Test 2
In considering materiality for planning purposes, an auditor believes that misstatements aggregating $10,000 would have a material effect on an entity's income statement, and that misstatements would have to aggregate $30,000 to materially affect the balance sheet. Ordinarily, it would be appropriate to design auditing procedures to detect misstatements that aggregate
$10,000
The estimated total misstatement of $40,000 in inventory are based on a sample of $500,000 of inventory out of the total balance of $2,500,000 in which the auditors detected $5,000 of overstatement misstatements. What is the allowance for sampling risk in the projection of misstatement?
15000
The following identifies various aspects of the audit, such as client characteristics, external factors, and auditor decisions related to the risk model. For each factor, identify the most closely related risk model element (AAR, IR, CR, or PDR): and the direction of the change: The client's financial condition has deteriorated
AAR Decrease
For each procedure, indicate the primary audit objective being satisfied: Examine duplicate sales invoices for indication that prices were compared to the approved price list.
Accuracy-transactions
A key internal control is the separation of duties between cash handling and record keeping. The objective most directly associated with this control is to verify that:
All cash receipts are recorded.
For each procedure, indicate the primary audit objective being satisfied: Account for a sequence of receiving reports and verify that each one has an invoice attached.
Completeness-transactions
Indicate which of the five COSO internal control components is best represented by the following internal control: The accounts payable clerk matches purchase invoices received with the receiving report and purchase order.
Control activities
Indicate which of the five COSO internal control components is best represented by the following internal control: The company has an organizational chart that establishes the formal lines of reporting and authorization protocols.
Control environment
Tests of controls are most likely to be performed when:
Control risk is assessed at less than the maximum.
For each procedure, indicate the primary audit objective being satisfied: Examine dates on sales invoices and shipping documents for a sample of transactions before and after year-end.
Cutoff
Based on evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, an auditor might:
Decrease detection risk.
After determining that a related party transaction has in fact occurred, an auditor should
Determine whether the nature of the transaction is properly disclosed.
Inherent risk and control risk differ from detection risk in that they:
Exist independently of the financial statement audit.
For each procedure, indicate the primary audit objective being satisfied: Examine vendor's invoices and receiving reports supporting amounts on the listing of accounts payable.
Existence
For each procedure, indicate the primary audit objective being satisfied: Send confirmations to customers to determine whether they have an accounts receivable balance.
Existence
After the study and evaluation of internal control has been completed, an auditor might decide to
Expand substantive tests in areas where weaknesses in control procedures exist.
When an auditor increases the planned assessed level of control risk because certain control procedures were determined to be ineffective, the auditor would most likely increase the:
Extent of substantive tests of details.
The following identifies various aspects of the audit, such as client characteristics, external factors, and auditor decisions related to the risk model. For each factor, identify the most closely related risk model element (AAR, IR, CR, or PDR): and the direction of the change: The client's inventory is at increased risk for obsolescence
IR Increase
Indicate which of the five COSO internal control components is best represented by the following internal control: The company's computer systems track individual transactions and automatically accumulate transactions to create a trial balance.
Information and communication
After obtaining an understanding of the internal control structure and assessing control risk, an auditor decided to perform tests of controls. The auditor most likely decided that
It would be efficient to perform tests of controls that would result in a reduction in planned substantive tests.
The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the risk that:
Material misstatements may exist in the financial statements.
For certain controls, such as segregation of duties, documentary evidence may not exist. An auditor would most likely test the procedures by:
Observation & Inquiry
For each procedure, indicate the primary audit objective being satisfied: Foot the sales journal for one month and trace postings to the general ledger and accounts receivable master file.
Posting and Summarization
For each procedure, indicate the primary audit objective being satisfied: Trace entries from the cash receipts journal to the accounts receivable master file.
Posting and Summarization
Indicate the type of test for the following audit procedure: Foot the sales journal for one month and trace postings to the general ledger and accounts receivable master file.
STOT
Indicate the type of test for the following audit procedure: Trace entries from the cash receipts journal to the accounts receivable master file.
STOT
The actual operation of an internal control system may be most objectively evaluated by
Selection of items processed by the system and determination of the presence or absence of errors and compliance deviations.
Indicate the type of test for the following audit procedure: Vouch entries in the cash receipts journal to the cash receipts prelist and related remittance advices.
Substantive test of transactions
Indicate the type of test for the following audit procedure: Examine duplicate sales invoices for indication that prices were compared to the approved price list.
Test of control
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.
In deciding whether recorded sales are valid, which of the following items of evidence would be considered most competent?
The shipping document, independent bill of lading, and the invoice for the merchandise.
The following information is provided for the audit of Spasmodics. Performance materiality is twice the amount of materiality. There are no other misstatements other than those indicated. Account Amount Performance Materiality Estimated Misstatements Overstating Income * Accounts receivable Inventory Fixed assets All other accounts (net) 1,000,000 2,500,000 2,000,000 1,500,000 30,000 60,000 10,000 40,000 35,000 40,000 5,000 10,000 Net assets 7,000,000 140,000 * Amount includes projected misstatement and allowance for sampling risk What is the reason for your decision on the acceptability of the financial statements?
Total misstatements are greater than planning materiality
Which of the following audit risk components may be assessed in nonquantitative terms?Control Risk / Detection Risk / Inherent Risk
Yes / Yes / Yes
The following identifies various aspects of the audit, such as client characteristics, external factors, and auditor decisions related to the risk model. For each factor, identify the most closely related risk model element (AAR, IR, CR, or PDR): and the direction of the change: The client increased the size of its bank loan
aar decrease
Indicate which of the five COSO internal control components is best represented by the following internal control: The accounts receivable clerk reconciles the accounts receivable subsidiary ledger to the accounts receivable general ledger account on a monthly basis.
control activities
The following identifies various aspects of the audit, such as client characteristics, external factors, and auditor decisions related to the risk model. For each factor, identify the most closely related risk model element (AAR, IR, CR, or PDR): and the direction of the change: The auditor performed tests of controls and obtained more favorable results than the previous year.
cr decresae
One form of the risk model is AAR = IR x CR x PDR Where: AAR = Acceptable Audit Risk IR = Inherent Risk CR = Control Risk PDR = Planned Detection Risk (note you are asked to address planned evidence, not PDR). Indicate the effect of the following items on control risk After evaluating and testing controls, the auditor decided that controls were less effective than planned.
increase
One form of the risk model is AAR = IR x CR x PDR Where: AAR = Acceptable Audit Risk IR = Inherent Risk CR = Control Risk PDR = Planned Detection Risk (note you are asked to address planned evidence, not PDR). Indicate the effect of the following items on control risk You find controls over inventory are significantly worse compared to the prior year. Due to technological changes, the client's inventory may be somewhat obsolete.
increase
One form of the risk model is AAR = IR x CR x PDR Where: AAR = Acceptable Audit Risk IR = Inherent Risk CR = Control Risk PDR = Planned Detection Risk (note you are asked to address planned evidence, not PDR). Indicate the effect of the following items on inherent risk You find controls over inventory are significantly worse compared to the prior year. Due to technological changes, the client's inventory may be somewhat obsolete.
increase
One form of the risk model is AAR = IR x CR x PDR Where: AAR = Acceptable Audit Risk IR = Inherent Risk CR = Control Risk PDR = Planned Detection Risk (note you are asked to address planned evidence, not PDR). Indicate the effect of the following items on planned evidence After evaluating and testing controls, the auditor decided that controls were less effective than planned.
increase
One form of the risk model is AAR = IR x CR x PDR Where: AAR = Acceptable Audit Risk IR = Inherent Risk CR = Control Risk PDR = Planned Detection Risk (note you are asked to address planned evidence, not PDR). Indicate the effect of the following items on planned evidence You find controls over inventory are significantly worse compared to the prior year. Due to technological changes, the client's inventory may be somewhat obsolete.
increase
Indicate which of the five COSO internal control components is best represented by the following internal control: Each quarter, department managers are required to perform a self-assessment of the department's compliance with company policies. Reports summarizing the results are to be submitted to the senior executive overseeing that department.
monitoring
The following information is provided for the audit of Spasmodics. Performance materiality is twice the amount of materiality. There are no other misstatements other than those indicated. Account Amount Performance Materiality Estimated Misstatements Overstating Income * Accounts receivable Inventory Fixed assets All other accounts (net) 1,000,000 2,500,000 2,000,000 1,500,000 30,000 60,000 10,000 40,000 35,000 40,000 5,000 10,000 Net assets 7,000,000 140,000 * Amount includes projected misstatement and allowance for sampling risk Are the financial statements acceptable?
no
One form of the risk model is AAR = IR x CR x PDR Where: AAR = Acceptable Audit Risk IR = Inherent Risk CR = Control Risk PDR = Planned Detection Risk (note you are asked to address planned evidence, not PDR). Indicate the effect of the following items on acceptable audit risk After evaluating and testing controls, the auditor decided that controls were less effective than planned.
no change
One form of the risk model is AAR = IR x CR x PDR Where: AAR = Acceptable Audit Risk IR = Inherent Risk CR = Control Risk PDR = Planned Detection Risk (note you are asked to address planned evidence, not PDR). Indicate the effect of the following items on acceptable audit risk You find controls over inventory are significantly worse compared to the prior year. Due to technological changes, the client's inventory may be somewhat obsolete.
no change
One form of the risk model is AAR = IR x CR x PDR Where: AAR = Acceptable Audit Risk IR = Inherent Risk CR = Control Risk PDR = Planned Detection Risk (note you are asked to address planned evidence, not PDR). Indicate the effect of the following items on inherent risk After evaluating and testing controls, the auditor decided that controls were less effective than planned.
no change
For each procedure, indicate the primary audit objective being satisfied: Vouch entries in the cash receipts journal to the cash receipts prelist and related remittance advices.
occurence
The following identifies various aspects of the audit, such as client characteristics, external factors, and auditor decisions related to the risk model. For each factor, identify the most closely related risk model element (AAR, IR, CR, or PDR): and the direction of the change: Auditor decided to confirm receivables at an interim date
pdr increase
Indicate which of the five COSO internal control components is best represented by the following internal control: The compensation committee reviews compensation plans for senior executives to determine if those plans create unintended pressures that might lead to distorted financial statements.
risk assesment
Indicate the type of test for the following audit procedure: Account for a sequence of receiving reports and verify that each one has an invoice attached.
test of control
Indicate the type of test for the following audit procedure: Examine dates on sales invoices and shipping documents for a sample of transactions before and after year-end.
test of details of balances
Indicate the type of test for the following audit procedure: Examine vendor's invoices and receiving reports supporting amounts on the listing of accounts payable.
test of details of balances
Indicate the type of test for the following audit procedure: Send confirmations to customers to determine whether they have an accounts receivable balance.
test of details of balances
