AUDIT MC #2

Equation for difference estimation

(misstatement in sample/number of transactions in sample) x number of transactions in the population

What is the formula for the Tainting percentage

(recorded balance - audited value)/recorded balance

Calculate a nonstatistical sample size:

(recorded balance of population/tolerable misstatement) x confidence factor

What are the seven steps in attribute sampling?

*Planning:* 1. Determine the objective of sampling 2. Define the characteristic of interest 3. Define the population *Performing:* 4. determine the sample size 5. Select the sample items 6. measure the sample items *Evaluating:* 7. Evaluate the sample results

Key components of the auditors' report on internal control for a public company includes a(n):

- Statement regarding management responsibilities - title that includes the word "independent" - audit opinion on internal control over financial reporting

The final assessment of control risk should:

- assist in determining the list of substantive procedures required - be coordinated with the final audit plan

MUS is a good choice when

- few or no misstatements are expected - Overstatement (existence assertion) is of greatest concern

The acceptable rate of compliance for an internal control to be considered effective:

- is a matter of professional judgement - may be based on internal firm guidelines

MUS is more appropriate than classical variables sampling when:

- overstatements (existence) are of great concern - few misstatements are anticipated - a high level of variability exists

Performing a walkthrough is the most effective way to:

1) gain an understanding of the flow of transactions 2) identifying the points at which a material misstatements could occur 3) identifying the controls that management has implemented to mitigate each risk

Proper separation of duties involves different people handling:

1. *Custody* of checks 2. Cash disbursements *authorization* 3. *Recording* of payments 4. Bank *reconciliation*

What are the four methods of testing controls?

1. Inquiry 2. Observation 3. Document examination 4. Reperformance

COSO internal control categories are:

1. Reliability of financial reporting 2. effectiveness and efficiency of operations 3. compliance with applicable laws and regulations

Two types of sampling risks in attribute sampling:

1. Risk of underreliance 2. Risk of overreliance

two types of sampling risk for variables sampling:

1. risk of incorrect rejection 2. risk of incorrect acceptance

What four factors influence sample size in an MUS application?

1. sampling risk 2. tolerable misstatement 3. expected misstatement 4. population size

Regardless of the results of the attributes sampling application the audit team should conduct what to determine their nature and cause?

A Qualitative evaluation of deviations

The purpose of separating the duties of hiring personnel and distributing payroll checks is to separate the: a. authorization of transactions from the custody of related assets b. operational responsibility from the record-keeping responsibility c. human resources function from the controllership function d. administrative controls from the internal accounting controls

A. Authorization of transactions from the custody of related assets

When planning the audit of internal controls for an issuer, the audit team should: a. identify significant accounts, locations and assertions b. conduct a walkthrough of the internal control process c. make inquiries of employees regarding the existence of control activities d. reperform control activities performed by client employees to determine their effectiveness

A. Identify significant accounts, locations and assertions

If the auditor plans to assess control risk at less than the maximum and rely on controls, and the nature, timing, and extent of further audit procedures are based on that lower assessment, the auditor must: a. obtain evidence that the controls selected for testing are designed effectively and operated effectively during the entire period of reliance b. assess control risk at less than maximum for all relevant assertions c. perform only substantive procedures d. provide additional examples of responses to assessed fraud risks relating to fraudulent financial reporting

A. Obtain evidence that the controls selected for testing are designed effectively and operated effectively during the entire period of reliance

Which of the following statements is not true with respect to the auditor's report on internal control over financial reporting? a. the report will be dated as of the date on the financial statements b. the report will express an opinion on the effectiveness of internal control over financial reporting c. the auditor will issue an adverse opinion if one of more material misstatement exist d. the report may be presented with the report on the entity's financial statement as a combined report

A. The report will be dated as of the date on the financial statements False, because the report would be dated as of the day that enough evidence has been gathered to support the auditors' opinion on the effectiveness of the entity's internal control.

A good fraud prevention program should address employees' motivation to steal from the company. The best method for doing this is to: a. establish employee assistance programs b. require a fidelity bond on all employees c. require reconciliations of all accounts to be reviewed by a supervisor d. ensure that all accounts with high inherent risk or fraud are audited

A. establish employee assistance programs Problems due to debt, addictions, or family problems motivate employees to commit frauds. Establishing an employee assistance program addresses these issues and ultimately may reduce the motivation to commit fraud for some employees.

When auditing with "fraud awareness," auditors should especially notice and follow up employee activities under which of these conditions? a. the company always estimates the inventory but never takes a complete physical count b. the petty cash box is always locked in the desk of the custodian c. management has published a company code of ethics and sends frequent emails about it d. the board of directors reviews and approves all investment transactions

A. the company always estimates the inventory but never takes a physical count

Which of these arrangements of duties could most likely lead to an embezzlement or theft? a. the inventory warehouse manager has responsibility for making the physical inventory observation and reconciliation discrepancies to the perpetual inventory records b. the cashier prepared the bank deposit, endorsed the checks, and delivered the cash and checks to the bank c.. the accounts receivable clerk received a list of payments received by the cashier so he could make entries in the customers subsidiary accounts d. the financial vice president received checks made out to suppliers and the supporting invoices, signed the checks, and mailed the checks

A. the inventory warehouse manager has responsibility for making the physical inventory observation and reconciliation discrepancies to the perpetual inventory records

Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this defalcation and be least likely to be detected by an auditor? a. understating the sales journal b. overstating the accounts receivable control account c. overstating the accounts receivable subsidiary ledger d. overstating the sales journal

A. understating the sales journal Not recording sales on account in the books of original entry is the most effective way to conceal a subsequent theft of cash receipts. The accounts will be incomplete but balanced, and procedures applied to the accounting records will not detect the defalcation.

if the audit team identifies a material weakness in internal controls, a(n) _____ opinion on the effectiveness of the entity's internal control over financial reporting is issued

Adverse opinion

The numeric distance from the estimated population value in which the true (but unknown) population may like with a given probability is the:

Allowance for sampling risk

The population of all possible applications of controls by client personnel is used in:

Attributes sampling

What sampling is being used when the audit team's objective is to determine whether they can rely upon important control policies and procedures to prevent and detect financial statement misstatements?

Attributes sampling

Which of the following control activities would best protect against the preparation of improper or inaccurate cash disbursements? a. all checks must be signed by an officer designated by the boards of directors b. all signed checks must be reviewed and compared with supporting documentation by the treasurer before mailing c. all checks must be sequentially numbered and accounted for by internal auditors d. all checks must be perforated or otherwise effectively canceled when they are returned with the bank statement

B. All signed checks must be reviewed and compared with supporting documentation by the Treasurer before mailing

In most audits of large entities, control risk assessment contributes to audit efficiency, which means that: a. the cost of substantive procedures will exceed the cost of control evaluation work b. auditors will be able to reduce the cost of substantive procedures by an amount more than the control evaluation costs c. the cost of control evaluation work will exceed the cost of substantive procedures d. auditors will be able to reduce the cost of substantive procedures by an amount less than the cost of tests of controls

B. Auditors will be able to reduce the cost of substantive procedures by an amount more than the control evaluation costs

Once the auditor detects a control deficiency, which of the following steps must he or she take first? a. perform tests of other controls related to the same assertion as the control deemed ineffective b. evaluate the severity of the deficiency on the auditor's control risk assessment for that assertion c. modify the planned substantive procedures as a result of the deficiency d. test the deficient control, assuming a maximum level of risk

B. Evaluate the severity of the deficiency on the control risk assessment The first step an auditor is likely to take after detecting a control deficiency is to determine the impact of the severity of the deficiency on the auditor's control risk assessment for that assertion. The additional steps to be taken will depend in large part on this determination.

which of the following combinations is a good way to conceal employee fraud but an ineffective way of perpetrating management (financial reporting) fraud? a. overstating sales revenue and overstating customer accounts receivables b. overstating sales revenue and overstating bad debt expense c. understating interest expense and understating interest payable d. omitting the disclosure information about related-party sales to the president's relatives

B. Overstating sales revenue and overstating bad debt expense by the same amount does not overstate net income or total assets (which is often a goal of financial reporting fraud). However, this action would help to hide an employee's theft of assets (i.e., embezzlement).

The most important fundamental components of an entity's internal controls is: a. effectiveness and efficiency of operations b. people who operate the control system c. reliability of financial reporting d. compliance with applicable laws/regulations

B. People who operate the control system

A transaction-level internal control activity is best described as: a. an action taken by auditors to obtain evidence b. an action taken by client personnel for the purpose of preventing, detecting, and correcting errors and frauds in transactions to eliminate or mitigate risks identified by the company c. a method for recording, summarizing, and reporting financial information d. the functioning of the board of directors in support of its audit committee

B. an action taken by client personnel for the purpose of preventing, detecting, and correcting errors and frauds in transactions to eliminate or mitigate risks identified by the company

Which of the following is a device designed to help the audit team obtain evidence about the accounting and control activities of an audit client? a. a narrative memorandum describing the control system b. an internal control questionnaire c. a flowchart of the documents and procedures used by the company

B. an internal control questionnaire - designed to help the audit team obtain evidence about the control environment

The primary purpose for obtaining an understanding of a nonpublic audit client's internal control is to: a. provide a basis for making constructive suggestions in a management letter b. determining the nature, timing, and extent of further audit tests to be performed c. provide the rationale for the inherent risk assessment at the financial statement assertion level d. provide information for a communication of internal control-related matters to management

B. determining the nature, timing, and extent of further audit tests to be performed

In an audit sampling application, an auditor: a. Performs procedures on all items in a balance and makes a conclusion about the entire balance b. Performs procedures on less than 100 percent of the items in a balance and formulates a conclusion about the entire balance c. Performs procedures on less than 100 percent of the items in a class of transactions to become familiar with the client's accounting system d. Performs analytical procedures on the client's unaudited financial statements when planning the audit

B. performs procedures on less than 100 percent of the items and formulates a conclusion about the entire balance

Immediately upon receipt of cash, a responsible employee should: a. record the amount in the cash receipts journal b. prepare a remittance listing c. update the subsidiary ledger d. prepare a deposit slip in triplicate

B. prepare a remittance listing

Each morning the controller gets the prior day's list of remittances, a copy of the payment report, and a copy of the deposit slip returned from the bank. When comparing these items, the controller would be able to determine that: a. no checks were returned for sufficient funds b. the cash received and remittance advice received were maintained in a single batch c. the AR systems has controls over unauthorized access d. the assistant controller does not also reconcile the subsidiary AP

B. the cash received and remittance advice received were maintained in a single batch If the cash received was not deposited intact or remittances were not posted, the deposit slip amount would not match the remittances or the payments recorded.

A series of contiguous items from the population is chosen when using _________ selection

Block

Upon receipt of customers' checks in the mail room, a responsible employee should prepare a remittance list that is forwarded to the cashier. A copy of the list should be sent to the: a. internal auditors to investigate the list for unusual transactions b. treasurer to compare the list with the monthly bank statement c. AR bookkeeper to update the subsidiary AR records d. entity's bank to compare the list with the cashier's deposit slip

C. AR bookkeeper to update the subsidiary AR records The individuals with record-keeping responsibility should not have custody of cash. Hence, those individuals should use either the remittance advices or a list of the remittances to make entries to the cash and accounts receivable control account and to the subsidiary accounts receivable records.

In preparing for the audit of cash, the auditors perform analytical procedures concerning cash balances. Which of the following would be the best source of information for use in the estimate of cash? a. prior-years balances b. management inquiry c. cash budgets d. aged accounts receivables reports

C. Cash budgets Budgets provided by management provide the best management estimates for the sources and uses of cash. Where cash receipts or cash expenditures vary from the budget by a material amount, a higher level of risk may be assessed.

To test the operating effectiveness of a control, an audit team might use a combination of each of the following tests except for: a. inquiry of client personnel b. observation of company operations c. confirmation of balances d. inspection of documentation

C. Confirmation of balances (substantive test)

Which report would not be appropriate for a public accounting firm to provide on financial reporting controls? a. unqualified - no material misstatement found b. disclaimer of opinion - unable to perform all necessary procedures c. disclaimer of opinion - significant deficiencies exist d. adverse - material misstatements exists

C. Disclaimer of opinion - significant deficiencies exist A disclaimer is used when the auditor's scope is limited but not when significant deficiencies exist, so it is not an appropriate report.

When completing the audit of internal controls for a public company, the PCAOB requires auditors to audit internal controls over: a. operations b. compliance with regulations c. financial reporting d. all of the above

C. Financial reporting

A material weakness is a situation in which: a. it is probable that an immaterial financial statement would not be detected on a timely basis b. there is a remote likelihood that a material misstatement would be detected on a timely basis c. It is reasonably possible that a material misstatement would not be detected on a timely basis d. it is reasonably possible that an immaterial misstatement would not be detected on a timely basis

C. It is reasonably possible that a material misstatement would not be detected on a timely basis.

Which of the following is a preventive control? a. reconciliation of a bank account b. recalculation of a sample of payroll entries by internal auditors c. separation of duties between the payroll and personnel departments d. detailed fluctuations analysis completed by the CFO for revenues

C. Separation of duties between the payroll and personnel departments

Which of the following information would be included in the introductory paragraph of the auditors' report on internal control over financial reporting if the report is presented separately from the auditors' report on the entity's financial statements? a. the fact that the auditors conducted an audit of the entity's financial statements b. the definition of a material weakness in internal control over financial reporting c. statements identifying the responsibility of the auditors and management for internal control over financial reporting d. a reference to the auditors' report and opinion on the entity's financial statements

C. Statements identifying the responsibility of the auditors and management for internal control over financial reporting

When completing the audit of internal controls for a public company, AS 2201 requires auditors to test: a. operating effectiveness only b. design effectiveness only c. both operating and design d. neither operating or design

C. both operating and design effectiveness

An employee in accounts payable believes she can run a fictitious invoice through the accounts payable system and collect the money. She knows payments are subject to an audit. Which account would be the best place to hide the fraud? a. inventory b. wage expense c. consulting service expense d. property tax expense

C. consulting service expense Expense accounts are often good places to hide fraud because accounts are closed at the end of the year. Consulting expense is a particularly good place to hide a fraud because it provides no actual product that may be counted or compared to the expense.

Which of the following would the auditor consider to be an incompatible operation if the cashier receives remittances? a. prepares the daily deposit b. makes the daily deposit at a local bank c. posts the receipts to the AR subsidiary ledger cards d. endorses the checks

C. posts the receipts to the AR subsidiary ledger cards - incompatible because the cashier would have both custody of cash and record-keeping responsibility and, hence, could steal money and fix the records without interference by anyone else.

Auditors consider statistical sampling to be characterized by the following: a. representative sample selection and non-mathematical evaluation of the results b. carefully biased sample selection and mathematical evaluation of the results c. representative sample selection and mathematical evaluation of the results d. carefully biased sample selection and non-mathematical evaluation of the results

C. representative sample selection and mathematical evaluation of the results

A code of ethics is an important element of a fraud prevention program. Which of the following would diminish the effectiveness of a company's code of conduct? a. the establishment of a chief ethics officer b. the establishment of a hotline for reporting unethical behavior c. the violation of the code of ethics by senior management d. the posting of the code of ethics in the company workplace

C. violation of the code of ethics by senior management

Clearly defining the ______ in a sampling application is critical because it is the measure that will be obtained and evaluated

Characteristic of Interest

When completing the audit of internal controls for an issuer, the severity of an internal control deficiency depends on: a. whether there is a reasonable possibility that the company's controls will fail to prevent or detect a misstatement of an account balance or disclosure b. whether a misstatement has actually occurred as a result of the deficiency c. the magnitude of the potential misstatement resulting from the deficiency d. both a and c are correct e. all of the answers are correct

D) Whether there is a reasonable possibility that the company's controls will fail to prevent or detect a misstatement of an account balance or disclosure AND The magnitude of the potential misstatement resulting from the deficiency

Matters that could affect the necessary extent of testing for a control activity as it related to the degree of auditor reliance on a control activity would NOT include the following: a. the frequency of the performance of the control by the company during the period being audited b. the length of time that the auditor is planning to rely on the operating efficiency of the control activity c. the expected rate of deviation for a control activity d. the relevance and reliability of the audit evidence to be obtained to test the operating effectiveness of a control activity

D. The relevance and reliability of the evidence to be obtained would not have an impact on the extent of testing to be completed. The extent of testing required should be determined and then the necessary evidence should be gathered.

The auditor should assess control risk for each relevant assertion by evaluating the evidence obtained form all sources, including: a. the auditors testing of controls for the audit of internal control on a public company b. misstatements detected during the financial statement audit c. any control deficiencies identified during the audit d. all of the above

D. All of the above Evidence obtained during the test of controls would be relevant to the assessment of control risk (response a); misstatements detected during the audit (response b); and control deficiencies detected during the audit (response c) would all be relevant. As a result, the correct answer is all of the above.

Embezzlement is a type of fraud that involves: A. An employee's misappropriating an employer's money or property not entrusted to him or her. B. A manager's falsification of financial statements for the purpose of misleading investors and creditors. C. An employee's mistake representation of opinion that causes incorrect accounting entries. D. An employee misappropriating an employer's money or property entrusted to the employee's control in the employee's normal job.

D. An employee misappropriating an employer's money or property entrusted to the employee's control in the employee's normal job. (definition of embezzlement)

When testing a control activity's operating effectiveness, procedures the auditor performs to test operating effectiveness would likely include: a. inquiry of appropriate personnel b. reading over the company's code of conduct c. reperformance of the control activity d. both A and C are correct

D. Both A and C are correct When testing the operating effectiveness of a control, the auditor should use a combination of inquiry, observation, inspection, and reperformance.

If the auditors encounter a significant scope limitation in evaluating a public company's internal control over financial reporting, which of the following types of opinions on the effectiveness of the company's internal control over financial reporting would be appropriate? a. unqualified or adverse b. qualified or adverse c. unqualified or disclaimer of opinion d. disclaimer of opinion

D. Disclaimer of Opinion the reporting option when a scope limitation exist is disclaimer of opinion

Test of controls in a GAAS audit are required for: a. Obtaining evidence about the financial statement assertions b. Accomplishing control over the occurrence of recorded transactions c. Applying analytical procedures to financial statement balances d. Obtaining evidence about the operating effectiveness of client control activities

D. Obtaining evidence about the operating effectiveness of client control activities

Which of the following would probably *not* be considered an indication of a material misstatement? a. evidence of a material misstatement b. ineffective oversight by the audit committee c. immaterial fraud committed by senior management d. overproduction by the manufacturing plant

D. Overproduction by the manufacturing plant

Effectiveness of audit procedures would be reduced by: a. selecting larger sample sizes for audit b. performing audit procedures at the fiscal year-end date as opposed to interim c. deciding to obtain external evidence instead of internal evidence d. performing procedures during the interim period as opposed to at fiscal year-end

D. Performing procedures during the interim period as opposed to at fiscal year-end

The best way to enact a broad fraud prevention program is to: a. install airtight control systems of checks and supervision b. name an "ethics officer" who is responsible for receiving and acting on fraud tips c. place dedicated hotline telephones on walls around the workplace with direct communication to company ethics officer d. practice management "of the people, for the people" to help them share personal and professional problems

D. Practice management "of the people, for the people" to help them share personal and professional problems Because "people" are essential to a fraud prevention program

Incorporating elements of unpredictability in the selection of audit procedures to be performed by auditors include all of the following except: a. varying the timing of the audit procedures b. selecting items for testing that have lower amounts or are otherwise outside customary selection parameters c. performing audit procedures on an unannounced basis d. sending attorney letters to every attorney listed under the legal expense account e. non of these are correct

D. Sending attorney letters to every attorney listed under the legal expense account

Fraud risk factors are events or conditions that indicate which of the following: a. an opportunity to carry out a fraud b. an attitude or rationalization that justifies a fraudulent action c. an incentive or pressure to perpetrate fraud d. all of the above

D. all of the above

In what ways can audit procedures be modified to address assessed fraud risks? a. obtain more reliable information b. perform procedures close to year-end c. apply computer-assisted techniques to all items d. all of these are valid modifications

D. all of these are valid modifications

Which of the following control activities could prevent a paid disbursement voucher from being presented for payment a second time? a. vouchers should be prepared by individuals who are responsible for signing disbursement checks b. disbursement vouchers should be approved by at least two responsible management officials c. the date on a disbursement voucher should be within a few days of the date the voucher is presented for payment d. the official signing the check should compare it with the voucher and should stamp "paid" on the voucher documents

D. the official signing the check should compare it with the voucher and should stamp "paid" on the voucher documents

A conclusion that an account balance is fairly stated when in fact it is material misstated is the basic definition of

Detection risk

In attribute sampling, the characteristic of interest is a what?

Deviation condition

When a control is extremely important for the audit team's examination or when the existence of fraud is suspected, what type of sampling should be used?

Discovery

what type of sampling does the audit team use when deviations from controls are very critical yet expected to occur at a relatively low rate?

Discovery sampling

The risk of over-reliance results in what type of loss?

Effectiveness loss because an insufficient level of substantive procedures will be performed

During an audit of cash, the auditor is most concerned with the management assertion of

Existence

T/F: An understanding of the design of controls or how they are intended to function provides the audit team evidence as to the operating effectiveness of controls

False This alone does not unless there is some automation that provides for the consistent application of the operation of the control

The least persuasive type of control test evidence is:

Inquiry

When testing controls, the audit team often uses _______ about the existence of the activity and then corroborate the evidence by observing the control activities are actually being performed

Inquiry

What type of relationship exists between the tolerable rate of deviation and sample size?

Inverse relationship

What estimations provide estimates of the recorded balance of the accounts?

Mean-per-unit and ratio estimates

probability proportionate to size (PPS)

Monetary unit sampling

the audit team may judgmentally determine the sample size and is not required to quantify the various parameters when using what?

Non-statistical sampling methods

Classical variables sampling uses what to form an estimate of the range of recorded balances or misstatements that has some specified probability?

Normal distribution theory and central limit theorem

Whether a control is working as designed and whether the person performing the control has the authority and qualifications to perform the control is referred to as:

Operating effectiveness

If the auditor believes that a misstatement is or might be intentional and the effect on the financial statements could be material or cannot be readily determined, what should the auditor do?

Perform procedures to obtain additional audit evidence to determine whether fraud has occurred or is likely to have occurred

What is an effective audit procedure that an auditor might use to detect kiting between inter-company banks?

Prepare a schedule of the bank transfers

when the audit team identifies a series of random numbers equal to the desired sample size and selects the numbered items in the corresponding population, what type of selection is being used?

Random selection

Under what estimation is it assumed that each dollar in the population has an equal percentage of misstatement?

Ratio

A situation where the audit team determines that the rate of deviation exceeds the tolerable rate of deviation when it is actually lower than the tolerable rate is an example of:

Risk of Underreliance

Sampling risk for MUS

Risk of incorrect acceptance

when auditors conclude an account balance is not fairly stated when in fact it is, this is referred to as the:

Risk of incorrect rejection

The audit team examines transactions or components and calculates a ________ estimate of misstatement that is adjusted to a level that has a specified probability of equaling or exceeding the true level of misstatement

Sample estimate

In a systematic selection, the frequency with which items are selected within a population is referred to as the:

Sampling interval

the audit team has the opportunity to draw conclusions using a smaller sample size than a traditional fixed sampling plan when using what type of sampling?

Sequential ("stop-and-go") sampling

Auditors use attribute sampling when doing what types of tests?

Test of controls

When using MUS, the audit team examines _________ that contains the individual sampling item selected for examination

The logical unit

The maximum rate of deviation that could exist before auditors would reduce reliance on a control is called:

The tolerable rate of deviation

Auditors normally estimate what after calculating performance materiality for the various account balances and classes of transactions?

Tolerable misstatement

In addition to entity-level controls, the audit team also identifies ____________ controls that pertain to specific classes on entries, account balances and disclosures

Transaction-level controls

T/F: One limitation of systematic selection is that the population must be randomly ordered

True This could result in bypassing a number of items having similar characteristics

Allowance for Sampling risk

ULRD - Sample Rate deviation

Random sample selection may be either:

Unrestricted or systematic

The test of details risk is determined using what?

Using the audit risk model and considering inherent risk, control risk, and analytical procedures risk

What sampling is being used when auditors examine a population to estimate the amount or value of some characteristic of that population?

Variables sampling

What does the walkthrough consist of?

a combination of: - inquiry of personnel - observation of an entity's operations - document examination while tracing through the entire audit

population size has what type of relationship with sample size?

a direct relationship

When evaluating sampling results using classical variable sampling, what is constructed to control the exposure to the risk of incorrect acceptance and rejection?

a precision interval of sample estimates

After their understanding of the entity's internal control has been documented, the audit team may choose not to perform tests on the operating effectiveness of the controls because

a) The internal control is *too* ineffective in preventing/detecting misstatements b) the cost of obtaining a low control risk assessment is high c) it is less time consuming to conduct substantive tests

an important factor in determining the appropriate sample size is the:

acceptable level of sampling risk

What is a Dual-purpose test?

an audit procedure that is used as both test of controls and substantive test, by examining documents for both attributes and monetary misstatements

An item that exceeds the tolerable misstatement is called?

an individually significant item

Sampling risk has what type of relationship to sample size?

an inverse relationship

The risk of incorrect rejection has what type of relationship with sample size?

an inverse relationship

If a control is judged to be more important and would result in a more significant reduction in substantive testing, the tolerable rate of deviation is established:

at lower levels

According to the PCAOB, during the audit of internal controls for an issuer, the ultimate objective of testing the design effectiveness of internal controls is to: a. determine whether the company's controls are processing company data effectively b. determine that the company's controls will satisfy the company's control objectives and can effectively prevent or detect errors or fraud that could result in material misstatements c. determine that the company's employees are processing the controls according to the policy and procedures manuals at the company d. none of the above

b. determine that the company's controls will satisfy the company's control objectives and can effectively prevent or detect errors or fraud that could result in material misstatements

Which of the following is least indicative of fraudulent activities? a. numerous cash refunds have been made to different people at the same post office box address b. internal auditors cannot locate several credit memos to support reductions of customer balances c. bank reconciliation has no outstanding checks or deposits older than 15 days d. three people were absent the day the auditors handed out paychecks and have not picked them up four weeks later

c. Bank reconciliation has no outstanding checks or deposits older than 15 days

the company's checkbook is the

cash disbursement journal

Which of the following is true regarding Stratification? a. allows auditors to give more attention to high-dollar items b. permits the audit team to reduce sample size c. subdivides populations into homogeneous groups based on size d. all of the above

d. all of the above

Which of the following is not a main factor influencing the sampling size in an attribute sampling application? a. expected population deviation rate b. risk of underreliance c. population size d. tolerable rate of deviation

d. risk of underreliance The risk over *overreliance* is a factor

In a computerize environment, proper separation of duties is

dependent on proper password controls

What estimation provides an estimate of the degree of misstatements?

difference estimation

what estimation assumes that each transaction has an equal dollar misstatement

difference estimation

Expected misstatement has what type of relationship with sample size?

direct relationship

Auditors must gain an understanding of internal controls that are in place to mitigate assessed fraud risk and, at a minimum,

document that understanding in the workpapers

Controls that are pervasive to the internal control system and the reliability of the financial statements as a whole are called:

entity-level controls

Deviation conditions provide the audit team what?

evidence regarding the operating effectiveness of the client's internal control

If the audit team members believe management's SOX Section 302 annual certification is misstated, the report on internal control over financial reporting should:

include a paragraph describing why modifications are needed

To control exposure to sampling risk, the audit team calculates an adjustment to the projected misstatement using differences in confidence factors called the:

incremental allowance for sampling risk

The audit team's decision that it would take more time to test the operating effectiveness of the control activities than it would to perform the substantive tests necessary for a relevant assertion:

is equivalent to assessing control risk at 100%

The Chain of Custody

is the crucial link of the evidence to the criminal suspected that bears directly on the relevance of evidence

it is assumed under what estimation that each item (transaction) in the population has an equal recorded balance?

mean-per-unit

Sample rate of Deviation

number of deviations/sample size

When the ULRD is </= the tolerable rate of deviation, the audit team

relies on internal controls as planned and maintains control risk at planned levels

the documentation prepared by the audit team should be sufficient for an experienced auditor to _________ the sampling procedure

replicate

Basic allowance for sampling risk =

sampling interval x confidence factor

When using haphazard selection, items are

selected in an unstructured manner without intentional bias

When performing a walkthrough, the auditor:

selects examples of a transaction and traces them from the initial receipt to the recording in the accounting records

The variability of the population being examined is represented by what?

standard deviation

population variability is often measured as:

standard deviation

If the internal control activities over cash are not operating effectively, audits may need to expand:

substantive audit procedures

The adjusted rate that provides a conservative estimate of the rate of deviation that allows the audit team to control exposure to sampling risk is:

the Upper limit rate of deviation

What is the "true" balance?

the amount at which the account should be recorded if no misstatements exist

In variable sampling, the auditor wants to determine the amount at which an item should be recorded, which is referred to as?

the audited value

Sampling is used when:

the gains associated with efficiency exceed the losses associated with effectiveness

If the audit team decides an entity-level control sufficiently reduces a specific risk...

transaction-level controls related to that risk may not be needed

When the audit team wants to estimate the "true" balance or the misstatement of a particular account, what type of sampling is used?

variable sampling

The population of all components or transactions comprising the account balance of class of transactions is used in:

variables sampling