Audit Exam 2

An auditor concluded that no excessive costs for an idle plant were charged to inventory. The conclusion most likely related to the auditor's objective to obtain evidence about the financial statement assertions regarding inventory, particularly: A. Valuation and allocation (about costs of inventory not quantities) B. Completeness. (risk = inventory items should be recorded & is not recorded) C. Existence/occurrence (risk = inventory item is recorded & should not be) D. Rights and obligations (risk = client does not own the rights to the items recorded in inventory)

A

Effective internal control: A. Helps to mitigate risks that threaten the company's objectives. B. Eliminates risk and potential loss to the organization. C. Cannot be circumvented by management. D. Is unaffected by changing circumstances and conditions encountered by the organization

A

Evidence is reliable if it A. Signals the true state of a management assertion. B. Applies to the period being audited. C. Relates to the audit assertion being tested. D. Is consistent with management's assertions.

A

If the objective of a test of details is to detect overstatements of sales, the auditor should trace transactions from the... A. accounting records to source documents (I'm worried that the they recorded things that didnt exist) B. source documents to accounting records (test records are complete) C. general ledger to the subledger D. subledger to the general ledger

A

In monetary-unit sampling, population size is: A. The dollar balance in an account. B. The number of items in an account. C. Unrelated to sample size. D. Included in the denominator of the formula to determine sample size

A

The purpose of tests of controls is to determine that: A.. Internal control policies and procedures are operating as designed B. Substantive procedures can be kept to a minimum C. Errors and irregularities are prevented and detected in a timely manner D. The auditor has an understanding of internal control

A

Which of the following is not true? A. The auditor should not communicate any discovered control deficiencies to management until the audit of internal control over financial reporting is finished. B. Written communication between the auditor and management about internal control over financial reporting should include the definitions of control deficiencies, significant deficiencies, and material weaknesses. C. The auditor should not include in the audit report that no significant deficiencies were noted during an audit of internal control over financial reporting. D. If fraud is discovered, the auditor must report it to the appropriate level of management. E. All of the above are false statements

A

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 : A. Incorrect rejection. B. Incorrect acceptance. C. Assessing control risk too high. D. Assessing control risk too low

A

Your audit client is under intense pressure to meet an earnings target. Which of the following assertions for sales are you most concerned with? A Occurrence B. Completeness C. Classification D. Rights and Obligations

A

Harvey Jones, CPA, uses nonstatistical sampling to test an account balance. What is a benefit of using nonstatistical sampling? A A. It provides a means of mathematically measuring the sampling risk that result from examining only a part of the data. B. It enables the auditor to utilize their professional judgement in selecting a sample. C. It increases Jones' knowledge of the entity's prescribed procedures and their limitations. D. It is required by generally accepted auditing standards. E. It is allowed by generally accepted auditing standards.

B

If the expected deviation rate exceeds the tolerable deviation rate, the auditor is most likely to: A. have a large sample size. B. set control risk at the maximum without sampling. C. set control risk at the minimum without sampling. D. pick a lower risk of assessing control risk too low to increase sample size.

B

Internal controls are not designed to provide reasonable assurance that A. Transactions are executed in accordance with management's authorization. B. Embezzlement will be eliminated. C. Access to assets is permitted only in accordance with management's authorization. D. Amounts recorded for assets are compared with the actual existing assets at reasonable intervals.

B

You are performing sampling for a test of controls with a population size of 1000 and a sample size of 20. You determine that you will use systematic selection in order to select items for testing. What sampling interval do you use? A. 1000*20= 20,000 B. 1000/20=50 C. 1000 D. 20 E. 1000/20=50-20=30

B

Which of the following best describes the primary purpose of audit procedures? A. To detect all errors or fraudulent activities. B. To comply with generally accepted accounting principles. C. To gather corroborative evidence about management's assertions. D. To verify the accuracy of the balance sheet account balances.

C

Which of the following statements is FALSE? A. A Type II error is the risk of incorrect acceptance. B. Confidence level is the complement of sampling risk. (confidence risk + sampling risk =100) C. The larger the sample, the lower the confidence level and the lower the sampling risk. D. With a nonstatistical sampling application, the auditor relies on professional judgment rather than the laws of probability to reach a conclusion about the audit test.

C

In a monetary-unit sample with a sampling interval of $5,000, an auditor discovers that a selected account receivable with a recorded amount of $10,000 has an audit amount of $8,000. If this were the only error discovered by the auditor, the projected misstatement for this sample would be A. $5,000. B. $4,000. C. $2,000. D. $1,000

C BOOK VALUE > SAMPLE INTERVAL Use the misstatement BV - AV = AMOUNT OF MISSTATEMENT 10,000 - 8,000 = 2,000

A service organization processes payroll data having a material effect on the financial statements of an audit client. The client has established certain internal controls over input and output data. If the user auditor intends to rely on the operating effectiveness of the service organization's controls, which of the following statements is FALSE? (Remember to pick the BEST answer.) A. The user auditor may decide that obtaining evidence of the operating effectiveness of the service organization's controls is not necessary or efficient and still be able to rely on those controls. B. The user auditor may need to perform tests of the service organization's controls to provide a basis for relying on the controls. C. If certain relevant controls exist only at the service organization, the user auditor must evaluate the operating effectiveness of those controls to place reliance on the controls. D. If certain relevant controls exist only @ the service organization and a service auditor issues a report only on the design of the controls, the user auditor may use the report as a basis for reliance on the controls.

D

An auditor would most likely be concerned with internal control policies and procedures that provide reasonable assurance about the A. Efficiency of management's decision-making process. B. Appropriate prices that the entity should charge for its products. C. Methods of assigning production tasks to employees. D. Entity's ability to accurately process and summarize financial data Question is asking what the auditor is most interested in → ICFR → Internal control over financial reporting

D

If auditors conducting attributes sampling found that the entity deviated from a control in nine of the first 10 items examined, the auditor is most likely to: A. Increase sample size B. Increase computed upper deviation rate C. Decrease tolerable deviation rate D. Stop the test and increase control risk

D

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: A. the only deviation discovered in the sample. B. identical to a deviation discovered during the prior year's audit. C. caused by an employee's incompetence. D. initially concealed by a forged document.

D

SOX requires management to include a report on internal control in the firm's annual report. It also requires auditors to evaluate management's internal control report. Which of the following statements concerning these requirements is FALSE? A. The auditors should provide recommendations for improving internal control in their assessment. B. Management should identify significant deficiencies and material weaknesses in its report. C. Management's report should state its responsibility for establishing and maintaining an adequate internal control system. D. The auditors should evaluate whether internal controls are effective in accurately and fairly reflecting the firm's transactions. E. Both A&B F. None of the above

E

You have been placed in charge of determining the MUS sample size during substantive testing over accounts receivable. Your superior would like a confidence level of 99%. How does this affect your determination of sample size? A. You must use the 99% confidence level statistical sample table we used in class to obtain the correct sample size. B. A lot of work will be required to achieve a 99% confidence level. This will be reflected by a very large sample size. C. A 99% confidence level will result in an inefficiently large sample size. As such, you would most likely pursue an alternate approach for testing the AR balance. D. A, B, and C are true. E. B and C are true.

E

S&H Associates has just performed an ICFR audit of Bob's Bikes, an accelerated filer. S&H was unable to obtain a written representation from management about internal control. Which of the following is true? A. S&H must still assume that management has assessed the effectiveness of internal control. B. S&H should consider this situation a limitation on the scope of the audit C. Depending on other factors in the audit, S&H can still issue an unqualified opinion over ICFR because this may only be considered a minor scope limitation. D. Management does not need to give S&H a letter if it has disclosed all known internal control deficiencies. E. S&H should issue a disclaimer opinion over ICFR. F. Both B and C G. Both B and E

G