ACC 514 EXAM 2
An auditor would most likely be concerned with internal control structure policies and procedures that provide reasonable assurance about the a)Efficiency of management's decision-making process. b)Entity's ability to process and summarize financial data. c)Methods of assigning production tasks to employees. d)Appropriate prices the entity should charge for its products.
b)Entity's ability to process and summarize financial data.
Immediately upon receipt of cash, a responsible employee should a)Record the amount in the cash receipts journal. b)Update the subsidiary accounts receivable records. c)Prepare a deposit slip in triplicate. d)Prepare a remittance listing.
d)Prepare a remittance listing.
Assessing control risk begins with understanding entity-level controls. True False
true
If the assessed risk of material misstatement for an assertion is high, auditors need to gather more persuasive audit evidence. True False
true
An underlying requirement of _______ is that the client's data be reliable
ADA
When performing a test of a control with respect to control over cash receipts, an auditor 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 Must be systematically replaced in the population after sampling. Must be recorded in a systematic pattern before the sample can be drawn. May systematically occur more than once in the sample. May occur in a systematic pattern, thus destroying the sample randomness.
May occur in a systematic pattern, thus destroying the sample randomness.
Which of the following factors is most likely to affect the extent of the documentation of the auditor's understanding of a client's system of internal controls? a)The degree to which information technology is used in the accounting function. b)The degree to which the auditor intends to use internal audit personnel to perform substantive tests. c)The industry and the business and regulatory environments in which the client operates. d)The relationship between management, the board of directors, and external stakeholders.
a)The degree to which information technology is used in the accounting function.
If the auditor is able to collect evidence that IT general controls are strong, then the auditor can conclude that: a)software applications are more likely to operate consistently over time. b)the risk of batch totals failing to detect misstatements is low. c)IT transactions are adequately supported by source documents. d)application controls function properly and put the correct transactions on exception reports.
a)software applications are more likely to operate consistently over time.
Nonsampling risk: only occurs if you test every item of the population. is the risk that an auditor arrives at an inappropriate conclusion for a reason unrelated to sampling issues. only applies to samples taken for the purposes of substantive testing. does not occur if an auditor relies on unreliable evidence.
is the risk that an auditor arrives at an inappropriate conclusion for a reason unrelated to sampling issues.
Sampling risk: is the risk that the sample chosen by the auditor is not representative of the population of transactions. applies only to samples for substantive testing. can be eliminated by taking a random sample. is the risk that the results of the test will be misinterpreted by the auditor.
is the risk that the sample chosen by the auditor is not representative of the population of transactions.
An auditor is using regression analysis to investigate battery expense for a computer manufacturer that purchases batteries. Which of the following would be a good choice of independent variable for the regression? a)Number of computers sold. b)Revenues. c)Number of employees. d)Square footage of manufacturing space.
number of computers sold
_______ are designed to provide assurance that changes to computer applications are introduced in a controlled and coordinated manner.
program change controls
The auditor's best estimate of the misstatement in a population based on the misstatement found in a sample drawn from the population is called a: judgmental misstatement. factual misstatement. projected misstatement. confirmation misstatement.
projected misstatement.
An auditor uses the knowledge provided by the understanding of internal control and the assessed level of the risks of material misstatements primarily to a)Determine the nature, timing, and further audit procedures. b)Determine whether procedures and records concerning the safeguarding of assets are reliable. c)Ascertain whether the opportunities to allow any person to both perpetrate and conceal fraud are minimized. d)Modify the initial assessments of inherent risk and preliminary judgments about materiality levels.
a)Determine the nature, timing, and further audit procedures.
An auditor is going to test the client's controls over bank reconciliations. The auditor will perform which of the following audit procedures for this test of controls? a)Inquiry of the person performing the bank reconciliation and reperformance of the bank reconciliation procedure. b)Inquiry of the person performing the bank reconciliation. c)Reperformance of the bank reconciliation procedure. d)Software-based audit techniques using test data.
a)Inquiry of the person performing the bank reconciliation and reperformance of the bank reconciliation procedure.
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? a)Nonfinancial information that may affect financial information. b)The nature of the assertion tested. c)Explanations provided by the client. d)Interrelationships of financial information.
b)The nature of the assertion tested.
A key aspect of testing the completeness of a data set is: a)the data has information from customers in data files from two different divisions. b)checking the numerical continuity of the data. c)the data contains misstatements. d)determining that every customer has a transaction.
b)checking the numerical continuity of the data.
The ______ also sets the foundation for effective internal control, and provides discipline and structure
control environment
It is important for an auditor to understand a public company's system of internal control in order to: a) audit internal control over financial reporting. b) make a preliminary assessment of control risk. c) develop an audit strategy. d) All of these answer choices are correct.
d) All of these answer choices are correct.
The nature of an audit procedure refers to: the sample size required to perform the procedure. its purpose and its type. when the procedure is performed. the assessed level of detection risk.
its purpose and its type.
With respect to sample size, ______ risk of incorrect acceptance is equivalent to having a higher desired level of assurance from the sample
lower
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: block selection. random selection. haphazard selection. stratified sampling.
stratified sampling.
______ are controls that affect a particular transaction or group of transactions.
transaction level controls
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. By obtaining a management representation letter. By performing tests of controls at interim-and period-end dates. By performing analytical procedures, but not substantive procedures, at period end.
By assigning more experienced staff or those with specialized skills to high-risk areas.
Which of the following ultimately determines the sufficiency and appropriateness of audit evidence to support the auditor's conclusions? Professional requirements. Professional experience. Professional judgment. Professional standards.
Professional judgement
The auditor's decision about the risk of incorrect acceptance affects which of the following factors in a statistical PPS sample? Reliability factor. Tolerable misstatement. Expected misstatement. Book value of the population.
Reliability factor
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? Greater reliance on internal control. Smaller expected frequency of errors. Smaller measure of tolerable misstatement. Greater reliance on analytical procedures.
Smaller measure of tolerable misstatement.
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): a)IT-dependent manual control. b)detective control. c)preventive control. d)IT general control.
b)detective control.
An auditor normally obtains an understanding of transaction-level controls by: a)conducting an interview with senior management. b)reading the prior year's management letter. c)testing the entity's risk assessment process. d)performing a system walkthrough.
d)performing a system walkthrough.
A ______ procedure involves the auditor describing (in words) each step of the flow of a transaction from start to finish.
narrative
When using audit data analytics, the balances or transactions that do not meet the auditor's expectations are defined as
notable items
Which of the following best illustrates the concept of sampling risk? An auditor may select audit procedures that are not appropriate to achieve the specific objective. An auditor may fail to recognize errors in the documents examined for the chosen sample. The documents related to the chosen sample may not be available for inspection. A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest.
A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest
In an audit of a nonissuer's financial statements, projected misstatement is The only amount that the auditor considers in evaluating materiality and fairness of the financial statements. An auditor's best estimate of misstatements in a population extrapolated from misstatements identified in an audit sample. The likely amount of misstatement in the subsequent period's financial statements if a control is not properly implemented. An auditor's best estimate, before performing audit procedures, of misstatements that the auditor expects to find during the audit.
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. Stratifying the population when appropriate. An increase in the amount of tolerable misstatement. A decrease in the amount of expected misstatement in the population to be tested.
An increase in the desired level of assurance that the tolerable misstatement is not exceeded by the actual amount of misstatement in the population.
Which of the following procedures would provide the most reliable audit evidence? Audit evidence provided by original documents is more reliable than audit evidence generated through a system of effective controls. Audit evidence provided by copies is more reliable than that provided by facsimiles. Audit evidence obtained from indirect sources rather than directly is more reliable than evidence obtained directly by the auditor. Audit evidence obtained from knowledgeable independent sources outside the client company is more reliable than audit evidence obtained from non independent sources.
Audit evidence obtained from knowledgeable independent sources outside the client company is more reliable than audit evidence obtained from non independent sources.
Which of the following would not be a reason to increase the extent of a substantive test? The risk of material misstatement is high. Internal controls are weak. Auditors have time to test more items. Qualitative factors suggest there may be errors in the account.
Auditors have time to test more items.
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. Assess control risk at below the maximum for the assertions embodied in the accounts selected for interim testing. Determine that the accounts selected for interim testing are not material to the financial statements taken as a whole. Obtain written representations from management that all financial records and related data will be made available.
Consider whether the amounts of the year-end balances selected for interim testing are reasonably predictable.
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 Increase in assessed level of control risk Increase sample size Decrease sample size Decrease sample size Decrease sample size Decrease sample size Increase sample size Increase sample size Increase sample size
Decrease sample size Increase sample size
Which of the following characteristics of an accounting estimate would lead to lower estimation uncertainty? Estimate is related to routine transactions. Estimate is derived from a model developed by the client. Estimate is related to complex transactions. Estimate involves assumptions that cannot be observed in a public market.
Estimate is related to routine transactions.
Which of the following factors would most likely cause an auditor to use audit sampling versus audit data analytics? Relevant data are reliable and internal controls over the reliability of data are strong. Evidence to support the audit test is not available in electronic form. The audit population is large, and the auditor's tests are supported by reliable and relevant data in electronic form, making ADA efficient. Relevant data are clean or can be cleaned up easily.
Evidence to support the audit test is not available in electronic form.
______ are internal controls that are performed by individuals but rely on computer generated information
IT dependent manual controls
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? Assessing control risk too high. Incorrect acceptance. Incorrect rejection. Assessing control risk too low.
Incorrect acceptance.
Which of the following procedures would provide the most reliable audit evidence? Inspection of prenumbered client purchase orders filed in the vouchers payable department. Inspection of bank statements obtained directly from the client's financial institution. Analytical procedures performed by the auditor on the entity's trial balance. Inquiries of the client's internal audit staff held in private.
Inspection of bank statements obtained directly from the client's financial institution.
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? Accounts receivable Interest expense Travel and entertainment expense Accounts payable
Interest expense
Which of the following best describes the distinguishing feature of statistical sampling? It allows the auditor to substitute sampling techniques for audit judgment. It provides for measuring mathematically the degree of uncertainty that results from examining only a part of the data. It allows the auditor to have the same degree of sampling risk as with non statistical sampling but with substantially less work. It provides for measuring the actual misstatements in financial statements in terms of sampling risk and allowance for sampling risk.
It provides for measuring mathematically the degree of uncertainty that results from examining only a part of the data.
An underlying feature of random-based selection of items is that each Item in the accounting population should have an opportunity to be selected. Item in the accounting population be randomly ordered. Stratum of the accounting population be given equal representation in the sample. Item must be systematically selected using replacement.
Item in the accounting population should have an opportunity to be selected.
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)Intensify the examination with the expectation of detecting management fraud. b)Consider the matter a scope limitation. c)Perform additional audit procedures to investigate the matter further. d)Withdraw from the engagement.
Perform additional audit procedures to investigate the matter further.
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. Set the tolerable rate of deviation at a lower level than originally planned. Continue to draw new samples until all the unusually large disbursements appear in the sample. Increase the sample size to reduce the effect of the unusually large disbursements.
Stratify the cash disbursements population so that the unusually large disbursements are selected.
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? Substantive procedures and analytical procedures Substantive analytical procedures and tests of controls Tests of details and substantive procedures Tests of controls and tests of details
Tests of controls and tests of details
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 control risk. The planned level of assurance at the relevant assertion level. The effectiveness of internal controls. Management's assertions that internal controls exist and are operating efficiently.
The planned level of assurance at the relevant assertion level.
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. Tests of details typically provide a low level of assurance. Analytical procedures are an inefficient means of obtaining assurance. The use of tests of controls should be considered without regard to the level of assurance required.
The procedures to be applied on a particular engagement are a matter of the auditor's professional judgment.
Which of the following would be the most likely reason to include more unpredictability in the selection and performance of audit procedures? Unpredictability provides the audit team with more variety. Client was not audited in the previous year. There is heightened risk of fraud. Client has a strong internal control environment.
There is heightened risk of fraud.
Which three of the following are included in common inherent limitation in internal control? (Select all that apply.) a) Collusion by two or more individuals to circumvent a control b)Ineffective understanding of the purpose of a control c)A control within a software that cannot be overridden or disabled d)Human error that results in a breakdown in internal control
a) Collusion by two or more individuals to circumvent a control b)Ineffective understanding of the purpose of a control d)Human error that results in a breakdown in internal control
Which three of the following are among the five components of internal control? (Select all that apply.) a) Risk assessment b)Information and communication c)Reward and Punishment d)The control environment
a) Risk assessment b)Information and communication d)The control environment
What step follows planning the ADA? a)Accessing and preparing the data for ADA. b)Considering the relevance and reliability of data used. c)Evaluating results and concluding whether the purpose of the ADA has been achieved. d)Performing the ADA.
a)Accessing and preparing the data for ADA.
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 a)Believes the internal control policies and procedures are unlikely to be effective. b)Performs tests of controls to restrict detection risk to an acceptable level. c)Identifies internal control policies and procedures that are likely to prevent material misstatements. d)Determines that the pertinent internal control structure elements are not well documented.
a)Believes the internal control policies and procedures are unlikely to be effective.
If an auditor performs tests of controls and determines that the control is not effective, what should the auditor's next step in testing controls be? a)Determine if a compensating control exists. b)Document the results of tests of controls and proceed with the planned audit strategy. c)Perform tests of controls on compensating controls. d)Document the results of tests of controls and proceed with a primarily substantive approach.
a)Determine if a compensating control exists.
Which three of the following are true of monitoring? (Select all that apply.) a)Much of the information used in monitoring is produced by the entity's information systems. b)Ongoing monitoring procedures are built into the normal recurring activities of the entity. c)Monitoring excludes information obtained from communications with external parties. d)One of the most common monitoring activities is the internal audit function.
a)Much of the information used in monitoring is produced by the entity's information systems. b)Ongoing monitoring procedures are built into the normal recurring activities of the entity. d)One of the most common monitoring activities is the internal audit function.
An auditor's decision whether to apply analytical procedures as substantive tests usually is determined by the a)Precision and reliability of the data used to develop expectations. b)Number of transactions recorded just before and just after the year-end. c)Availability of documentary evidence that should be verified. d)Extent of accounting estimates used in preparing the financial statements.
a)Precision and reliability of the data used to develop expectations.
Which of the following is a general control that would most likely assist an entity whose systems analyst left the entity in the middle of a major project? a)Systems documentation. b)Grandfather-father-son record retention. c)Input and output validation routines. d)Check digit verification.
a)Systems documentation.
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 observation. An inspection. A confirmation. A reperformance.
an inspection
A primary objective of procedures performed to obtain an understanding of internal control is to provide an auditor with a) A basis from which to modify tests of controls. b) Knowledge necessary to assess the risk of misstatement. c) Audit evidence to use in reducing detection risk. d) Information necessary to prepare flowcharts.
b) Knowledge necessary to assess the risk of misstatement.
A "false positive" is: a) indicative of a higher risk of material misstatement. b) incorrectly identified as a notable item and requires no further response to identify new or higher risks. c)another term for a notable item. d)a notable item that requires further investigation.
b) incorrectly identified as a notable item and requires no further response to identify new or higher risks.
Which of the following actions should the auditor take in response to discovering a deviation from the prescribed control procedure? a)Assume that the deviation is an isolated occurrence without audit significance. b)Make inquiries to understand the potential consequence of the deviation. c)Report the matter to the next higher level of authority within the entity. d) Increase sample size of tests of controls.
b)Make inquiries to understand the potential consequence of the deviation.
Auditing by testing the input and output of a computer system instead of the computer program itself will a)Detect all program errors, regardless of the nature of the output. b)Not detect program errors which do not show up in the output sampled. c)Not provide the auditor with confidence in the results of the auditing procedures. d)Provide the auditor with the same type of evidence as tests of application controls.
b)Not detect program errors which do not show up in the output sampled.
Documenting internal controls: a)is always handled through the use of checklists and preformatted questionnaires. b)can be handled with a combination of narratives and flowcharts or logic diagrams. c)is not done for smaller clients because of the risk of management override. d)is done after internal controls are tested so that the results can be included in the documentation.
b)can be handled with a combination of narratives and flowcharts or logic diagrams.
A key aspect of preparing the data for ADA is: a)evaluating the reliability of internally generated evidence. b)determining if the data is complete. c)determining the source of the data. d)determining the validity of data obtained from an external source.
b)determining if the data is complete.
A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that ________ ________. (choose two options) a)does not merit attention by those charged with governance b)merits attention by those charged with governance c)is less severe than a material weakness d)is more severe than a material weakness
b)merits attention by those charged with governance c)is less severe than a material weakness
The objectives of internal control include: a)risk assessment objectives, compliance objectives, and reporting objectives. b)operations objectives, reporting objectives, and compliance objectives. c)operations objectives, control environment objectives, and financial reporting objectives. d)operations objectives, internal control objectives, and financial reporting objectives.
b)operations objectives, reporting objectives, and compliance objectives.
The internal control component that addresses how an organization holds an individual accountable for his or her internal control responsibilities in pursuit of objectives is related to: a)information and communication. b)the control environment. c)risk assessment. d)control activities.
b)the control environment.
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 a)Compare a sample of paid vendors' invoices to the receiving records at year-end. b)Increase the sample of transactions to be selected for cutoff tests. c)Perform tests several times during the year, rather than only at year-end. d)Plan for a large measure of tolerable misstatement in substantive tests.
c) Perform tests several times during the year, rather than only at year-end.
Benchmarking is a process that involves: a) an audit strategy that allows the auditor to test only identified key controls rather than all controls used by the client. b)comparing the effectiveness of one control with another control. c) an audit strategy that allows the auditor to use evidence from testing an IT application control in a prior period, if the application has not been changed. d)an audit strategy that allows an auditor to rely on IT application controls if manual follow-up procedures are strong.
c) an audit strategy that allows the auditor to use evidence from testing an IT application control in a prior period, if the application has not been changed.
Which of the following would require the auditor to increase the level of control testing for a particular control? a)The WCGW addressed by the control is not very important. b)There are several controls relating to a particular audit objective. c)A high degree of reliance is to be placed on the control to limit the amount of substantive testing required. d)The control is performed monthly instead of daily.
c)A high degree of reliance is to be placed on the control to limit the amount of substantive testing required.
In a good system of segregation of duties, which of the following duties should be segregated? a)Physical access to assets, recording of transactions, and consideration. b)Authorization of transactions, physical access to assets, and management. c)Authorization of transactions, physical access to assets, and recording transactions. d)Authorization of transactions, recording transactions, and management.
c)Authorization of transactions, physical access to assets, and recording transactions.
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 a)Suspend all audit activities pending directions from the client's audit committee. b)Withdraw from the engagement. c)Consider the effects of the condition on the audit. d)Consider the weakness a scope limitation and therefore disclaim an opinion.
c)Consider the effects of the condition on the audit.
Which of the following presumptions is correct about the reliability of audit evidence? a)To be reliable, audit evidence should be convincing rather than persuasive. b)Information obtained indirectly from outside sources is the most reliable audit evidence. c)Effective internal control provides more assurance about the reliability of audit evidence. d)Reliability of audit evidence refers to the amount of corroborative evidence obtained.
c)Effective internal control provides more assurance about the reliability of audit evidence.
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 a)Level of detection risk. b)Level of inherent risk. c)Extent of tests of details. d)Extent of tests of controls
c)Extent of tests of details.
Assessing control risk at a low level most likely would involve a) Performing more extensive substantive tests with larger sample sizes than originally planned. b)Reducing inherent risk for most of the assertions relevant to significant account balances. c)Identifying specific controls relevant to specific assertions. d)Changing the timing of substantive tests by omitting interim-date testing and performing the tests at year-end.
c)Identifying specific controls relevant to specific assertions.
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? a)Compare the cash balance in the general ledger with the bank confirmation request. b)Inquire about employees' access to recorded but undeposited cash. c)Observe the consistency of the employees' use of cash registers and tapes. d)Trace the deposits in the cash receipts journal to the cash balance in the general ledger.
c)Observe the consistency of the employees' use of cash registers and tapes.
When an auditor identifies internal control deficiencies, what levels of internal control deficiencies must be reported to those charged with governance of the entity? a)Deficiencies and significant deficiencies in internal control. b)Significant deficiencies only. c)Significant deficiencies and material weaknesses in internal control. d)Material weaknesses only.
c)Significant deficiencies and material weaknesses in internal control.
Which of the following is an example of a validity check? a) After data for a transaction are entered, the computer sends certain data back to the terminal for comparison with data originally sent. b)As the computer corrects errors and data are successfully resubmitted to the system, the causes of the errors are printed out. c)The computer flags any transmission for which the control field value did not match that of an existing file record. d)The computer ensures that a numerical amount in a record does not exceed some predetermined amount.
c)The computer flags any transmission for which the control field value did not match that of an existing file record.
Which of the following represents an example of an IT application control? a)The accounts receivable manager reviews credit balances in accounts receivable quarterly to determine their causes. b)All changes to software applications must be reviewed and approved by the department affected by the application. c)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. d)The assistant controller performs a monthly bank reconciliation and follow-up of unexpected outstanding items.
c)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.
An auditor is using ADA as a substantive test to validate accounts receivable because consumers are poor at responding to confirmations. In this case, the auditor validates the receivable by: a)tracing shipping documents to bills of lading. b)vouching the receivable back to sales orders. c)finding electronic evidence that the receivable is supported by subsequent cash receipt in the same amount. d)finding electronic evidence of strong internal controls.
c)finding electronic evidence that the receivable is supported by subsequent cash receipt in the same amount.
An entity's risk assessment process: a)is designed to help an entity think about risk in the same way that an auditor thinks about risk. b)never allows management of an entity to decide to accept a risk without taking any action. c)is the entity's process for identifying and responding to business risks and the results of those risks. d)is established only if the entity is subject to unusually high risk.
c)is the entity's process for identifying and responding to business risks and the results of those risks.
A software application will not allow a sale to be processed if a customer is over its credit limit. This is an example of a(n): a)detective control. b)IT general control. c)preventive control. d)IT-dependent manual control.
c)preventive control.
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? Nonroutine. Compensating. Adjustive. Preventive.
compensating
_______ controls are designed to provide reasonable assurance that IT records, processes and reports data properly for specific applications.
computer application
When analyzing the results of substantive procedures, auditors should beware of: professional skepticism. confirmation bias. weak internal controls. audit engagement deadlines.
confirmation bias.
The auditor decides which controls to test by considering: a)the points at which fraud or error can occur. b)the nature of controls implemented by management. c)the significance of each control in achieving its control objective. d)All of these answer choices are correct.
d)All of these answer choices are correct.
When performing ADA as a risk assessment procedure, a notable item: a)is indicative of a risk of material misstatement not previously identified by the auditor. b)is indicative of a higher risk of material misstatement than anticipated by the auditor. c)provides information useful in designing procedures to address the risk of material misstatement. d)All of these answer choices describe notable items.
d)All of these answer choices describe notable items.
Which of the following represent a common categorization of control activities? a)Authorization controls, control over human error, information-processing controls, and segregation of duties. b)Authorization controls, control over human error, information-processing controls, physical controls, and segregation of duties. c)Authorization controls, information-processing controls, physical controls, and segregation of duties. d)Authorization controls, performance reviews, information-processing controls, physical controls, and segregation of duties.
d)Authorization controls, performance reviews, information-processing controls, physical controls, and segregation of duties.
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 a)Include an additional paragraph in the audit report due to the inability of the client company to continue as a going concern. b)Require footnote disclosure. c)Evaluate management's performance in causing this decline. d)Consider the possibility of a misstatement in the financial statements.
d)Consider the possibility of a misstatement in the financial statements.
Sound internal control procedures dictate that defective merchandise returned by customers should be presented initially to the a) Shipping department supervisor. b)Accounts receivable supervisor. c)Sales clerk. d)Receiving clerk.
d)Receiving clerk.
Which of the following is an example of data that needs to be cleaned before it can be analyzed? a)The data contains misstatements. b)The data has information from customers in data files from two different divisions. c)The data comes from a system with poor internal controls. d)The data has dates in two different formats (MM/DD/YY and DD/MM/YY).
d)The data has dates in two different formats (MM/DD/YY and DD/MM/YY).
Which of the following is the most reliable analytical procedure to verify the year-end financial statement balances of a wholesale business? a)Verify interest expense, which includes imputed interest, by multiplying long-term debt balances by the year-end prevailing interest rate. b)Verify depreciation expense by multiplying the depreciable asset balances by one divided by the depreciation rate. c)Verify FICA tax liability by multiplying total payroll costs by the FICA contribution rate in effect during the year. d)Verify commission expense by multiplying sales revenue by the company's standard commission rate.
d)Verify commission expense by multiplying sales revenue by the company's standard commission rate.
ITGCs are important because they: a)impact the effectiveness of manual controls. b)allow client staff to change programs without needing to receive authorization for the change. c)prevent the reliability of electronic audit evidence. d)prevent unauthorized personnel from having access to data and applications.
d)prevent unauthorized personnel from having access to data and applications
Audit data analytics (ADA) is effective only for identifying general types of misstatements and not for identifying specific transactions or accounts that are likely to be misstated. True False
false
Audit sampling can be used for all substantive tests. True False
false
In inquiry, the auditor is not allowed to ask the employee who prepares the bank reconciliation how reconciling items are identified and the reasons for them. True False
false
Strong entity-level controls make it less likely that transaction-level controls will operate effectively. True False
false
The auditors should plan to test each and every control. True False
false
The choice of statistical or non-statistical sampling affects the selection of procedures or the competence of evidence obtained about individual sample items. True False
false
The flow of a transaction, and the documents involved, will be the same from transaction class to transaction class. True False
false
The more judgment that is involved in conducting the substantive procedures and evaluating the results, the less documentation is needed. True False
false
The two levels of internal control are entity-level controls and auditor-level controls. True False
false
The risk of _____________represents a situation where the auditor has conducted substantive procedures on a sample and concluded that there is a material misstatement in an assertion, when in fact there is no material misstatement.
incorrect rejection
Audit sampling is defined as a situation where: the auditor screens less than 100% of the population to identify a subset with particular risk traits. the auditor tests a representative group that is less than 100% of the population for the purpose of drawing a conclusion about the entire population. the auditor screens 100% of the population to identify a subset with particular risk traits. the auditor tests a subset of the population to draw a conclusion about a subset of the population.
the auditor tests a representative group that is less than 100% of the population for the purpose of drawing a conclusion about the entire population.
Designing substantive procedures responds to: the risk of all types of misstatements at the entity level. the risk of all types of misstatements at the assertion level. the risk of material misstatement at the assertion level. the risk of material misstatement at the entity level.
the risk of material misstatement at the assertion level.
If the auditor is performing substantive tests at an interim date, the auditor must perform steps to update their conclusion to the date of the financial statements. True False
true
In some cases, it is feasible to audit the entire population. True False
true
Systematic selection involves the selection of a population for testing by dividing the number of items in a population by the sample size, resulting in the sampling interval (n). True False
true
Whenever the auditor draws a conclusion about the entire population based on a sample, there is some level of uncertainty about the auditor's conclusion. True False
true
An auditor is performing a cluster analysis and sorts a client's customers into groups based on the aging of accounts receivable. The auditor is most likely auditing which of the following assertions? Rights and obligations. Completeness. Valuation and allocation. Existence.
valuation and allocation
All of the following are initial procedures performed on an account balance except: scanning account details for unusual items. agreeing the opening balance to the audited ending balance from the prior year's working papers. vouching items from the trial balance to supporting documentation. footing a trial balance for mathematical accuracy.
vouching items from the trial balance to supporting documentation.
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 misstatementsMeasure of tolerable misstatement NoNo YesYes YesNo NoYes
yes yes
