Audit Final
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. Such a situation illustrates the risk of
incorrect rejection
An advantage of using statistical over nonstatistical sampling methods in tests of controls is that the statistical methods:
provide an objective basis for quantitatively evaluating sample risks.
Which of the following most likely would be the result of ineffective internal control policies and procedures in the revenue process?
Final authorization of credit memos by personnel in the Sales Department could permit an employee defalcation scheme.
Using nonstatistical sampling, 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?
Identify the large and unusual disbursements as individually significant and test 100 percent.
Which of the following combinations guarantees a larger sample size?
Increase the desired confidence level and decrease the tolerable deviation rate.
For which of the following audit tests would an auditor most likely use attributes sampling?
Inspecting employee time cards for proper approval by supervisors.
Which of the following best describes the distinguishing feature of statistical sampling?
It permits the auditor to use the most efficient sample size and to quantify the sampling risk to reach a statistical conclusion about the population.
Harvey Jones, CPA, uses statistical sampling to test control procedures. What is a benefit of using statistical sampling?
It provides a means of mathematically measuring the sampling risk that result from examining only a part of the data.
In nonstatistical sampling for tests of controls, increasing the desired confidence level results in a:
Larger sample size
Statistical sampling provides a technique for:
Measuring the sufficiency of evidential matter.
Which of the following misstatements is not related to the completeness assertion for revenue?
Next year's revenue is recorded this year.
Which of the following might be detected by an auditor's review of the entity's sales cutoff?
Overstated sales for the year.
In attributes sampling, a 10% change in which of the following factors normally will have the least effect on the size of a statistical sample?
Population Size
Which of the following is not an issue related to the valuation of accounts receivable?
Proper cutoff.
Audit sampling is commonly used for which type of audit evidence?
Reperformance
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 misstatements.
For an attributes sampling plan, the tolerable deviation rate is 4%, the computed upper deviation rate is 7%, the sample deviation rate is 3%, and the risk of assessing control risk too low is 5%. Which of the following is true?
The auditor is likely to increase control risk because the computed upper deviation rate is greater than the tolerable deviation rate.
In determining the adequacy of the allowance for uncollectible accounts, the least reliance should be placed upon which of the following?
The credit manager's opinion.
Which of the following is not an inherent risk factor for the revenue process?
The entity does not follow its stated policies for sales order approvals.
Which of the following is the best argument against the use of negative accounts receivable confirmations?
The inference drawn from receiving no reply may not be correct.
Which of the following statements is correct concerning statistical sampling for tests of controls?
The population size has little or no effect on determining sample size except for very small populations.
Which of the following risks is related to effectiveness of testing?
The risk of incorrect acceptance.
Based on a 5% risk of assessing control risk too low, how would an auditor interpret a computed upper deviation rate of 7%?
There is a 5% chance that the deviation rate in the population exceeds 7%.
What is the primary objective of testing all individually significant items rather than sample testing?
To accept no sampling risk for items greater than tolerable misstatement.
In which of the following cases would the auditor determine that statistical sampling should not be performed?
Tolerable deviation is small and expected population deviation is high.
In determining the sample size for a test of controls, an auditor should consider the expected population deviation rate, desired confidence level, and the:
Tolerable deviation rate
For attributes sampling, of the three factors that enter into sample size determination, which two factors can the auditor adjust to reflect the importance of the control?
Tolerable deviation rate and confidence level.
Which of the following is a test of controls for the transaction assertion of completeness for revenue?
Trace shipping documents to sales invoices and the sales journal.
The tolerable deviation rate for a test of controls is generally
higher than the expected rate of deviations in the related accounting records.
The formula for nonstatistical sampling sample sizes provided by the AICPA
includes a measure for the expected misstatement in the population.
In the confirmation of accounts receivable, the auditor would most likely:
require that confirmation requests be sent as soon as possible after fiscal year-end.
When reviewing bank confirmations for any liens on receivables, the auditor is testing the ______________ assertion.
rights and obligations
An auditor who uses statistical sampling for attributes in testing internal controls is most likely to reduce the planned reliance on a prescribed control when the:
sample deviation rate plus the allowance for sampling risk exceeds the tolerable deviation rate.
An auditor plans to examine a sample of 20 checks for countersignatures as prescribed by the entity's internal 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:
treat the missing check as a deviation for the purpose of evaluating the sample.
To reduce the risks associated with accepting electronic responses to requests for confirmation of accounts receivable, an auditor most likely would:
validate the sender of electronic information.
For a large population of cash disbursement transactions, Smith, CPA is testing controls by using attribute sampling techniques. Anticipating an expected deviation rate of 3 percent, Smith found from a table that the required sample size is 400 with a tolerable deviation rate of 5 percent and a desired confidence level of 95 percent. If Smith anticipated an expected deviation rate of only 2 percent but wanted to maintain the same tolerable deviation rate and confidence level, the sample size would be closest to
200
For an attributes sampling plan, the tolerable deviation rate is 4.5%, the computed upper deviation rate is 7%, the sample deviation rate is 3%, and the desired confidence level is 95%. What is the allowance for sampling risk included in the computed upper deviation rate?
4%
Auditors may use positive and/or negative forms of confirmation requests for accounts receivable. Which of the following statements is true regarding the auditor's use of confirmations?
A combination of the two confirmation types can be used, with the positive form used for large balances and the negative form used for small balances.
What is channel stuffing?
A company induces distributors to buy substantially more inventory than they can promptly resell.
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 (regarding the characteristic being tested).
An auditor reconciles the total of the accounts receivable subsidiary ledger to the general ledger control account as of October 31. By this procedure, the auditor would be most likely to learn about which of the following?
An opening balance in a subsidiary ledger account was improperly carried forward from the previous accounting period.
Which of the following most likely would give the most assurance concerning the valuation assertion for accounts receivable?
Assessing the allowance for uncollectible accounts for reasonableness.
Jones, CPA, believes the industry-wide deviation rate of client billing errors is 3% and has established a tolerable deviation rate of 5%. In the review of client invoices, Jones should use
Attributes sampling
Auditors sometimes use ratios as audit evidence. For example, an unexplained increase in the ratio of gross profit to sales may suggest which of the following possibilities?
Fictitious sales.
Which of the following factors does an auditor generally need to consider in planning a particular audit sample for a test of controls?
Desired confidence level.
Which of the following statements is correct concerning statistical sampling in tests of controls?
Deviations from specific internal control procedures at a given rate ordinarily result in misstatements at a lower rate
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 misstatement and the measure of tolerable misstatement.
An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management's assertions about:
accuracy, valuation and allocation.
In general, revenue is recognized when:
an entity satisfies a performance obligation.
Confirmation is least likely to be a relevant form of evidence with regard to assertions about accounts receivable when the auditor has concerns about the receivables':
classification.
An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared. This test is performed to assess the assertion of:
completeness
When tracing a sample of shipping documents from throughout the year to the details of the sales invoices and to the sales journal and customers' accounts receivable subsidiary ledger, the auditor is testing the _____________ assertion.
completeness
The confirmation of customers' accounts receivable rarely provides reliable evidence about the completeness assertion because:
customers may not be inclined to report understatement errors in their accounts.
A control is deemed to be more important than thought at the time that attributes sampling parameters were set. The auditor is most likely to respond by:
decreasing the tolerable deviation rate.
The likelihood of assessing control risk too high is the risk that the sample selected to test controls:
does not support the auditor's planned assessed level of control risk when the true operating effectiveness of internal control justifies such an assessment.
The risk of incorrect acceptance relates to the:
effectiveness of the audit
Audit documents often include an aged trial balance of accounts receivable as of the balance sheet date. This aging is used by the auditor to:
evaluate the allowance for doubtful accounts.
Once a CPA has determined that accounts receivable has increased because of slow collection in a "tight money" environment, the CPA would be likely to:
expand tests regarding the collectability of receivables.
To determine the sample size for a test of controls, an auditor should consider the tolerable deviation rate, the desired confidence level, and the:
expected population deviation rate.
In addition to evaluating the frequency of deviations in tests of controls, an auditor should also consider certain qualitative aspects of the deviations. The auditor most likely would give broader consideration to the implications of a deviation if it was:
initially concealed by a forged document.
Audit sampling is not used for which type of audit evidence?
inquiry
An underlying feature of random-based selection of items is that each:
item in the accounting population should have an opportunity to be selected.
Auditors who prefer statistical sampling to nonstatistical sampling may do so because statistical sampling helps the auditor:
measure the sufficiency of the evidential matter obtained.
As a result of tests of controls, an auditor incorrectly assessed control risk too low and decreased substantive testing. This assessment occurred because the true deviation rate in the population was:
more than the deviation rate in the auditor's sample.
As a result of tests of controls, an auditor over relied on internal control and decreased substantive testing. This overreliance occurred because the true deviation rate in the population was:
more than the deviation rate in the auditor's sample.
When a sample of sales transactions recorded in the sales journal is traced back to the customer orders and shipping documents, the auditor is testing the ____________ assertion.
occurrence
Smith is engaged in the audit of a cable TV firm that services a rural community. All receivable balances are small, customers are billed monthly, and internal control is effective. To determine the existence of the accounts receivable balances at the balance sheet date, Smith would most likely:
send negative confirmation requests.
Cooper, CPA is auditing the financial statements of a small rural municipality. The receivable balances represent residents' delinquent real estate taxes. Internal control at the municipality is weak. To determine the existence of the accounts receivable balances at the balance sheet date, Cooper would most likely:
send positive confirmation requests.
If the expected deviation rate exceeds the tolerable deviation rate, the auditor is most likely to:
set control risk at the maximum without sampling.
If auditors conducting attributes sampling found that the entity deviated from a prescribed control in nine of the first 10 items examined, the auditor is most likely to:
stop the test and increase control risk.
In auditing accounts receivable, the negative form of confirmation request most likely would be used when:
the combined assessed level of inherent and control risk relative to accounts receivable is low.
The term precision relates to:
the difference between expected and tolerable deviation rate.
The use of the ratio projection is most effective when
the dollar amount of the misstatement is expected to relate to the dollar amount of items tested.
The confidence factor for nonstatistical sampling is based on
the risk of misstatement in the account and the level of desired confidence.
The computed upper deviation rate is
the sum of the sample deviation rate and an appropriate allowance for sampling risk.
