Audit Final

Materilaity

The magnitude (quantitative) and nature (qualitative) to make professional judgement on materiality (16)

How to verify depreciation expense?

The most important balance related objective for deprecation expense is accuracy. To determine accuracy the auditor must consider (GAAP depreciation method adopted, estimated residual value, and estimated useful life, accounting treatments to change in GAAP and changes in accounting estimates.)(19)

What is the relationship between the point estimate of the total misstatements and the true value of misstatements in the population. How are they determined?

The point estimate is made by auditors as to the total amount of misstatement projected from the known misstatements found in the sample to the entire population. The projection is based on either the average misstatement in the sample times the population size, or the net percent of misstatement in the sample times the population book value. By making the point estimate, it means that auditor uses non-statistical, non-probabilistic sample which does not allow auditor to express his/her audit conclusion in the range of possible misstatements or percentage of confidence. The true value of misstatements in the population is the net total of all misstatements in the population. The true misstatements can only be found when auditors conduct 100% audit without conducting sampling (17)

What are the concerns over auditing prepaid insurance?

The use of proper internal controls over the acquisition and recording of insurance, controls over the insurance register, controls over the charge off of insurance expense, and all PPE is sufficiently insured.(19)

How is the ending balance of Cash accounts and Accounts payable audited? (18)

These accounts are audited using Substantive analytical procedures (SAP) and Test of Details of Balances (TDB) (18)

Merchandise costing $1,822 was received on 01/3/17 and the related acquisition invoice recorded 01/05/17. The invoice showed the shipment was made on 12/29/16, FOB destination

This merchandise would be excluded because the title does not pass to buyer on an FOB destination shipment until delivery to the buyer. Since it was not received until 01/03/17 there is no basis for including it in inventory

Cash receipt collected but did not occur. What effect does this have on accounts. What accounts, and what objectives are related to this occurrence.

This transaction involves an overstatement of accounts receivable and relates to the existence audit objective. It also involves an understatement of the cash account and involves the completeness audit objective (16)

Cash Receipt recorded but did not occur. What effect does this have on accounts. What accounts, and what objectives are related to this occurrence.

This transaction involves an understatement of accounts receivable and relates to the completeness audit objective and involves cash account being over stated and relates to the occurrence audit objective (16)

Cutoff procedures

Three important cutoff procedures related to accounts receivable valuation: 1. Sales Cutoff 2. Sales return, sales discount, and allowance cutoff 3. Cash receipt cutoff (16)

Define TM?

Tolerable Misstatement. It is the application of performance materiality tp a particular sampling procedure. As the sample size increases then the TM decreases for the sampling procedure. (17)

Calculate the ratio of equipment repairs and maintenance to total equipment and compare to previous years.

Type of Evidence: Analytical procedures Type of Procedure: SAP Objectives: Existence, Completeness, and Accuracy (19)

Send letters to several vendors even with balance of zero to requesting to inform us of their balance

Type of Evidence: Confirmation Type of Procedure: TDB Objectives: Existence, completeness, accuracy, cutoff (19)

Obtain from the client a written statement that all mortgages payable have been included in the current F/S

Type of Evidence: Inquiry of client Type of Procedure: TDB Objectives: Completeness, and Accuracy (19)

Examine invoices and related shipping documents included in the clients unpaid invoice file ate the audit report date to determine whether they were recorded in the appropriate accounting period and at the correct amounts. (19)

Type of Evidence: Inspection of external documentation Type of Procedure: TDB Objectives: Completeness, cutoff, and accuracy

For 20 non-tangible acquisitions select a sample of line item from the acquisitions journal and trace each to related vendors invoices. Examine whether each transactions appears to be legitimate expenditure for the client and that each was approved and recorded at the correct amount and date in the journal and charged to the correct account per the chart of accounts.

Type of Evidence: Inspection of external documentation Type of Procedure: TOC and STOT Objectives: Occurrence, Accuracy, Timing, Classification (19)

Select a sample of cancelled checks and trace each one to cash disbursement

Type of Evidence: Inspection of external documentation (cancelled checks) Types of procedures: STOT Objectives: Completeness. Timing, Accuracy (19)

Examine Sample of receiving report numbers and see if it has initials indicating that it was recorded as an accounts payable

Type of Evidence: Inspection of internal documentation Type of Procedure: TOC Objectives: Completeness (19)

When the check signer's assistant writes paid, watch whatever she does it after the documents are reviewed

Type of Evidence: Observation Type of Procedure: Test of control Objectives: Occurrence (19)

Select a sample of equipment and inspect the asset

Type of Evidence: Physical examination Type of Procedure: Tests of details of balances Objectives: Existence, Realizable value (19)

Add the columns on the aged trial balance and compare the total with the general ledger.

Type of Evidence: Re-Performance Type of test: Test of details of balances Objectives: Detail Tie-in (16-29)

Refoot the acquisitions journal for one month and trace all totals to the general ledger

Type of Evidence: Recalculation Type of Procedure: STOT Objectives: Posting and Summarization (19)

Recalculate the portion of insurance premiums on the client prepaid insurance schedule

Type of Evidence: Recalculation Types of procedures: TDB Objectives: Completeness. Accuracy (19)

Review the acquisition journal for large and unusual transaction

Type of evidence used: Analytical Procedure Type of Procedure: Substantive Analytical Procedure Objectives: Occurrence, Accuracy, Classification (19)

Compute the ratio of allowance for uncollectible accounts divided by accounts receivable and compare with previous years.

Type of evidence: Analytical procedures Type of Tests: Substantive analytical procedure Objectives: N/A (16-29)

Discuss with the sales manager whether any sales allowances have been granted after the balance sheet date that may apply in the current period.

Type of evidence: Inquiry Type of Tests: Test of details of balances Objectives: Cutoff (16-29)

Compare the date on a sample of shipping documents throughout the year with related duplicate sales invoices and the accounts receivable master file.

Type of evidence: Inspection Type of Tests: Substantive test of transactions Objectives: Timing (16-29)

Examine a sample of customer orders and see if each has a credit authorization

Type of evidence: Inspection Type of Tests: Test of control Objectives: Occurrence (16-29)

Compare the date on a sample of shipping documents a few days before and after the balance sheet date with related sales journal transactions.

Type of evidence: Inspection Type of Tests: Test of details of balances Objectives: Cutoff (16-29)

Examine a sample of shipping documents to determine whether each has a sales invoice number included on it.

Type of evidence: Inspection Type of test: Test of Control Objectives: Completeness (16-29)

Observe whether the controller makes an independent comparison of the total in the general ledger with the trial balance of accounts receivable.

Type of evidence: Observation Type of Tests: Test of Control Objectives: Posting and Summarization (16-29)

What is a Positive Confirmation?

Typically the most normal and logical type of confirmation. - It is a letter addressed to the debtor, requesting that the recipient indicate directly on the letter whether the stated account balance is correct or incorrect, and if incorrect by what amount. -Use for large A/R balances - Biggest Concern = Over-statement

How is sufficient evidence accumulated according to GAAS?

UICS + TOC + STOT + SAP + TDB = Sufficient competent evidence (18)

Define UMB?

Upper Misstatement Bound. An estimate of the likely maximum overstatement at a given ARIA. Max amount the account will be overstated or understated. (17)

Documents included in recognizing liabilities

Voucher package( PO, receiving report and vendor invoice), vendor statement, acquisition file, acquisition journal, A/P master files, and debit memos(18)

Tracing

With tracing, the auditor starts with the original source documents and works forward to see whether the transaction was properly recorded in the accounting system(18)

Vouching

With vouching, the auditor starts with a journal entry or ledger balance and works back to the original source documents(18)

17-2: A) Which of the following sample planning factors will influence the sample size for a test of details of balances for a specific account?

Yes to both expected amount of Misstatements and to Measure of Tolerable Misstatements

Accounts Receivable Turnover

net credit sales/average net accounts receivable(16)

Non-Statistical Sampling

the auditor does not use statistical techniques to determine sample size, select the sample items, or measure sampling risk. 1. The distribution of items in the population for audit interest(% of exceptions or account balances) tend to be UNEVEN. 2. Implementation of risk based audit approach leads to auditors to focus on more certain items in the population or sub-areas in accounting process(accounts) that could contain material misstatements. - Auditors can use methods developed by the firm or apply formula provided by the AICPA to address the issues listed above(17)

Explain subsequent events?

Based on SAS (AU 560), Auditors are required to verify transactions and events that occurred after the balance sheet date to determine whether events occurred after reporting date might effect the fair presentation of current period financial statements under audit. SAS 1 (AU 530) requires the auditor to extend audit tests for the newly discovered subsequent event to make sure that it is correctly disclosed. Auditor is responsible for reviewing for subsequent event occurring between 12-31-16 and 3-11-17, but no later than the audit report date. Auditor can expand all subsequent events tests to a new date of completion of field work (3-11-17 to 3-26-17), or restrict the review to the matters related to the subsequent events to a second date (audit report is dual dated). Auditors are only responsible to the subsequent events specifically mentioned in the audit report(second date of 3-15-17)

What is basic precision and how is determined?

Basic precision is the upper limit when no misstatements are found in the sample, and represents the minimum amount allowance for sampling risk inherent when conducting a sampling plan. Basic precision is calculated by multiplying the sampling interval by the confidence factor with zero misstatements at the specified level of ARIA.(17)

How to determine ending balance of PPE?

Beg. Balance + Purcases - Disposal = Ending Balance (19)

What is the biggest concern over A/P accounts and how are account balances determined to be accurate by the auditor? (18)

Biggest concern is that A/P will be understated. Use negative confirmations to verify correct amount recorded in account (Concerns over accounts payable is potential understatement because client's management has strong incentive to understate liabilities to window-dressing its financial statement and understating any accounts payable with zero balance would allow client to maximize the amount of understatement.)(18)

What procedures are done to ensure there are NO Unrecorded liabilities? (18)

CUT OFF PROCEDURES 1. Examine contract terms 2. Verify shipping time (by end of year) to examine when the title of acquisition transfer from vendors to audit client 3. Two types of shipping terms: FOB shipping point and FOB destination 4. Search within a two week period after end of audit period - Also send negative confirmations to vendors to verify payable balances at end of period (18)

Documents included in processing and recording cash disbursements

Check or electronic payment, turnaround document, cash disbursement transaction file, cash disbursements journal or listing (18)

16-15: Explain why the analysis of differences is important in the conformation of accounts receivable even if the misstatements in the sample are not material?

Confirmation of accounts receivable is normally performed on only a sample of the entire population. The purpose of the confirmation is to obtain outside verification of the balance of the account and to obtain an indication of the rate of occurrence of misstatements in the accounts. In general, misstatements indicated by differences on the confirmation replies will not be material. However, differences must be analyzed individually and in total to determine their effects on the total accounts receivable balance. Though the individual differences may not be material, they may indicate a material problem when extended to the entire population, and with regard to the internal controls over the accounts receivable.(17)

What happens when a misstatement is found on a sampled item which is larger than the sample interval?

Exclude sample items with values greater than the sampling interval. (ex: Sampling Interval = 12,000 ; Recorded Amount = 12,910 -THEN- recorded amount is greater than the sampling interval and the projected misstatement is EQUAL to the actual misstatement) (17)

Example of Completeness

Existing acquisitions are recorded(18)

Define EPM?

Expected population misstatement. How much was the population misstated by. (17)

Verifying current year disposal can assure what? and what steps are involved in verifying current year disposals?

Failure to record current year disposals can significantly affect F/S. 1. Review whether newly acquired assets replace existing assets 2. Analyze gains and losses on the disposal of assets and miscellaneous income from assets 3. Review plant modifications and changes in product line,property taxes, and insurance coverage for indications of deletions of equipment 4. Make inquiries of management and production personnel about policies and procedures to dispose of assets(19)

What is the baseline of IC and testing of controls? What framework is followed?(18)

Focus is on proper segregation of duties in accounting Framework: is THE ARC FRAMEWORK 1. (AUTHORIZATION) of Purchases and cash disbursements 2. (RECORDING) Timely of purchases and payments 3. (CUSTODY) Separation of physical controls of assets (receiving) from authorization (purchases) and recording functions (accounting)

If an auditor fails to perform audit procedures during the audit what does GAAS require?

If any necessary audit procedures have been omitted then auitors need to determine whether: 1. There are any impacts of omitted procedures on the report (misstated financial statements) 2. Any alternative procedures applied during the audit can compensate for missed procedures ( IF YES and NO to ALT PROCEDURES) - Take proper actions by informing clients management or board of directors - Regulatory agency (SEC) - Persons who are likely to rely on the audit report

17-2: B) How would increases in tolerable misstatement and assessed level of control risk affect the sample size in substantive tests of details?

Increase sample size=decrease in sample size increase in assessed level of control risk=increase sample size

16-11: Under what circumstance is it ok to confirm accounts receivable before the balance sheet date?

It is acceptable to confirm accounts receivable prior to the balance sheet date if (1) the internal controls are adequate (2) the results from substantive tests of transactions are satisfactory, and (3) substantive analytical procedures can provide reasonable assurance that sales, cash receipts, and other credits are properly recorded between the date of the confirmation and the end of the accounting period. Other factors the auditor is likely to consider in making the decision include (1) the materiality of accounts receivable and (2) the auditor's exposure to lawsuits because of the possibility of client bankruptcy and similar risks (possible non-existence of accounts receivable stated in balance sheet). If the decision is made to confirm accounts receivable prior to year-end, it is necessary to test the transactions occurring between the date of confirmation and the date of balance sheet by examining internal documents and performing analytical procedures at year-end.(17)

16-10 " Is it common to use positive and negative confirmations"

It is common to use a combination of negative and positive confirmations by sending the positives to accounts with large balances and negatives to those with small balances. Using both types of confirmation allows an auditor to focus the confirmation testing on large account balances, while still testing a representative sample from the rest of the population at the lowest possible audit cost. This combination addresses both audit effectiveness and audit efficiency issues. (16)

16-10: why do CPAs use a combination of positive and negative confirmations on the same audit?

It is common to use a combination of negative and positive confirmations by sending the positives to accounts with large balances and negatives to those with small balances. Using both types of confirmation allows an auditor to focus the confirmation testing on large account balances, while still testing a representative sample from the rest of the population at the lowest possible audit cost. This combination addresses both audit effectiveness and audit efficiency issues.(17)

Income Smoothing

Misstated gross profit can cause net income to be overstated (16)

Audit Objectives for acquisitions (TOC and STOT)

Occurrence, Completeness, Accuracy, Posting and Summarization, Classification, and Timing (18)

PCAOB and AICPA Materiality

Performance Materiality (PCAOB) Tolerable Misstatement (AICPA) (16)

What are the two types of confirmations

Positive and Negative Confirmations 16

Documents included for processing purchase orders

Purchase requisition and purchase order (18)

What is the purpose of TOC, using attribute sampling? How do auditors achieve this objective?

Purpose: To find out whether clients employees have followed the prescribed policies and procedures established by the clients management. 1. Find audit attributes ( authorization, check items received) 2. Define exception conditions 3. Use attribute sampling when conducting TOC and STOT to transaction classes (% of exceptions) 4. Make projection from sample to population (CUER v TER) 5. Conclude whether internal controls are effective (18)

What audit objective is related to verifying accrued liabilities? What are the two most significant balance-related audit objectives?

Reasonableness. 1.Existing properties which accrual of taxes is appropriate are on the accrual schedule (Completeness) 2. Accrued property taxes are accurately recorded and the treatment is consistent from year to year (accuracy) (19)

Example of Occurrence

Recorded acquisitions are for goods and services received(18)

Define SM?

Represents the sample misstatement. (17)

How to calculate sample interval?

Sample Interval = Population size / sample size (ex: Sample size = 100; Population Size = 1,200,000 --- 1,200,000/100 = 12,000 SI) (17)

How to determine sample size? What is the formula?

Sample size = Population Recorded amount x Confidence Factor / Tolerable Misstatement(17)

Documents included in receiving goods and services

Shipping document from common carrier and (internal) receiving report (18)

Define Stratified Sampling? Explain importance in auditing

Stratified sampling is important when the auditor wants to emphasize testing of certain population items. This sampling method requires auditors to divide the entire population into several sub-populations. Each sub-population is independently sampled and tested. Then, the results of the sample are projected to each sub-population. Finally, the results of the individual sub-population will be computed and combined to determine the overall misstatement to the account. Following the example in the textbook, to obtain a stratified sample of 30 items from each of three strata to confirm accounts receivable balance, auditors first divide the population into three mutually exclusive strata (sub-populations) according his/her judgment. Then, a random sample of 30 items can be selected for each stratum independently. (17)

What tests should be done if auditor does not receive a reply of a second confirmation?

Test for subsequent cash receipts. It is direct evidence that the A/R exists at the end of balance sheet date. 16

16-1: distinguish among TDB, TOC, and substantive test of transactions for the sales and collection cycle. How are the tests of TOC and Substantive test of transactions affect the tests of details of balances.

Tests of controls for the sales and collection cycle are intended to determine the effectiveness of internal controls; while substantive tests of transactions examine the substance of the transactions in the cycle (whether the transactions contain monetary misstatements). These tests investigate whether credit sales have been properly approved prior shipping. Moreover auditors examine sales invoices to support accounting entries in the sales journal etc. On the other hand, Tests of details of balances are designed to determine whether the balances in sales, accounts receivable, and other account balances in the sales and collection cycle are materially misstated. Such tests include confirmation of accounts receivable and examining documents supporting the balance in these accounts. The results of the tests of controls and substantive tests of transactions affect the procedures, sample size, timing, and items selected for the tests of details of balances (i.e., effective internal controls will result in reduced testing when compared to the tests of details required in the case of inadequate internal controls). (17)

Why must an auditor review corporate minutes throughout the engagement/year. Provide 3 examples of what may be uncovered through the reading of corporate minutes.

The auditor should read the minutes to obtain authorization and other information that is relevant to performing the audit and subsequent events procedures. Examples of what can be uncovered in the corporate minutes include key authorizations such as compensation of officers, new contracts and agreements, acquisitions of property, loans, and dividend payments. Other relevant information includes discussion about litigation, a pending issuance of stock, contingent liabilities, or potential mergers. This information may need to be included in the footnotes of the financial statements, and auditors supplement review of the minutes with inquiries of the audit committee.

Why is it difficult to determine the appropriate sample size for MUS? How should the auditor determine the proper sample size?

The difficulty in determining sample size lies in estimating the amount of misstatements that may be found in the sample. The upper misstatement bound (UMB) of a monetary unit sample is sensitive to these factors. Thus, sample size varies a great deal with differing assumptions about the expected amount of misstatements. Sample size also varies with the specified ARIA, which is also an auditor judgment that depends on several factors, such as assessed control risk and inherent risk.(17)

What is a negative confirmation?

- A letter addressed to the debtor, requesting response only if the recipient disagrees with the amount of the stated account balance - Use for A/P "0" balances - CONCERNED WITH UNDERSTATEMENT 16

Explain Positive and Negative Confirmations

- A positive confirmation letter is addressed to the debtor asking whether the account balance is correctly stated and if incorrect by what amount. It is used for A/R large balances because auditors are concerned with over-statements. - If there is no response, an auditor should send a second confirmation. If there is no reply to this, the auditor should test for subsequent cash receipts for evidence that A/R exists at the end of balance sheet date. - A negative confirmation is a letter addressed to the debtor requesting response only if the recipient disagrees with the stated amount. It is used for smaller A/R balances for timing purposes.This is also used for A/P "O" balances because auditor is concerned with under-statements of liabilities.

After checking for subsequent cash receipts, and accounts where the client has not received payments by the testing date what should auditors do?

- Examine the sales invoice to support the existence and accuracy of tested accounts receivable -Also examine the shipping documents as well 16

What are the steps in non-responses of confirmations?

1) It is not appropriate to assume there are no misstatements in the accounts 2)Reasonable to assume that the auditor would do a follow-up on non-responses 3) Follow-up responses can be very time consuming 4) The auditor should send a SECOND confirmation( auditor should make copy of original confirmations before sending) 16

What are some examples of sub subsequent events that may require disclosure on the financial statements?

1. A decline in the market value of securities held for temporary investment of resale 2. The issuance of bonds or equity securities 3. A decline in the market value of inventory as a consequence of government action barring further sale of a product 4. The uninsured loss of inventories as a result of fire 5. A merger or acquisition

Procedures applied to conduct positive A/R Confirmation

1. Auditor selects debtors to confirm( Random or Judgmental) 2. Client prepares the relevant accounts balance from clients general ledger 3. Confirmation forms prepared by client(reviewed by auditor) 4.Client signs confirmation forms and cover letters 5. Confirmation forms to be sent by auditor 6. Return confirmation addressed to auditor and return directly to auditor (16)

How to calculate Basic Precision?

1. Calculate Sample Interval 2. Identify ARIA and number of misstatements (0 exceptions) use table 3. Multiply population by confidence factor for MUS (ex: 5% ARIA with 0 Misstatements; Population size = 1,200,000 ; Sample size = 100) Then multiply Sample Interval by 3.0 found on the table (12000x3=36000) (17)

What are the threee accounts in the aquisition and payment cycle? How are they related and tested? (18)

1. Cash in Bank 2. Accounts Payable 3. PPE (Purchases) Cash Disbursement ( Dr. A/P & Cr. Cash) Audited using STOT and SAP Acquisition ( Dr. PPE & Cr. A/P ) Audited using STOT and SAP

What are the analytical procedures for prepaid insurance?

1. Compare total prepaid insurance and insurance expense with previous years 2. Compare the ratio of prepaid insurance to insurance expense and compare it with previous years. 3. Compare individual insurance policy coverage on he schedule with preceding year 4. Compare the computed prepaid insurance balance for the current year on a policy-by-policy basis with that of the preceding year 5. Review the insurance coverage listed on the schedule with an appropriate client official or insurance broker for adequacy of coverage (19)

When can auditors skip accounts receivable confirmation?

1. Conclude that AR balance is immaterial 2. Consider confirmations may not be effective( low response rates) 3. Believe that combined level of inherent risk and control risk is low and other substantive tests procedures will allow auditor to accumulate sufficient evidence (16)

What are the audit tests applied to events in the first category (TYPE 1). What tests does it include and what does it satisfy?

1. Cutoff tests and Valuation tests 2. These are done as part of test of TDB 3. These include: Declaration of bankruptcy, settlements of litigation, disposal of assets below book value, sales of investments below recorded costs

What are some examples of subsequent events that require and adjustment?

1. Declaration of bankruptcy by a customer with an outstanding accounts receivable balance 2. Settlement of litigation at an amount different from the amount recorded in the books 3. Disposal of equipment not being used in operations at a price below the current book value

Due to concern of understatement of liabilities auditors perform TDB of A/P how?

1. Examine underlying documentation for subsequent cash disbursements (over a certain amount) 2. Examine underlying documentation for bills paid several weeks after year end (to see if they should have been recorded prior) 3. Trace receiving reports issued before year end to relate to vendors invoice 4. Trace vendors statements that show a balance due to the accounts payable trial balance (18)

A special machine, fabricated to order for a customer was finished and in the shipping room on 12/31/16. The customer was billed on that date and the machine excluded from inventory, although was shipped 01/04/17.

1. Exclude 2. Since this machine is fabricated to the customers order, title to the customer made merchandise passes to the buyer as materials and labor are appropriated to the job. When the job is completed and ready for shipment as in this case it may be considered as a complete sale.

Merchandise costing $625 was received on 12/28/16 and the ivoice was not recorded. You located it in the hands of the purchasing agent it was marked "on consignment.

1. Exclude from inventory 2. Goods held on consignment do not belong to the consignee, and should not be included in inventory

General Audit: Account Receivable balance related audit objectives

1. Existence 2. Completeness 3. Accuracy 4. Classification 5. Cutoff 6. Detail-In 7. Realizable Value 8. Rights and Obligations (A/R) (16)

in searching for unrecorded retirements, and auditor selects older fixed assets from the subsidiary ledger and then tries to locate those assets. This procedure primarily relates to management's assertion of 1. Existence 2. Completeness 3. Rights and obligations 4. Understandability and classification

1. Existence(19)

What are the two options for the auditor in extending dates to take action on subsequent events?

1. Expand all subsequent events tests to the new date (The audit date will be changed from 3-11-17 to 3-26-17) 2. Restrict the review to the matters related to the subsequent events (AUDIT REPORT IS DUAL DATED) - Two dates on the audit report - 1st date = date for the completion of field work (3-11-17) - 2nd date = refers to the specific subsequent event mentioned in the report (ex: 3-15-17) - The second date, is always later, deals with the exception - That is, auditors are only responsible to the subsequent events specifically mentioned in the audit report

In a probability-proportional-to-size sample with a sampling interval of $3,000, which of the following is true? I. An overstatement error of $200 in an item recorded at $300 will result in a projected error of $2,000 II. An overstatement error of $700 in an item recorded at $3,500 will result in a projected error of $600. 1. I only 2. II only 3. Both I and II 4. Neither I nor II

1. I only(17)

What are the 3 purposes of a management representation letter?

1. Impress upon management its responsibilities for the assertions made pertaining to the financial statements 2. Remind management to disclose potential misstatements or omissions on the Financial statements 3. Document the responses from management regarding inquiries made by the auditors to clients during various aspects of the audit

A packaging case containing products costing $816 was standing in the shipping room when the physical inventory was taken. It was not included in the inventory because it was marked "hold for shipping instructions. Your investigation revealed that the customer order was dated 12/18/16, but that the case was shipped and the customer billed on 01/10/17. The product was a stock item of your client.

1. Include 2. Normally title to a stock item does not pass to the customer until shipment, even though it was set aside. It should still be included in inventory

Merchandise received on January 3, 2017, costing $720 was entered in the acquisitions journal on 01/04/17. The invoice showed shipment was made FOB suppliers warehouse on 12/31/16. Because it was not on hand 12/31/16 it was not included in inventory.

1. Include 2. Title to good shipped FOB shipping point normally passes to the buyer on delivery to the transportation agency, and in this instance the goods belong to the client at 12/31/16. There is an error in recording the acquisition.

What are the tests for balance related objectives?

1. Insurance policies in the prepaid insurance schedule existing policies are listed (existence and completeness) 2. The client has the rights to all insurance policies in the prepaid insurance schedule (Rights) 3. Prepaid amounts on the schedule are accurate and the total is correctly added and agrees with the general ledger. ( Accuracy and Detail tie-in) 4. Insurance expense related to prepaid insurance is correctly classified(classification) 5. Insurance transactions are recorded in the correct period( Cutoff) (19)

Which of the following controls will most likely justify a reduced assessed level of control risk for the existence assertion for equipment? 1. Internal auditors periodically select equipment items in the fixed assets master file and locate the related equipment on company premises. 2. Department heads are asked to provide information to the accounting department each quarter about any equipment no longer in use or somewhat damaged. 3. All contracts of equipment purchases are reviewed by both the controller and attorney to verify that legal title transfers to the client and that no one represent operating leases. 4. As part of quarterly and annual inventory physical counts, factory equipment is listed an subsequently reconciled to the fixed asset master file.

1. Internal auditors periodically select equipment items in the fixed assets master file and locate the related equipment on company premises.(19)

Steps to testing IC. What is used to test TOC?

1. List control related audit objectives for TOC (STOT) 2. Identify the necessary control procedures (exist or any absent) 3. Evaluate sufficiency of controls 4. Design and conduct a TOC on areas auditors plan to rely on (18)

What do auditing standards require the auditor to obtain after auditors report? What does it contain?

1. Management representation letter 2. Auditing standards require the auditor to obtain written representations from management, usually in a letter of representation documenting managements most important oral representations made during the audit 3. Letter is prepared on the clients letterhead, addressed to the CPA, and signed by high level corporate officials 3. Dated no earlier then that date of the auditors report to ensure that there are adequate representations of subsequent events

General Audit Objectives: Transactions/Events

1. Occurrence 2. Completeness 3. Accuracy 4. Posting and Summarization 5. Classification 6. Timing (16)

What are the audit tests applied to events in the second category (TYPE 2). What tests does it include and what does it satisfy?

1. Performed specifically to obtain information to incorporate into the current years account balances or footnotes as tests of the COMPLETENESS PRESENTATION and DISCLOSURES OBJECTIVE 2. Tests include: Review records prepared subsequent to the B/S date, Review internal statements prepared subsequent to the B/S date, Examine minutes issued subsequent to the B/S date, Correspond with attorneys, Make inquired to clients management

What are the audit tests to test TOC of prepaid insurance?

1. Policy Information 2. Beginning prepaid insurance balance 3. Payment of policy premiums 4. Amount charged to insurance expense 5. Ending prepaid insurance balance (19)

What are the two categories of audit procedures for the subsequent events review?

1. Procedures normally integrated as a part of the verification of year end account balances 2. Procedures performed specifically for the purpose of discovering events or transactions that must be recognized as subsequent events

What are the four business processes in the acquisition and payment cycle?

1. Processing purchase orders 2. Receiving goods and services 3. Recognizing liabilities 4. Processing and recording cash disbursements (18)

According to SAS 1 (AU 530) what requirements are there for the auditor regarding subsequent events?

1. SAS 1 (AU 530) requires the auditor to extend audit tests for the newly discovered subsequent event to make sure that it is correctly disclosed.

What options does the auditor have when the sample is unacceptable?

1. Segregate a specific type of misstatement and test separately (for entire population). The sample would then not include the specified type of misstatement since it is being tested separately. 2. Increase the Sample Size 3. Adjust the account balance (propose an adjustment to client) 4. Request the client to review and correct the population 5. Consider qualifying the opinion if the client refuses to correct the problem 6. Consider the criteria used in the test, possibly in connection with additional audit work in areas outside A/R (ex: Of these options, the auditor is likely to increase the sample size to obtain a better estimate of the likely amount of projected misstatement in the population, and propose a sufficient adjustment so that the upper misstatement bound after adjustment is less than tolerable misstatement.) 17-27

In testing for unrecorded disposals of equipment, an auditor most likely will 1. Select items of equipment from the accounting records and then locate them during the plant tour 2. Compare depreciation journal entries with similar prior-year entries in search of fully depreciated equipment 3. Inspect items of equipment observed during the plant tour and then trace them to the equipment master file 4. Scan the general journal for unusual equipment additions and excessive debits to repairs and maintenance expenses

1. Select items of equipment from the accounting records and then locate them during the plant tour(19)

How is MUS different than statistical sampling?

1. Specify a level of confidence of their estimate of misstatement in a % (ARIA) 2. Stated in range of possible misstatement (UMB) - MAX AMOUNT TO BE O/S(17)

When a contingency is resolved subsequent to the issuance of audited financial statements, which correctly contained disclosure of the contingency in the footnotes based on information available at the date of issuance, the auditor should 1. Take no action regarding the event 2. Insist that the client issue revised financial statements 3. Inform the audit committee that the report cannot be relied on 4. Inform the appropriate authorities that the report cannot be relied on

1. Take no action regarding the event

What two concepts are essential in the audit of income and expense accounts?

1. The matching of periodic income and expense is necessary for a correct determination of operating results. 2. The consistent application of accounting principles for different period is necessary for comparability. (Approach: SAP, TOC and STOT, TDB) (19)

What are the two types of subsequent events that require consideration by management and evaluation by the auditor?

1. Those events that have a DIRECT effect on the financial statements, and require adjustment 2. Those events that DO NOT have direct effect on the financial statements but for which disclosure may be required

Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate controls over the invoicing function allow goods to be shipped that are not invoiced. The inadequate controls could cause an 1. Understatement of revenues and receivables, and an overstatement of inventory 2. Understatement of revenues and receivables, and inventory 3. Overstatement of revenues and receivables, and an understatement of inventory 4. Overstatement of revenues and receivables, and inventory

1. Understatement of revenues and receivables, and an overstatement of inventory

When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely is... 1. Vendors with whom the entity has previously done business. 2. Amounts recorded in the accounts payable subsidiary ledger. 3. Payees of checks drawn in the month after year-end 4. Invoices filed in the entity's open invoice file

1. Vendors with whom the entity has previously done business.(18)

What type of tests are performed to verify PPE accounts and what audit objectives do they satisfy?

1. Verify beginning balance of PPE ( Detail Tie IN) 2. Verify Current years acquisitions ( Occurrence) 3. Verify Current years disposals (occurrence, existence) 4. Verify ending balance in the asset account (accuracy and detail tie in) 5. Perform Substantive analytical procedures (analytical procedures) 6. Verify depreciation expense (valuation) 7. Verify the ending balance in accumulated depreciation (valuation)(19)

The confirmation of customers' accounts receivable rarely provides reliable evidence about the completeness assertion because 1. customer may not be inclined to report understatement errors in their accounts. 2. recipients usually respond only if they disagree with the information on the request. 3. many customers merely sign and return the confirmation without verifying details. 4. there is likely to be reliable third-party evidence available

1. customer may not be inclined to report understatement errors in their accounts. (16)

Monetary Unit Sampling (MUS) is approached by?

1. each sampling unit is a dollar 2.Sample selection is done using probability proportional to size sample selection (PPS) 3. The population is the recorded dollar amount in an account 4. Sample size can be calculated by following AICPA 5. A decision rule will be used to decide whether the population is acceptable(17)

An auditor who is auditing accounts receivable would likely perform which of the following tests? 1. selecting cash disbursements made shortly after year end and examine the supporting documentation such as receiving reports and vendors invoices. 2. confirm a sample of accounts receivable with the customers that owe the balances. 3. vouch cash receipts to the accounts receivables transactions. 4. obtain an aged trial balance of accounts receivable and trace the total to the general ledger control account

1. selecting cash disbursements made shortly after year end and examine the supporting documentation such as receiving reports and vendors invoices. (16)

which of the following audit procedures will best uncover an understatement of sales and accounts receivable? 1. test a sample of sales transactions, selecting the sample from prenumbered shipping documents. 2. test a sample of sales transactions, selecting the sample from sales invoices recorded in the sales journal. 3. confirm accounts receivable. 4. review the aged accounts receivable trial balance (16)

1. test a sample of sales transactions, selecting the sample from prenumbered shipping documents. (16)

Which of the following will likely provide the most assurance concerning the accuracy balance-related objective for accounts receivable? 1. vouch amounts in the subsidiary ledger to details on shipping documents. 2. compare receivable turnover ratios with industry statistic for reasonableness. 3. inquire about receivables pledge under loan agreements. 4. assess the allowance for uncollectible accounts for reasonableness

1. vouch amounts in the subsidiary ledger to details on shipping documents. (16)

Accounts Receivable Valuation

2 steps: 1. Verify the accuracy of accounts receivable balance 2. Assess the reasonableness of allowance for doubtful accounts (Aging accounts receivable by the number of days outstanding or overdue) and ( Assess a certain percentage based on total sales or total credit sales - according to experience) (16)

In an MUS sample with a sampling interval of $5,000, an auditor discovered that a selected accounts receivable with a recorded amount of $10,000 had an audit value of $8,000. If this is the only error discovered by the auditor, the projected error of the sample would be. 1. $1,000 2. $2,000 3. $4,000 4. $5,000

2. $2,000 (17)

which of the following would be least likely to be included in a standard inquiry to the client's attorney 1. A list provided by the client of pending litigation or asserted or unasserted claims with which the attorney has had some involvement 2. A request for the attorney to opine on the correct accounting treatment associated with an outstanding claim or pending lawsuit outcome 3. A request that the attorney provide information about the status of pending litigation 4. A request for the attorney to identify any pending litigation or threatened legal action not identified on a list provided by the client

2. A request for the attorney to opine on the correct accounting treatment associated with an outstanding claim or pending lawsuit outcome

A management letter is 1. Is the auditor's report on significant deficiencies and material weaknesses in internal control 2. Contains recommendations from the auditor designed to help the client improve the efficiency and effectiveness of its business 3. Is mandatory in all audits and must be dated the same date as the audit report 4. Contains management's representations to the auditor documenting statements made by management to the auditor during the audit about matters affecting the financial statements

2. Contains recommendations from the auditor designed to help the client improve the efficiency and effectiveness of its business

For control purposes, the quantities of materials ordered may be omitted from the copy of the purchase order that is 1. returned to the requisitioner 2. Forwarded to the receiving department 3. Forwarded to the accounting department 4. Retained in the purchasing department's files

2. Forwarded to the receiving department

In assessing control risk for purchases, an auditor vouches a sample of entries in the voucher register to the supporting documents. Which assertion would this test of controls most likely support? 1. Completeness 2. Occurrence 3. Valuation and allocation 4. Rights and obligations

2. Occurrence(18)

which of the following sets of duties related to inventory and warehousing causes the greatest concern about inadequate segregation of duties? 1. Individuals in charge of approving disbursements related to inventory purchases have "read-only" ability to view the list of vendors in the pre approved vendor master file 2. Purchasing agents who arrange for shipment of raw materials from vendors are responsible for verifying actual receipt of the inventory items at the receiving dock 3. The receiving department has access to copies of the purchase orders that exclude information about quantities ordered 4. Accounts payable personnel have access to receiving reports and purchase orders in addition to vendor invoices for inventory purchases

2. Purchasing agents who arrange for shipment of raw materials from vendors are responsible for verifying actual receipt of the inventory items at the receiving dock

in addition to making management inquires, an auditor should perform the following procedures to identify client contingencies with the exception of 1. Obtaining a client representation letter 2. Reviewing derivative transactions reflected on the quarter-end balance sheet 3. Reviewing the status of long-term leases 4. Discussing sales contracts with the sales manager.

2. Reviewing derivative transactions reflected on the quarter-end balance sheet

The risk of incorrect acceptance relates to 1. Substantive tests and affects audit efficiency 2. Substantive tests and affects audit effectiveness 3. Tests of controls and affects audit efficiency 4. Tests of controls and affects audit effectiveness

2. Substantive tests and affects audit effectiveness(17)

which of the following statements is correct about an auditor's required communication with those charged with governance? 1. Any matters communicated with those charged with governance are also required to be communicated to the entity's management 2. The auditor is required to inform those charged with governance about significant misstatements discovered by the auditor and subsequently corrected by management 3. Disagreements with management about the application of accounting principles must be communicated in writing to those charged with governance 4. The auditor should not communicate frequently recurring misstatements unless they are material

2. The auditor is required to inform those charged with governance about significant misstatements discovered by the auditor and subsequently corrected by management

Which of the following analytical procedure results might suggest that certain repairs and maintenance expenses have been inappropriately capitalized? 1. The ratio of additions to equipment divided by the beginning balance in the equipment account is significantly lower than the same ratio from the prior three years 2. The balance in the repairs and maintenance expense account is noticeably lower than amounts recorded in the past several years 3. The balance in the gross quipment account has decreased this year compared to the prior year 4. The ratio of depreciation expense divided by gross equipment is higher in the current year compared to prior years

2. The balance in the repairs and maintenance expense account is noticeably lower than amounts recorded in the past several years(19)

Which of the following is an internal control that will prevent paid cash disbursement documents from being presented for payment a second time? 1. The date on cash disbursement documents must be within a few days of the date that the document is presented for payment. 2. The official signing the check compares the check with the documents and should deface the documents. 3. Unsigned checks are prepared by individuals who are responsible for signing checks. 4. Cash disbursement documents are approved by at least two responsible management officials.

2. The official signing the check compares the check with the documents and should deface the documents.(18)

Management of Thurman Corporation included additional supplementary information in documents that include the audited financial statements for the year ended December 31, 2016. Management has asked its audit firm, Wally, CPAs, whether they can report on the supplementary information. Which of the following conditions would precluded Wally, CPAs, from conducting this engagement? 1. The supplementary information is derived from the accounting records used to generate the basic financial statements 2. The supplementary information covers the period January 1, 2016 through February 15, 2017 3. Wally's opinion on the basic financial statements was unqualified 4. When evaluating supplementary information, Wally plans to use the same materiality threshold as that used in the audit of the basic financial statements

2. The supplementary information covers the period January 1, 2016 through February 15, 2017

When auditing a client's property, plant, and equipment transactions, which of the following tests of details can be used to support the existence and occurrence assertion? 1. Examine a sample of material charges to repairs and maintenance expense to determine if any items should have been capitalized. 2. Vouch a sample of purchases to the vendor invoice and receiving report 3. Recalculate any revaluation losses or surplus transactions made to property, plant, and equipment during the year 4. Review fixed asset purchases and dispositions right before and after year-end to determine if recorded in the correct period

2. Vouch a sample of purchases to the vendor invoice and receiving report(19)

An auditor's preliminary analysis of accounts receivable turnover revealed the following rates over these accounting periods: 2016 = 4.3, 2015 = 6.2, 2014 = 7.3. Which is the most likely cause of the decrease in accounts receivable turnover? 1. increase in the cash discount offered 2. liberalization of credit policy 3. shortening of due date terms 4. increased cash sales

2. liberalization of credit policy (16)

A client acquired 255 of its outstanding capital stock after year-end but prior to the date of the auditor's report. The auditor should 1. Advise management to adjust the balance sheet to reflect the acquisition 2. Issue pro forma financial statements giving effect to the acquisition as if it had occurred at year-end 3. Advise management to disclose the acquisition in the notes to the financial statements 4. Disclose the acquisition in the opinion paragraph of the auditor's report

3. Advise management to disclose the acquisition in the notes to the financial statements

An auditor selected items for test counts while observing a client's physical inventory. The auditor traced the test counts to the client's inventory listing. This procedure likely obtained evidence about which balance-related objective for inventory? 1. Existence 2. Rights and obligations 3. Completeness 4. Realizable value

3. Completeness

In auditing account payable, an auditor's procedures most likely will focus primarily on management's assertion of... 1. Existence 2. Realizable value 3. Completeness 4. Valuation and allocation

3. Completeness(18)

In connection with the audit of the prepaid insurance account, which of the following procedures is usually not performed by the auditor? 1. Recompute the portion of the premium that expired during the year 2. Prepare excerpts of the insurance policies for audit documentation 3. Confirm premium rates with an independent insurance broker 4. Examine support for premium payments

3. Confirm premium rates with an independent insurance broker(19)

which of the following comparisons will be most useful to an auditor in auditing an entity's income and expense account? 1. Prior year accounts payable to current year accounts payable 2. Prior year payroll expense to budgeted current year payroll expense 3. Current year revenue to budgeted current year revenue 4. Current year warranty expense to current year contingent liabilities

3. Current year revenue to budgeted current year revenue(19)

An auditor traced a sample of purchase orders and the related receiving reports to the acquisitions journal and cash disbursements journal. The purpose of this substantive test of transactions most likely was to... 1. Identify unusually large purchases that should be investigated further. 2. Verify that cash disbursements were good actually received 3. Determine that purchases were properly recorded. 4. Test whether payments were for goods actually ordered.

3. Determine that purchases were properly recorded.(18)

An auditor's principal objective in analyzing repairs and maintenance expense accounts is to 1. determine that all obsolete property, plant, and equipment assets were written off before the year-end 2. Verify that all recorded property, plant, and equipment assets actually exist 3. Discover expenditures that were expenses but should have been capitalized 4. Identify property, plant, and equipment assets that cannot be repaired and should be written off

3. Discover expenditures that were expenses but should have been capitalized(19)

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 misstate. This situation illustrates the risk of... 1. Assessing control risk too high. 2. Assessing control risk too low. 3. Incorrect rejection. 4. Incorrect acceptance

3. Incorrect rejection.(17)

Equipment acquisitions that are misclassified as maintenance expense most likely would be detected by an internal control that provides for 1. Segregation of duties of employees in the accounts payable department 2. Authorization by the board of directors of significant equipment acquisitions 3. Investigations of variances within a formal budgeting system 4. Independent verification of invoices for disbursement recorded as equipment acquisitions

3. Investigations of variances within a formal budgeting system(19)

An audit report was dual-dated for a subsequent event disclosed in the financial statements, which occurred after the completion of the evidence collection process but before the issuance of the financial statements. The auditor's responsibility for events occurring subsequent to the completion of the evidence collection process was 1. Limited to include only event occurring before the date of the last subsequent event referred to 2. Extended to subsequent events occurring through the date of issuance of the financial statements 3. Limited to the specific events referred to 4. Extended to include all events occurring since the completion of the evidence collection process

3. Limited to the specific events referred to

Which of the following is not a required item to be communicated by the auditor to the audit committee or others charged with governance 1. Information about the auditor's responsibility in an audit of financial statements 2. Information about the overall scope and timing of the audit 3. Recommendations for improving the client's business 4. Significant findings arising from the audit

3. Recommendations for improving the client's business

Which of the following audit procedures is best for identifying unrecorded trade accounts payable? 1. Examining unusual relationships between monthly accounts payable balances and recorded cash payments 2. Reconciling vendors' statements to the file of receiving reports to identify items received just prior to the balance sheet date. 3. Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period. 4. Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports(18)

3. Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.

Investment and property schedules are presented for purposes of additional analysis in a document outside the basic financial statements. The schedules are not required supplementary information. When the auditor is engaged to report on whether the supplementary information is fairly stated in relation to the audited financial statements as a whole, the measurement of materialy is the 1. Greater of the individual schedule of investments or schedule of property by itself 2. Lesser of the individual schedule of investments or schedule of property by itself 3. Same as that used in forming an opinion on the basic financial statements as a whole 4. Combined total of both the individual schedules of investments and property as a whole

3. Same as that used in forming an opinion on the basic financial statements as a whole

Which of the following tests would an auditor be least likely to perform during an audit of accounts payable? 1. Examine open vouchers, receiving reports, and vendor invoices shortly after the year-end 2. Trace a sample of vouchers to the purchase journal 3. Send out accounts payable confirmations 4. Select cash disbursements made shortly after year-end and examine supporting documentation such as receiving reports and vendor invoices.

3. Send out accounts payable confirmations (18)

Written management representations obtained by the auditor in connection with a financial statement audit should include a 1. Summary of all corrected misstatements 2. Statement of management's belief that any uncorrected misstatements are in fact not misstatements 3. Statement of management's belief that the effects of uncorrected misstatements are not material 4. Summary of all uncorrected misstatements

3. Statement of management's belief that the effects of uncorrected misstatements are not material

The Form 10-K filed by management of a public company includes a section on MD&A in addition to the annual financial statements. Which of the following best describes the auditor's responsibility for the MD&A information? 1. The auditor must perform sufficient appropriate audit procedures to opine on the MD&A information 2. The auditor has no responsibilities related to the MD&A disclosures 3. The auditor must read the MD&A information to determine if there is any material inconsistency with the audited financial statements 4. The auditor must provide a disclaimer of opinion related to the MD&A information

3. The auditor must read the MD&A information to determine if there is any material inconsistency with the audited financial statements

An inventory turnover analysis is useful to the auditor because it may detect 1. Inadequacies in inventory pricing 2. Methods of avoiding cyclical holding costs 3. The existence of obsolete merchandise 4. The optimum automatic reorder points

3. The existence of obsolete merchandise

Which of the following would be an advantage of using variables sampling rather than probability-proportional-to-size (PPS) sampling? 1. An estimate of the standard deviation to the population's recorded amount is not required. 2. The auditor rarely needs the assistance of a computer program to design an efficient sample. 3. The inclusion of zero and negative balances usually does not require special design considerations. 4. Any amount that is individually significant is automatically identified and selected.

3. The inclusion of zero and negative balances usually does not require special design considerations.(17)

in auditing a manufacturing entity, which of the following procedures would an auditor most likely perform to determine whether slow-moving, defective, and obsolete items included in inventory are properly identified? 1. Test the mathematical accuracy of the inventory report 2. Inquire of management about whether inventory has been pledged or assigned 3. Tour the manufacturing plant or production facility 4. Test the computation of standard overhead rates

3. Tour the manufacturing plant or production facility

Which of the following procedures will an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second request? 1. review the cash receipts journal for the month prior to year end 2. intensify the study of internal control concerning the revenue cycle 3. inspect the shipping records documenting the merchandise sold to the debtors 4. increase the assessed level of detention risk for the existence assertion

3. inspect the shipping records documenting the merchandise sold to the debtors (16)

The auditor sends out positive accounts receivable confirmations for a client. assuming a second confirmation is sent out to a major customer who still fails to respond, the auditor should: 1. consider the nonresponse as a minor audit finding and use responding confirmations as a basis for test results. 2. issue a qualified opinion due to the lack of sufficient audit evidence. 3. send out a third confirmation request and if no response, perform alternative procedures. 4. provide the client a copy of the accounts receivable confirmation and request that they obtain the information from the customer

3. send out a third confirmation request and if no response, perform alternative procedures. (16)

As result of analytical procedures, the auditor determines that the gross profit percentage has declined from 30% in the preceding year to 20% in the current year. the auditor should: 1) express a qualified opinion due to inability of the client company to continue as going concern. 2)evaluate management's performance in causing this decline. 3)require footnote disclosure 4) consider the possibility of a misstatement in the financial statements

4) consider the possibility of a misstatement in the financial statements (16)

The accounting department reports the accounts receivable balance as $175,000. You are willing to accept that balance if it is within $15,000 of the actual balance. Using a variables sampling plan, you compute a 95% confidence interval of $173,000 to $187,000. You would therefore... 1. Find it impossible to determine the acceptability of the balance. 2. Accept the balance but with a lower level of confidence. 3. Take a larger sample before rejecting the sample and requiring adjustments. 4. Accept the $175,000 balance because the confidence interval is within the materiality limits.

4. Accept the $175,000 balance because the confidence interval is within the materiality limits.(17)

17-2: Mr. Murray decides to use stratified sampling. The reason for using stratified sampling rather than unrestricted random sampling is to... 1. Reduce as much as possible the degree of variability in the overall population. 2. Give every element in the population an equal chance of being included in the sample. 3. Allow the person selecting the sample to use personal judgment in deciding which elements should be included in the sample. 4. Allow the auditor to emphasize larger items from the population.

4. Allow the auditor to emphasize larger items from the population.(17)

The authority to accept incoming goods in receiving should be based on a(n)... 1. Vendor's invoice 2. Purchase requisition 3. Bill of lading 4. Approved purchase order

4. Approved purchase order(18)

Which of the following questions would be best to include in an internal control questionnaire concerning the completeness assertion for purchases? 1. Is an authorized purchase order required before the receiving department can accept a shipment or the vouchers payable department can record a voucher? 2. Are purchase requisitions prenumbered and independently match with vendor invoices? 3. Is the unpaid voucher file periodically reconciled with inventory records by an employee who does not have access to purchase requisitions? 4. Are purchase orders, receiving reports, and vouchers prenumbered and periodically accounted for?

4. Are purchase orders, receiving reports, and vouchers prenumbered and periodically accounted for?(18)

While auditing a client's purchase transactions, an auditor selects a sample of vouchers, and then compares the dates on the vouchers to the dates on which the corresponding transactions were actually recorded in the client's purchase journal. The audit procedure is most likely designed to test the... 1. Occurrence assertion 2. Completeness assertion 3. Accuracy assertion 4. Cutoff assertion

4. Cutoff assertion(18)

An example of an event occurring in the period between the end of the year being audited and the date of the auditor's report that normally will not require disclosure in the financial statements or auditor's report is 1. Serious damage to the company's plant from a widespread flood 2. Issuance of a widely advertised capital stock issue with restrictive covenants 3. Settlement of a large liability for considerably less than the amount recorded 4. Decreased sales volume resulting from a general business recession

4. Decreased sales volume resulting from a general business recession

Which of the following procedures is the auditor least likely to perform on the actual date the physical inventory count is observed? 1. Examine inventory to make sure that it is tagged by client count teams. 2. Watch for inventory items that are rust- or dust-covered or otherwise damaged 3. Observe client count teams to determine if they are conducting the physical inventory count in accordance with client policies and procedures 4. Examine documentation supporting the acquisition of highly material inventory items on hand at the count date

4. Examine documentation supporting the acquisition of highly material inventory items on hand at the count date

The auditor may note that annual depreciation expense is too low for a class of assets by noting 1. Insured values greatly in excess of carrying amounts 2. Large numbers of fully depreciated assets are still in use 3 continuous trade-ins of relatively new assets 4. Excessive recurring losses on assets retired

4. Excessive recurring losses on assets retired(19)

When the auditor uses monetary unit statistical sampling to examine the total dollar value of invoices, each invoice. 1. Has an equal probability of being selected 2. Can be represented by no more than one monetary unit. 3. Has an unknown probability of being selected. 4. Has a probability proportional to its dollar value of being selected.

4. Has a probability proportional to its dollar value of being selected.(17)

which of the following internal control procedures most likely would be used to maintain accurate inventory records? 1. Perpetual inventory records are periodically compared with the current cost of individual inventory items 2. A just-in-time inventory ordering system keeps inventory levels to a desired minimum 3. Requisitions, receiving reports, and purchase orders are independently matched before payment is approved 4. Periodic inventory counts are used to adjust the perpetual inventory records

4. Periodic inventory counts are used to adjust the perpetual inventory records

In applying variables sampling, an auditor attempts to 1. Estimate a qualitative characteristic of interest. 2. Determine various rates of occurrence for specified attributes. 3. Discover at least one instance of a critical deviation. 4. Predict a monetary population value within a range of precision

4. Predict a monetary population value within a range of precision(17)

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? 1. Greater reliance on internal control 2. Greater reliance on substantive analytical procedures 3. Smaller expected frequency of errors 4. Smaller measure of tolerable misstatement

4. Smaller measure of tolerable misstatement(17)

An audit firm performs a preliminary review of the client's internal control over its property, plant, and equipment cycle. Which of the following would represent a weakness in internal control? 1. Each fixed asset has an identification plate that is listed on a control account 2. Assets that are retired are documented on a sequential work order, which includes an authorization signature 3. A subsidiary ledger is used by the client to keep detailed transaction information for each fixed asset 4. The purchasing department generates a special requisition form upon oral or written approval by senior management

4. The purchasing department generates a special requisition form upon oral or written approval by senior management(19)

As part of the current audit, the auditor begins performing substantive tests on a client's inventory. To test the valuation, allocation, and accuracy assertion, the auditor should perform all of the following procedures except for 1. Review direct labor rates and testing the computation of the standard overhead rates used 2. Performing inventory price tests on a sample of inventory items to ensure the inventory is properly valued 3. Testing the mathematical computations of the inventory report and reconciling to the inventory general ledger accounts 4. Vouching a sample of items from the client's inventory report sheet to the corresponding pre numbered inventory tags

4. Vouching a sample of items from the client's inventory report sheet to the corresponding pre numbered inventory tags

The return of a positive confirmation of accounts receivable without an exception attests to the 1. collectibility of the receivable balance. 2. accuracy of the allowance for uncollectible accounts. 3. accuracy of the aging of accounts receivable. 4. accuracy of the receivable balance

4. accuracy of the receivable balance (16)

Which of the following is least likely to be reasonable explanation for an increase in accounts receivable turnover? 1. early payment incentive for customers 2. tightening of credit policy 3. implementation of more aggressive collection policies. 4. allowance of a new grace period for customer payments

4. allowance of a new grace period for customer payments (16)

which of the following questions is an auditor least likely to include on an internal control questionnaire concerning the initiation and execution of equipment transaction? 4. are procedures in place to monitor and properly restrict access to equipment?

4. are procedures in place to monitor and properly restrict access to equipment?(19)

After a CPA has determined that accounts receivable have increased as a result of slow collection in a "tight money" environment, the CPA will be likely to 1. increase the balance in the allowance for bad debt account 2. review the going concern ramification 3. review the credit and collection policy 4. expand tests of collectibility

4. expand tests of collectibility (16)

The negative form of accounts receivable confirmation request is useful except when 1. internal control surrounding accounts receivable is considered to be effective. 2. a large number of small balances are involved. 3. the auditor has reason to believe the persons receiving the requests are likely to give them consideration 4. individual account balances are relatively large

4. individual account balances are relatively large (16)

When is the sample unacceptable?

A population is not acceptable when the upper misstatement bound exceeds tolerable misstatement (17)

Monetary Unit Sampling (MUS)

AKA: Dollar Unit Sampling, Cumulative monetary unit sampling, and Sampling with probability proportional to size (PPS)(17)

What is the relationship between ARIA for TDB and ARO for TOC?

ARIA for tests of details of balances is the equivalent of ARO for tests of controls and substantive tests of transactions. There is an inverse relation between ARO for tests of controls and ARIA for tests of details of balances. If internal controls are considered to be effective, control risk can be reduced. While testing internal controls, a lower control risk requires a lower ARO which in turn requires a larger sample size for testing. If controls are determined to be effective after testing, control risk can be estimated below maximum, which permits the auditor to increase ARIA. By increasing ARIA, auditors can reduce sample sizes for tests of details of balances. (17)

Define ARIA?

Acceptable Risk of Incorrect Acceptance. It is the risk that the sample supports the conclusion that the recorded account balance is not materially misstated when it is materially misstated. It is the equivalent term to (Acceptable risk of over reliance ARO). If auditor decides to reduce ARIA than the sample size size increases and vice versa) (17)

Explain ARIA and what are the factors that effect ARIA

Acceptable risk of incorrect acceptance (ARIA) is the risk the auditor is willing to take of accepting a balance as correct when the true misstatement in the balance is greater than tolerable misstatement. ARIA is the equivalent term to acceptable risk of overreliance (ARO) for audit sampling for tests of controls and substantive tests of transactions. The primary factor affecting the auditor's decision about ARIA is control risk in the audit risk model, which is the extent to which the auditor relies on internal controls. When internal controls are effective, control risk can be reduced, which permits the auditor to increase ARIA, which in turn reduces the required sample size. ✓ Besides control risk, ARIA is also affected directly by acceptable audit risk (AAR) and inversely by inherent risk (IR) and other substantive tests already performed (STOT, SAP) on the accounts. For example, if acceptable audit risk is reduced, ARIA must also be reduced. If substantive analytical procedures were performed and there is no indication of problem areas, there is a lower likelihood of misstatements in the account being tested, and ARIA can be increased(17)

16-6: Why does an auditor review sales returns subsequent to year end? What audit objective does this procedure satisfy?

Accounting standards require that sales returns and allowances be matched with related sales if the amounts are material. For most companies, however, sales returns and allowances are recorded in the accounting period in which they occur, under the assumption of approximately equal, offsetting amounts at the beginning and end of each accounting period. This approach is acceptable as long as the amounts are not material. Since auditors concern about possible overstatement of sales revenue, the cutoff (timing) tests are simple and straightforward when auditors are confident that the client records all sales returns and allowances in a timely manner. The auditors can examine supporting documents for a sample of sales returns and allowances recorded during several weeks subsequent to the closing date to determine the date of the original sale. If auditors discover that the amounts recorded in the subsequent period are significantly different from unrecorded returns and allowances at the beginning of the period under audit, they probably will ask client to make an adjusting entry.(17)

Example of Posting and Summarization

Acquisition transactions are correctly included in accounts payable and inventory master files and are correctly summarized(18)

Example of Timing

Acquisition transactions are recorded in the correct dates(18)

Example of accuracy

Acquisitions are accurately recorded (18)

Example of classification

Acquisitions are correctly classified in the company's record(18)

Another way of explaining management representation letter?

Auditing standards require the auditor to obtain written representations from management documenting management's most important oral representations made during the audit.This letter is prepared on the client's letterhead, addressed to the CPA, and signed by high-level corporate officials (CEO, CFO, controller) and should be dated no earlier than the date of the auditor's report to ensure that there are adequate representations about subsequent events. The three purposes of the client letter of representation include impressing upon management its responsibilities for the assertions made to financial statements, reminding management to disclose potential misstatement or omission on financial statements, and to document responses from management regarding inquiries made by auditors to clients.

Explain a management representation letter?

Auditing standards require the auditor to obtain written representations from management, usually in a letter of representation documenting managements most important oral representations made during the audit. A clients management should state their responsibilities for establishing and maintaining effective internal control over financial reporting in a management representation letter. Management should also make a conclusion about the effectiveness of internal controls over financial reporting as the end of the reporting period, disclose of deficiencies, and reveal knowledge of any fraudulent activities. The letter should also address recognition, measurement, and disclosure policies made by the company.

Explain SAS 1 (AU 560). What does it require from the auditor?

Auditors are required to verify the transactions and events occurred after the balance sheet date to determine whether events occur after the end of the reporting date might affect the fair presentation or disclosures of the current-period financial statements under audit

Stratified Sampling

Auditors divide the items in the population into two or more groups according to judgement. Items within the sub-pop will be sampled and tested independently. This method is non-statistical in nature so auditors cannot project misstatements found in the sample to entire population with a specified level of confidence(%) nor a range of possible misstatements. WHY? (PDR increases, Sample size decreases)(17)