes the internal control policies and procedures are unlikely to be effective. The auditor may assess control risk at maximum for some assertions if he/she believes that the internal controls are not effective. If they are not effective, they cannot be relied upon to reduce substantive testing. Control risk, therefore, may be assessed at maximum and more emphasis placed on substantive testing.

How would an auditor of a nonissuer most appropriately respond to a heightened assessed risk of material misstatement?

By assigning more experienced staff or those with specialized skills to high-risk areas. This answer is correct because a heightened assessed risk of material misstatement may result in the assignment of more experienced staff and/or those with specialized skills to high-risk areas; examples of other responses include (1) providing more supervision and emphasizing the need for professional skepticism, (2) incorporating additional elements of unpredictability into audit procedures and (3) increasing the overall scope of audit procedures.

An entity's internal control requires for every check request that there be an approved voucher, supported by a prenumbered purchase order and a prenumbered receiving report. To determine whether checks are being issued for unauthorized expenditures, an auditor most likely would select items for testing from the population of all

Canceled checks. The requirement is to identify the population from which items should be selected to determine whether checks are being issued for unauthorized expenditures. Answer (b) is correct because a sample of canceled checks should be selected and compared with the approved vouchers, a prenumbered purchase order and prenumbered receiving reports. A canceled check that does not have such support may have been unauthorized. Answers (a), (c), and (d) are all incorrect because selecting items from purchase orders, receiving reports, or approved vouchers will not reveal circumstances in which a check was issued without that supporting document. For example, when selecting a sample from purchase orders, one would not discover a situation in which a check had been issued without a purchase order.

Which of the following types of evidence would an auditor most likely examine to determine whether controls are operating as designed?

Client records documenting the use of computer programs. Inspection of client records documenting the use of computer programs will provide evidence to help the auditor evaluate the effectiveness of the design and operation of internal control; the client's control overuse of its computer programs, in this case, is documentation of the use of the programs. In order to test this control, the auditor will inspect the documentation records. See AU-C 330 for information on the nature of tests of controls.

Which of the following procedures would an auditor most likely perform to verify management's assertion of completeness?

Compare a sample of shipping documents to related sales invoices. This answer is correct because comparison of a sample of shipping documents to recorded sales invoices will provide evidence on whether all items shipped were recorded on sales invoices, which ultimately leads to the recording of a sale (completeness); thus, if no sales invoice is prepared it is doubtful that a sale will be recorded, even though goods have been shipped.

Assume that a company has a control deficiency regarding the processing of cash receipts. Reconciliation of cash accounts by a competent individual otherwise independent of the cash function might make the likelihood of a significant misstatement due to the control deficiency remote. In this situation, reconciliation may be referred to as what type of control?

Compensating. It is a compensating control which supplements a basic underlying control, in this case basic information processing controls related to cash.

An auditor wants to determine that all sales adjustments are recorded. This relates to which of the following transaction-class assertions?

Completeness.

During the audit the independent auditor identified the existence of a weakness in the client's internal control and communicated this finding in writing to the client's senior management and those charged with governance. The auditor should

Consider the effects of the condition on the audit. The auditor, as outlined throughout AU-C 330, considers and documents his/her understanding of internal control to assist in planning and determining the proper nature, timing, and extent of substantive tests.

As a result of analytical procedures, the independent auditor determines that the gross profit percentage has declined from 30% in the preceding year to 20% in the current year. The auditor should

Consider the possibility of a misstatement in the financial statements. This answer is correct because a significant fluctuation in the gross profit percentage might be indicative of a misstatement and, therefore, the auditor should consider the possibility of a misstatement in the financial statements.

Before applying principal substantive tests to the details of accounts at an interim date prior to the balance sheet date, an auditor should:

Consider whether the amounts of the year-end balances selected for interim testing are reasonably predictable. The auditor's objective is to issue an opinion on the financial statements at the balance sheet date. The performance of substantive tests prior to the balance sheet date increases the risk that misstatements may occur at the balance sheet date that the auditor will not detect. As a result, the auditor must consider certain factors carefully before electing to perform such tests. The performance of substantive analytical procedures to address the roll-forward activity between the interim date and the year-end date would specifically consider whether the amounts of the year-end balances are reasonably predictable with respect to amount, significance, and composition.

In auditing an entity's computerized payroll transactions, an auditor would be least likely to use test data to test controls concerning

Control and distribution of unclaimed checks. "Test data" would not be helpful in evaluating physical security controls over unclaimed checks or other documents.

When the shipping department returns nonconforming goods to a vendor, the purchasing department should send to the accounting department the

Debit memo. A debit memo advises accounting that the vendor invoice should not be paid in full due to returned goods. When the shipping department returns nonconforming goods to a vendor, purchasing should send accounting a debit memo.

In an entity under audit, employees have the opportunity to change their time worked after their time cards have been approved. This is an example of which of the following types of deficiency?

Design In an entity under audit, employees have the opportunity to change their time worked after their time cards have been approved. This is an example of which of the following types of deficiency?

In obtaining an understanding of an entity's internal control relevant to audit planning, an auditor is required to obtain knowledge about the

Design of the controls pertaining to internal control components. The requirement is to identify the knowledge that an auditor must obtain when obtaining an understanding of an entity's internal control sufficient for audit planning. Answer (a) is correct because an auditor must obtain an understanding that includes knowledge about the design of relevant controls and records and whether the client has placed those controls in operation. Answers (b) and (c) are incorrect because auditors may choose not to obtain information on operating effectiveness of controls and their consistency of application. Answer (d) is incorrect because there is no such explicit requirement relating to controls; see AU-C 315 for the necessary understanding of internal control.

An auditor uses the knowledge provided by the understanding of internal control and the assessed level of the risks of material misstatements primarily to

Determine the nature, timing, and further audit procedures. Correct answer iconThis answer is correct because the auditor uses the knowledge provided by his/her understanding of internal control and the assessed level of the risks of material misstatement in determining the nature, timing, and extent of further audit procedures.

Which of the following presumptions is correct about the reliability of audit evidence?

Effective internal control provides more assurance about the reliability of audit evidence. The requirement is to identify a correct presumption about the reliability of audit evidence. Answer (d) is correct because AU-C 500 indicates that effective internal control provides more assurance about the reliability of audit evidence than ineffective control. Answer (a) is incorrect because information obtained directly is considered more reliable than that obtained indirectly. Answer (b) is incorrect because audit evidence is normally persuasive rather than convincing. Answer (c) is incorrect because reliability of audit evidence relates to the appropriateness of audit evidence.

An auditor vouched data for a sample of employees in a payroll register to approved clock card data to provide assurance that

Employees work the number of hours for which they are paid. The clock card data provides the auditor with evidence on whether employees worked the number of hours for which the payroll register indicates they were paid.

If a customer pays its receivable in full but a client fails to record cash received from the customer, which of the following account balance assertions related to accounts receivable is misstated?

Existence

Which of the following sample planning factors would influence the sample size for a substantive test of details for a specific account?

Expected amount of misstatements: Yes Measure of tolerable misstatement: Yes Both the expected amount of misstatements and the measure of tolerable misstatement are factors that would influence sample size for a substantive test of details for a specific account.

When an auditor increases the assessed level of control risk because certain control activities were determined to be ineffective, the auditor would most likely increase the

Extent of tests of details. Correct answer iconIncreases in the assessed level of the risk of material misstatement lead to decreases in the acceptable level of detection risk. Accordingly, the auditor will need to increase the extent of substantive tests such as tests of details.

Assessing control risk at a low level most likely would involve

Identifying specific controls relevant to specific assertions. Assessing control risk at a low level involves (1) identifying specific controls relevant to specific assertions that are likely to prevent or detect material misstatements in those assertions, and (2) performing tests of controls to evaluate the effectiveness of such controls. Answer (a) is incorrect because assessing control risk at a low level may lead to less extensive, not more extensive substantive tests. Answer (b) is incorrect because the actual level of inherent risk is not affected by the level of control risk. Also, one would not expect a change in the assessed level of control risk to result in a change in the assessed level of inherent risk. Answer (c) is incorrect because assessing control risk at a low level may lead to interim-date substantive testing rather than year-end testing.

Assessing control risk at below the maximum level most likely would involve

Identifying specific internal control structure policies and procedures relevant to specific assertions. In order to assess control risk below maximum, the auditor must collect evidence to support the reduction. Collecting such evidence involves identifying specific internal controls relevant to specific assertions and then performing tests of controls to evaluate the effectiveness of the controls.

When sending positive confirmations, which of the following would not be an appropriate way to address nonresponse by a customer?

If the customer's account balance is individually immaterial, conclude that no further work or analysis is necessary.

Which of the following most likely would not be considered an inherent limitation of the potential effectiveness of an entity's internal control structure?

Incompatible duties Correct! A system of internal control can provide only reasonable assurance of achieving an entity's control objectives because of inherent limitations. These include the fallibility of human judgment and performance and the possibility of collusion or management override. The answer that is not an inherent limitation is "incompatible duties."

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 sampling types of risks?

Incorrect acceptance. This answer is correct because the risk of incorrect acceptance is the risk of accepting a population as being materially correct when in fact it is materially misstated.

How would increases in tolerable misstatement and assessed level of control risk affect the sample size in a substantive test of details?

Increase in tolerable misstatement: Decrease sample size Increase in the assessed level of control risk: Increase Sample Size Correct answer iconIncreasing tolerable misstatement decreases sample size while increasing the assessed level of control risk increases sample size.

Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests?

Inspect the shipping records documenting the merchandise sold to the debtors. The requirement is to identify the most likely alternate procedure when replies have not been received to either first or second accounts receivable confirmation requests. Answer (d) is correct because the inspection of shipping records will provide evidence that the merchandise was actually shipped to the debtor. Answer (a) is incorrect because, a review of the cash receipts journal prior to year-end is unlikely to provide evidence on account recorded as unpaid as of year-end. Also, the procedure would only detect one specific type of misstatement, that in which payments were recorded in the cash receipts journal, but not credited to the customers' accounts. Answer (b) is incorrect because the lack of a reply to the confirmation provides no particular evidence that the scope of procedures related to internal control should be modified. Answer (c) is incorrect because the lack of a reply need not necessarily lead to a presumption that the account is misstated. See AU-C 505 for procedures typically performed for year-end accounts receivable confirmation requests for which no reply is received.

Which of the following procedures would provide the most reliable audit evidence?

Inspection of bank statements obtained directly from the client's financial institution. Bank statements obtained directly from the financial institution would provide the most reliable evidence as they were obtained from an independent source outside the client.

Auditors try to identify predictable relationships when using analytical procedures. Relationships involving transactions from which of the following accounts most likely would yield the highest level of evidence?

Interest expense Estimation of interest expense, based on interest rates and principal balances, would most likely yield the highest level of evidence because the relationship is highly predictable. Relationships involving income statement accounts are more predicable than relationships involving balance sheet accounts because income statement accounts involve transactions occurring over a period of time rather than at a point in time.

In a financial statement audit of a nonissuer, an auditor would consider a judgmental misstatement to be a misstatement that

Involves an estimate. AICPA Professional Standards describe the term "judgmental misstatement" as follows: "differences in estimates, such as a difference in a fair value estimate" (AU-C 450.A11).

Which of the following best describes the distinguishing feature of statistical sampling?

It provides for measuring mathematically the degree of uncertainty that results from examining only a part of the data. This answer is correct because statistical sampling provides the auditor with a means of assessing sampling risk—the risk that the sample will not accurately reflect the population characteristics.

An underlying feature of random-based selection of items is that each

Item in the accounting population should have an opportunity to be selected. Every item in the accounting population should have an opportunity to be selected.

Which of the following actions should the auditor take in response to discovering a deviation from the prescribed control procedure?

Make inquiries to understand the potential consequence of the deviation. When a deviation from a prescribed control procedure occurs, the auditor should evaluate the significance of the potential effects associated with the deficiency. It would be appropriate to make inquiry of management and other client personnel in evaluating the potential effect of such a control deficiency.

Management's attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment when

Management is dominated by one individual who is also a shareholder. The control environment sets the tone for the entire organization and is the basis for all other components of internal control. Significant factors in the control environment include integrity and ethical values, commitment to competence, board of directors or audit committee participation, management philosophy and operating style, organizational structure, assignment of authority and responsibility, and human resource policies and practices. If management is dominated by one individual who is also a shareholder, the opportunity is present for management's attitude toward financial reporting to significantly influence an entity's control environment.

An advantage that using statistical sampling has over nonstatistical sampling is that statistical sampling helps an auditor to

Measure the sufficiency of the evidential matter obtained. Statistical sampling allows an auditor to: 1) design an efficient sample; 2) measure the sufficiency of the evidential matter obtained; and 3) evaluate the sample results.

Which of the following statements about audit sampling risks is correct for a nonissuer?

Nonsampling risk can arise because an auditor failed to recognize misstatements. Nonsampling risk refers to any error unrelated to sampling risk that the auditor might commit when performing an audit sampling task, such as failing to recognize a misstatement or otherwise misinterpreting the audit evidence.

An auditor wishes to perform tests of controls on a client's cash disbursements procedures. If the control procedures leave no audit trail of documentary evidence, the auditor will be most likely to test the procedures by

Observation and inquiry. When documentation of a control does not exist, the auditor may use observation and inquiry to test the procedure.

Which of the following audit techniques most likely would provide an auditor with the most assurance about the effectiveness of the operation of an internal control procedure?

Observation of client personnel. Confirmation with outside parties and recomputation of account balanced amounts are substantive procedures designed to gather evidence about the fair presentation of account balances. Inquiry of client personnel would provide some evidence about the operation of an internal control, but the best evidence would be provided through the auditor's observation of client personnel.

Which of the following procedures would an auditor most likely perform to test controls relating to management's assertion about the completeness of cash receipts for cash sales at a retail outlet?

Observe the consistency of the employees' use of cash registers and tapes. The cardinal rule regarding cash receipts is to ensure that they are recorded. By requiring employees to record all sales in the cash register and to give customers the cash register tape evidencing the sale, companies can ensure that all cash sales are recorded (the completeness of cash receipts for cash sales). The auditor can test controls by observing employees' use of cash registers and tapes.

Which of the following procedures would an auditor ordinarily perform first in evaluating management's accounting estimates for reasonableness?

Obtain an understanding of how management developed its estimates. In evaluating management's accounting estimates for reasonableness, the auditor must first obtain an understanding of how management developed the estimate. While this approach is cited in the Standards, common sense should also tell you that you must first understand how the estimate was created.

The auditor notices significant fluctuations in key elements of the company's financial statements. If management is unable to provide an acceptable explanation, the auditor should

Perform additional audit procedures to investigate the matter further. The auditor notices significant fluctuations in key elements of the company's financial statements. If management is unable to provide an acceptable explanation, the auditor should

A retailing entity uses the Internet to execute and record its purchase transactions. The entity's auditor recognizes that the documentation of details of transactions will be retained for only a short period of time. To compensate for this limitation, the auditor most likely would

Perform tests several times during the year, rather than only at year-end. This answer is correct because in such a circumstance auditors will perform tests throughout the year so as to be able to test transactions when such documentation is still available.

An auditor's decision whether to apply analytical procedures as substantive tests usually is determined by the

Precision and reliability of the data used to develop expectations. This answer is correct because, to have value in substantiating the assertions in an account, the data used should be reliable and precise enough to provide the desired level of assurance.

Jackson, the purchasing agent of Judd Hardware Wholesalers, has a relative who owns a retail hardware store. Jackson arranged for hardware to be delivered by manufacturers to the retail store on a COD basis thereby enabling his relative to buy at Judd's wholesale prices. Jackson was probably able to accomplish this because of Judd's poor internal control over

Purchase orders. This answer is correct because proper control over purchases would require that ordered goods only be shipped to authorized locations; proper control would also determine that all ordered goods had been received by the firm. If purchase orders are issued by Judd and the purchases are never received, there is an internal control condition over the purchase orders. All purchase orders should be accounted for (prenumbered) and followed up to assure receipt of orders that are issued.

Which of the following is usually a benefit of using electronic funds transfer for international cash transactions?

Reduction of the frequency of data entry errors. Using electronic funds transfer for international cash transactions reduces the manual handling and data entry related to such transfers. As a result, the frequency of data entry errors is reduced. As a general rule, whenever the data must be "touched" by human hands, the opportunity for error is introduced. The less the data are touched, the fewer the opportunities for error.

Which of the following tends to be most predictable for purposes of analytical procedures applied as substantive tests?

Relationships involving income statement accounts Relationships involving income statement accounts tend to be more predictable for analytical review purposes because the income statement accounts represent transactions occurring over a period of time.

When performing an audit, a CPA notes that bad-debt expense is unusually high relative to similar firms in the industry. The CPA should recommend which of the following controls?

Require credit checks on all new customers. This answer is correct because effective credit checks on new customers are likely to decrease the likelihood of sales to customers whose accounts ultimately become uncollectible.

Which of the following payroll control activities would most effectively ensure that payment is made only for work performed?

Require employees to have their direct supervisors approve their time cards. The approval of time cards by supervisors helps to ensure that payment is made only for work performed. The supervisor's approval indicates that the employee has indeed worked the hours indicated on the time card. The approved hours per the time card will then be paid. Thus, payment is made only for work performed.

Which of the following procedures most likely would assist an auditor in determining whether management has identified all accounting estimates that could be material to the financial statements?

Review the lawyer's letter for information about litigation. If the auditor is concerned about identifying all material accounting estimates, the auditor is seeking to discover unrecorded estimates. The auditor is most likely to review the lawyer's letter for information about litigation. Litigation losses is an area that commonly requires estimates and one in which estimates could be material to the financial statements. It is also an area that falls outside of the normal financial reporting process and, thus, is more likely to be missed.

The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the

Risk that material misstatements exist in the financial statements. The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the risk that material misstatements exist in the financial statements. Assessing control risk and inherent risk helps the auditor identify where misstatements might exist; the auditor then performs auditing procedures to detect those misstatements.

An auditor is studying a ratio of accounts receivable growth rate to sales growth rate. Which of the following indicates a potential risk of collection problem in accounts receivable?

Sales grew by 5% and receivables grew by 17% from year one to year two.

Which of the following internal control procedures would most likely deter lapping of collections from customers?

Segregation of duties between receiving cash and posting the accounts receivable ledger. Lapping occurs when a remittance received from one customer is stolen and the shortage is hidden by crediting the first customer's account with the cash received from a second customer. Lapping is best prevented by separating custody from recording. The person responsible for receiving cash should not also be responsible for posting the amounts to the accounts receivable subsidiary ledger.

An internal control narrative indicates that an approved voucher is required to support every check request for payment of merchandise. Which of the following procedures provides the greatest assurance that this control is operating effectively?

Select and examine canceled checks and ascertain that the related vouchers are dated no later than the checks This answer is correct because vouchers should have been prepared and approved prior to issuance of the check (otherwise the voucher was not present when the check was issued). In addition, the auditor must begin his/her test with the canceled checks to determine whether all checks are supported by an approved voucher.

At which point in an ordinary sales transaction of a wholesaling business would a lack of specific authorization be of least concern to the auditor in the conduct of an audit?

Selling of goods for cash. This answer is correct because at the point of selling the goods for cash, decisions on matters such as appropriate discounts will have already been made. The fact that cash is being received eliminates any credit problem considerations. Therefore, the lack of specific authorization will not be of great concern to the auditor in this situation.

If the objective of an auditor's test of details is to detect a possible understatement of sales, the auditor most likely would trace transactions from the

Shipping documents to the sales invoices This answer is correct because tracing from shipping documents to sales invoices will reveal whether the items shipped (and presumably sold) have been recorded, as evidenced by the existence of sales invoices.

A number of factors influence the sample size for a substantive test of details of an account balance. All other factors being equal, which of the following would lead to a larger sample size?

Smaller measure of tolerable misstatement. The sample size required to achieve the auditor's objective at a given risk of incorrect acceptance increases as the auditor's assessment of tolerable misstatement for the balance or class decreases.

Which of the following courses of action would an auditor most likely follow in planning a sample of cash disbursements if the auditor is aware of several unusually large cash disbursements?

Stratify the cash disbursements population so that the unusually large disbursements are selected. Stratifying the population will allow the auditor to ensure inclusion of the disbursements. The sampling procedure (selecting less than all items) will then be applied only to the smaller disbursements.

A senior auditor conducted a dual-purpose test on a client's invoice to determine whether the invoice was approved and to ascertain the amount and other terms of the invoice. Which of the following lists two tests that the auditor performed?

Tests of controls and tests of details A "dual-purpose" test involves gathering evidence in part to evaluate the effectiveness of internal control and in part to evaluate the fairness of the financial statements. "Tests of controls" address the internal control part of the dual-purpose test; and the inspection of underlying accounting documents constitutes a test of details, which addresses the substantive part of the dual-purpose test.

The degree of audit risk always present in an audit engagement is referred to as a combination of nonsampling and sampling risk. Which of the following is an example of nonsampling risk?

The auditor selecting inappropriate auditing procedures. This answer is correct because nonsampling risk includes the aspects of audit risk not due to the mathematics supporting the sampling process itself; nonsampling risk includes "human" errors such as selecting an inappropriate auditing procedure rather than "statistical" errors.

An audit client sells 15 to 20 units of product annually. A large portion of the annual sales occur in the last month of the fiscal year. Annual sales have not materially changed over the past five years. Which of the following approaches would be most effective concerning the timing of audit procedures for revenue?

The auditor should inspect transactions occurring in the last month of the fiscal year and review the related sale contracts to determine that revenue was posted in the proper period. This answer is correct because examining transactions occurring during the last month will reveal whether they have been recorded in the proper period.

Which of the following is an example of a validity check?

The computer flags any transmission for which the control field value did not match that of an existing file record. Correct answer iconA validity check is a check to see if the data carry valid values. Of the items listed, this item is the only validity check. The computer matches a control field value to an existing file record and highlights those which do not match.

An auditor may decide to increase the risk of incorrect rejection when

The cost and effort of selecting additional sample items are low. The risk of incorrect rejection relates to the efficiency of the audit. If the auditor incorrectly believes that a material misstatement exists, the auditor will perform extra auditing procedures to try to find the material misstatement. After performing the extra work, the auditor will then reach the correct conclusion that the balance is fairly stated. When the auditor decides to increase the risk of incorrect rejection, the auditor is increasing the risk of audit inefficiency, i.e., of doing too much work. This decision might seem appropriate if the cost and effort of selecting additional sample items are low.

When considering the internal control structure, an auditor should be aware of the concept of reasonable assurance, which recognizes that

The cost of an entity's internal control structure should not exceed the benefits expected to be derived. Internal control can provide only reasonable assurance as a limiting factor is the cost/benefit ratio. The cost of an entity's internal control should not exceed the benefits derived therefrom.

The auditor should consider certain factors in assessing the efficiency and effectiveness of analytical procedures as compared to tests of details. In determining whether and to what extent analytical procedures should be used, which of the following should the auditor consider?

The nature of the assertion tested. AICPA Professional Standards (specifically, AU-C 520.A8) list 4 factors that determine the effectiveness and efficiency of analytical procedures used for substantive purposes: (1) the nature of the assertion, (2) the plausibility and predictability of the relationship, (3) the availability and reliability of the data used to develop the expectation, and (4) the precision of the expectation. Explanations provided by the client are not included on that list.

An auditor of a nonissuer should design tests of details to ensure that sufficient audit evidence supports which of the following?

The planned level of assurance at the relevant assertion level. The auditor should consider whether the assessments of the risks of material misstatement at the relevant assertion level in engagement planning are appropriate in light of the auditor's substantive procedures.

Which of the following is an important consideration when deciding the nature of tests to use in a financial statement audit?

The procedures to be applied on a particular engagement are a matter of the auditor's professional judgment. Audit procedures should be responsive to the auditor's assessment of the risks of material misstatement. The specific procedures that are appropriate in the circumstances is a matter of professional judgment.

Which of the following could indicate source document fraud?

The same invoice number appears on different invoices. An entity's invoices should be identified by unique invoice numbers. If multiple invoices have the same invoice number, there may be an underlying intention to deceive or conceal certain transactions, which is consistent with possible fraud.

Which of the following control activities would most likely assure that no fictitious billings have been posted to the sales journal?

The software application compares each sales invoice with the supporting shipping documents and notes any discrepancies.

An auditor's analytical procedures most likely would be facilitated if the entity

Uses a standard cost system that produces variance reports. Use of a standard cost system (a form of budgeting) produces variance reports that will allow the auditor to compare the financial information with the standard cost system data to identify unusual fluctuations. See AU-C 520 for the approach used.

Which of the following is the most reliable analytical procedure to verify the year-end financial statement balances of a wholesale business?

Verify commission expense by multiplying sales revenue by the company's standard commission rate. This answer is correct because if the firm has a standard commission rate, the commission expense would be directly related to the sales revenue. Therefore, this would be a reliable analytical procedure.

To reduce the risks associated with accepting fax responses to requests for confirmations of accounts receivable, an auditor most likely would

Verify the sources and contents of the faxes in telephone calls to the senders. To ensure that a fax is valid, the auditor would need to perform other procedures that would aid in verifying the authenticity of the fax. Telephoning the sender would provide additional evidence that the fax was authentic.

Which of the following factors would least influence an auditor's consideration of the reliability of data for purposes of analytical procedures?

Whether the data were processed in a computerized system or in a manual accounting system. This answer is correct because whether the data were processed in a computerized system or in a manual accounting system will not in and of itself influence reliability--either type of system may provide reliable (or unreliable) information.

An audit client that manufactures and sells goods to a network of authorized dealers may create the equivalent of a consignment sale if the client:

allows an unconditional right of return at any time until the goods are sold by the dealer.

Documenting internal controls:

can be handled with a combination of narratives and flowcharts or logic diagrams.

An effective and robust system of internal control ________.

can only provide an entity with reasonable assurance in achieving its financial reporting objectives

Compensating controls are described as ________.

controls that compensate for another control's potential ineffectiveness

The software application compares all sales invoices with underlying shipping information on the bills of lading and packing slips with sales invoices. If differences are revealed, a report is generated for review and follow-up by the billing supervisor. This is an example of a(n):

detective control.

An auditor normally obtains an understanding of transaction-level controls by:

performing a system walkthrough.

Physical controls are concerned with limiting ________.

physical access to assets to those authorized to have access