Auditing Exam 2 Multiple Choice Quesitons

Auditing standards require the auditor to consider materiality early in the audit. Which statement(s) regarding preliminary materiality is(are) true? I. Preliminary materiality may change during the engagement. II. Preliminary materiality is the maximum amount by which the auditor believes the financials could be misstated and still not affect the decisions of reasonable users. A. I only B. II only C. Both I and II D. Neither I or II

C. Both I and II

Which of the following is the primary basis used to decide materiality for a profit-oriented entity? A. Net sales B. Net assets C. Net income before taxes D. All of the above

C. Net income before taxes

In which of the following circumstances would an auditor of an issuer be least likely to reevaluate established materiality levels? A. the materiality level was established based on preliminary financial statement amounts that differ significantly from actual amounts B. the client disposed of a major portion of the client's business C. the client released third-quarter results before the SEC-prescribed deadline D. significant new contractual arrangements draw attention to a particular aspect of a client's business that is separately disclosed in the financial statements

C. the client released third-quarter results before the SEC-prescribed deadline

Actions, policies, and procedures that reflect the overall attitude of management, directors, and owners of the entity about internal control relate to which of the following internal control components? (1) Control environment (2) Information and communication (3) Risk assessment (4) Monitoring

(1) Control environment

Which of the following is generally not considered a category of IT general controls? (1) . Controls that determine whether a vendor number matches the pre-approved vendors in the vendor master file (2) Controls that restrict system-wide access to programs and data (3) Controls that oversee the acquisition of application software (4) Controls that oversee the day-to-day operation of IT applications

(1) Controls that determine whether a vendor number matches the pre-approved vendors in the vendor master file

Which of the following would not be considered an inherent limitation of the potential effectiveness of an entity's internal control structure? (1) Incompatible duties (2) Management override (3) Mistakes in judgment (4) Collusion among employees

(1) Incompatible duties

Of the four factors that determine the initial sample size in attributes sampling (population size, tolerable exception rate, acceptable risk of overreliance, and expected population exception rate), which factor has the least effect on sample size? (1) Population size (2) Expected population exception rate (3) Tolerable exception rate (4) Acceptable risk of overreliance

(1) Population size

In which of the following scenarios would an auditor most likely increase tests of controls? (1) When the client's IT system is extensively integrated throughout the company's accounting system (2) When the client's accounting system is largely based on manual processes (3) When the auditor has decided not to rely on internal controls and instead elects to increase substantive testing (4) When the auditor's assessment of inherent risk is low

(1) When the client's IT system is extensively integrated throughout the company's accounting system

In assessing sampling risk, the risk of underreliance (i.e. the risk of assessing control risk too high) relates to the (1) efficiency of the audit. (2) effectiveness of the audit. (3) selection of the items in the sample. (4) audit quality controls.

(1) efficiency of the audit

The auditor faces a risk that the audit will not detect material misstatements that occur in the accounting process. To minimize this risk, the auditor relies primarily on (1) substantive tests. (2) tests of controls. (3) internal control. (4) statistical analysis

(1) substantive tests.

As compared to a nonstatistical sampling plan, a statistical sampling plan (1) eliminates the need to apply professional judgment in determining sample size. (2) provides a more representative sample from the population. (3) makes greater use of mathematical methods in determining an appropriate sample size. (4) emphasizes qualitative evaluation of results as opposed to quantitative evaluations.

(3) makes greater use of mathematical methods in determining an appropriate sample size

An auditor will use the test data approach to obtain certain assurances with respect to the (1) input data. (2) machine capacity. (3) procedures contained within the program. (4) degree of data entry accuracy.

(3) procedures contained within the program.

Tests of controls are most likely to be omitted when (1) an account balance reflects many transactions. (2) control risk is assessed at less than the maximum. (3) the understanding of internal control indicates that evaluating the effectiveness of control policies and procedures is likely to be inefficient. (4) the auditor wishes to increase the acceptable level of detection risk.

(3) the understanding of internal control indicates that evaluating the effectiveness of control policies and procedures is likely to be inefficient

Which of the following is an advantage of a computer-based system for transaction processing over a manual system? A computer-based system (1) does not require as stringent a set of internal controls. (2) will produce a more accurate set of financial statements. (3) will be more efficient in generating financial statements. (4) eliminates the need to reconcile control accounts and subsidiary ledgers.

(3) will be more efficient in generating financial statements

Vendor account reconciliations are performed by three clerks in the accounts payable department on Friday of each week. The accounts payable supervisor reviews the completed reconciliations the following Monday to ensure they have been completed. The work performed by the supervisor is an example of which COSO component? (1) Control activities (2) Information and communication (3) Risk assessment (4) Monitoring

(4) Monitoring

Which of the following correctly describes an internal control component? (1) Control activities set the tone of the organization. (2) Information and communication systems have to do with management's analysis of risk. (3) Risk assessment relates to assessing the quality of the internal control structure over time. (4) Monitoring relates to ongoing assessment by management to determine whether controls are operating as intended.

(4) Monitoring relates to ongoing assessment by management to determine whether controls are operating as intended

During the planning stage of an audit, the auditor initially assessed both inherent risk and control risk at a high level. Further testing of the client's internal controls led the auditor to reduce the assessment of control risk. Which of the following will most likely occur as a result? (1) The auditor may reduce the assessment of inherent risk to match the control risk, since they were assessed at the same level during the initial planning. (2) The auditor may decrease the allowed level of detection risk. (3) The auditor may rely solely on analytical procedures, with no substantive procedures performed. (4) The auditor may reduce the amount of substantive procedures performed

(4) The auditor may reduce the amount of substantive procedures performed

On the basis of audit evidence gathered and evaluated, an auditor decides to increase assessed control risk from that originally planned. To achieve an audit risk level (AcAR) that is substantially the same as the planned audit risk level (AAR), the auditor will (1) increase inherent risk. (2) increase materiality levels. (3) decrease substantive testing. (4) decrease planned detection risk

(4) decrease planned detection risk

An auditor uses assessed control risk to (1) evaluate the effectiveness of the entity's internal controls. (2) identify transactions and account balances where inherent risk is at the maximum. (3) indicate whether materiality thresholds for planning and evaluation purposes are sufficiently high. (4) determine the acceptable level of detection risk for financial statement assertions

(4) determine the acceptable level of detection risk for financial statement assertions

In addition to evaluating the frequency of deviations in tests of controls, an auditor should also consider certain qualitative aspects of the deviations. The auditor most likely would give additional consideration to the implications of a deviation if it was (1) the only deviation discovered in the sample. (2) identical to a deviation discovered during the prior year's audit. (3) caused by an employee's misunderstanding of instructions. (4) initially concealed by a forged document

(4) initially concealed by a forged document

An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor (1) minimize the failure to detect errors and fraud. (2) eliminate the risk of nonsampling errors. (3) design more effective audit procedures. (4) measure the sufficiency of the audit evidence by quantifying sampling risk

(4) measure the sufficiency of the audit evidence by quantifying sampling risk

An auditor of a large public company identifies a material weakness in internal control. The auditor (1) will be unable to issue an unqualified opinion of the financial statements. (2) must issue a qualified or disclaimer of opinion on internal control over financial reporting (3) may still be able to issue an unqualified opinion on internal control over financial reporting (4) must issue an adverse opinion on internal control over financial reporting

(4) must issue an adverse opinion on internal control over financial reporting

An auditor who uses statistical sampling for attributes in testing internal controls should reduce the planned reliance on a prescribed control when the (1) sample exception rate plus the allowance for sampling risk equals the tolerable rate. (2) sample exception rate is less than the expected rate of exception used in planning the sample. (3) tolerable rate less the allowance for sampling risk exceeds the sample exception rate. (4) sample exception rate plus the allowance for sampling risk exceeds the tolerable rate.

(4) sample exception rate plus the allowance for sampling risk exceeds the tolerable rate

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

Mr. Murray decides to use stratified sampling. The reason for using stratified sampling rather than unrestricted sampling is to 1) reduce as much as possible the degree of variability in the overall production 2)give every element in the population an equal change of being included in the sample. 3) allow the person selecting the sample to use personal judgement 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

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

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

In what order should the following steps occur? A. Set preliminary judgment of materiality and performance materiality. B. Understand the clients business and industry. C. Perform preliminary analytical procedures. D. Accept the client and perform initial audit planning. A. D, B, C, A B. B, A, C, D C. D, C, B, A D. B, D, A, C

A. D, B, C, A

Which of the following is least likely to be included in the auditor's engagement letter? A. Details about the preliminary audit strategy B. Overview of the objectives of the engagement C. Statement that management is responsible for the financial statements D. Description of the level of assurance obtained when conducting the audit

A. Details about the preliminary audit strategy

In considering materiality for planning purposes, an auditor believes that misstatements aggregating $10,000 will have a material effect on an entity's income statement, but that misstatement will have to aggregate to $20,000 to materially affect the balance sheet. Ordinarily, it is appropriate to design audit procedures that are expected to detect misstatements that aggregate to... A. $15,000 B. $20,000 C. $30,000 D. $10,000

D. $10,000

Which of the following will most likely indicate the existence of related parties? A. An unexplained increase in gross margin B. Writing down obsolete inventory prior to year-end C. Failing to correct deficiencies in the client's internal control D. Borrowing money at a rate significantly below the market rate

D. Borrowing money at a rate significantly below the market rate

The amount(s) set by the auditor at less than the materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole is referred to as... A. performance materiality B. the error range C. the materiality range D. tolerable materiality

A. performance materiality

The risk of incorrect acceptance relate to a) substantive tests and affects audit efficiency b) substantive tests and affects audit effectiveness c) tests of controls and affects audit efficiency d) tests of controls and affects audit effectiveness

b) substantive test and affects audit effectiveness

A computer operator picked up a computer-based data file for sales of the wrong week and processed them through the system a second time. a. Accuracy b. Cut-off c. Completeness d. Occurrence e. Posting & Summarization

b. Cut-off

To support the auditor's initial assessment of control risk below maximum, the auditor performs procedures to determine that internal controls are operating effectively. Which of the following audit procedures is the auditor performing? a. Substantive tests of transactions b. Tests of controls c. Tests of details of balances d. Tests of trends and ratios

b. Test of controls

The primary objective of performing tests of controls is to obtain a. sufficient appropriate audit evidence to afford a reasonable basis for the auditor's opinion, without the need for additional evidence. b. a reasonable degree of assurance that the client's internal controls are operating effectively on a consistent basis throughout the year. c. assurances that informative disclosures in the financial statements are reasonably adequate. d. knowledge and understanding of the client's prescribed procedures and methods.

b. a reasonable degree of assurance that the client's internal controls are operating effectively on a consistent basis throughout the year

Management implements internal controls to ensure that all required footnote disclosures are correctly worded and with the right numbers. Auditors test those controls to provide evidence supporting the ________ presentation. a. rights and obligations and existence b. completeness and accuracy c. completeness and valuation d. occurrence and accuracy

b. completeness and accuracy

Some account balances, such as those for pensions and leases, are the result of complex calculations. The susceptibility to materials misstatements in these types of accounts is defined as a. detection risk. b. inherent risk. c. audit risk. d. sampling risk.

b. inherent risk.

Which of the following situations is not an example of an inherent limitation of internal control? a. A fraud scheme whereby an employee orders personal goods and his supervisor, who is in on the scheme, signs the checks to pay for those goods. b. A programming error in the design of an automated control allows an employee to give himself an unauthorized pay increase. c. A lack of physical controls over the safeguarding of assets allows an employee to steal company assets. d. Management's failure to enforce control policies surrounding access to inventory allows employees to steal assets.

c. A lack of physical controls over the safeguarding of assets allows an employee to steal company assets.

Which of the following statements describes why a properly designed and executed audit may not detect a material misstatement in the financial statements resulting from fraud? a. An audit is designed to provide reasonable assurance of detecting material errors, but there is no similar responsibility concerning fraud. b. The factors considered in assessing control risk indicated an increased risk of intentional misstatements, but only a low risk of unintentional errors in the financial statements. c. Audit procedures that are effective for detecting an unintentional misstatement may be ineffective for an intentional misstatement that is concealed through collusion. d. The auditor did not consider factors influencing audit risk for account balances that have effects pervasive to the financial statements as a whole.

c. Audit procedures that are effective for detecting an unintentional misstatement may be ineffective for an intentional misstatement that is concealed through collusion.

Which of the following procedures would a CPA most likely perform during the planning stage of the audit? a. Evaluate the reasonableness of management's allowance for doubtful accounts. b. Evaluate the significance of uncorrected misstatements. c. Determine areas where there is a higher risk of material misstatement. d. Confirm a sample of accounts receivable

c. Determine areas where there is a higher risk of material misstatement.

Which of the following statements is most correct with respect to separation of duties? a. Employees who have temporary or permanent custody of an asset should account for that asset. b. Employees who authorize transactions should have recording responsibility for these transactions. c. Employees who authorize transactions should not have custody of related assets. d. Employees who open cash receipts should record the amounts in the subsidiary ledgers.

c. Employees who authorize transactions should not have custody of related assets.

Which of the following circumstances most likely would cause the auditor to suspect that there are material misstatements in the entity's financial statements? a. The entity's management places no emphasis on meeting publicized earnings projections. b. Monthly bank reconciliations ordinarily include several large outstanding checks. c. Significant differences between the physical inventory count and the accounting records are not investigated. d. Cash transactions are electronically processed and recorded, leaving no paper audit trail.

c. Significant differences between the physical inventory count and the accounting records are not investigated.

Tests of controls and substantive tests of transactions are an important determinant of the extent of the auditor's use of tests of details of balances. Which of the following is true? a. They are likely to have no impact on the planned tests of details of balances. b. They are likely to eliminate the need for tests of details of balances. c. They are likely to be performed prior to the client's end of the fiscal year. d. They are likely to be used only in the audit of internal control.

c. They are likely to be performed prior to the client's end of the fiscal year.

When designing the audit program and the particular audit tests, the auditor should keep in mind that a. auditing standards require that the tests contained in the audit program must be approved by the PCAOB. b. the tests of controls will not vary depending on assessed control risk. c. analytical procedures performed during substantive testing are generally more focused and more extensive than those done as part of planning. d. the audit program is broken down into two parts-the risk assessment procedures and the tests of details of balances.

c. analytical procedures performed during substantive testing are generally more focused and more extensive than those done as part of planning

Proper segregation of functional responsibilities calls for separation of a. authorization, execution, and payment. b. authorization, payment, and recording c. authorization, recording, and custody. d. authorization, execution, and reporting

c. authorization, recording, and custody

The primary emphasis by auditors is on controls over a. both A and B, because they vary from client to client b. both A and B, because they are equally important c. classes of transactions. d. account balances.

c. classes of transactions.

Inherent risk and control risk differ from planned detection risk in that they... a. arise from the misapplication of auditing procedures b. may be assessed in either quantitative or nonquantitative terms c. exist independently of the financial statement audit d. can be changed at the auditor's discretion

c. exist independently of the financial statement audit

An auditor's decision either to apply analytical procedures as substantive tests or to perform substantive tests of transactions and account balances usually is determined by the a. availability of data aggregated at a high level. b. timing of tests performed after the balance sheet date. c. relative effectiveness and efficiency of the tests. d. auditor's familiarity with industry trends

c. relative effectiveness and efficiency of the tests.

The auditor faces a risk that the audit will not detect material misstatements that occur in the accounting process. To minimize this risk, the auditor relies primarily on a. internal control. b. statistical analysis. c. substantive tests. d. tests of controls

c. substantive tests

A number of factors influence sample size for a substantive test of details of an account balance. All other factors being equal, which would lead to the largest sample size? A) Greater reliance on internal controls B) Greater reliance on analytical procedures C) Smaller expected frequency of misstatements D) Smaller amount of tolerable misstatement

d) smaller amount of tolerable misstatement

The internal control framework used by most U.S. companies is the ________ framework. a. SEC b. FASB c. AICPA d. COSO e. PCAOB

d. COSO

Substantive analytical procedures are most likely to be used to test which of the following accounts? a. Accounts Payable b. Cash c. Treasury Stock d. Interest Income

d. Interest Income

A customer number on a sales invoice was transposed and, as a result, charged to the wrong customer. By the time the error was found, the original customer was no longer in business. a. Completeness b. Posting & Summarization c. Accuracy d. Occurrence e. Cut-Off

d. Occurrence

As lower acceptable levels of both audit risk and materiality are established, the auditor should plan more work on individual accounts to a. find larger misstatements. b. increase the performance materiality in the accounts. c. increase inherent risk in the accounts. d. find smaller misstatements.

d. find smaller misstatements.

The reliance the auditor places on substantive tests in relation to the reliance placed on internal control varies in a relationship that is ordinarily a. parallel. b. equal. c. direct. d. inverse.

d. inverse

Prior to, or in conjunction with, the information-gathering procedures for an audit, audit team members should discuss the potential for material misstatement due to fraud. Which of the following best characterizes the mindset that the audit team should maintain during this discussion? a. presumptive b. judgemental c. criticizing d. questioning

d. questioning

The PCAOB places responsibility for the reliability of internal controls over the financial reporting process on a. the company's board of directors. b. the audit committee of the board of directors. c. the CFO and the independent auditors. d. the management of the company.

d. the management of the company.

The diagram below depicts an auditor's computed upper exception rate (CUER) compared with the tolerable exception rate (TER), and also depicts the true population exception rate compared with the TER. As a result of tests of controls, the auditor assesses control risk too low and thereby decreases substantive testing. This is illustrated by which situation? Auditor's estimate based on samples results: CUER is ___ than TER True State of Population: True exception rate ___ TER

less, exceeds

When approached to perform an audit for the first time, the CPA should make inquiries of the predecessor auditor. This is a necessary procedure because the predecessor may be able to provide the successor with information that will assist the successor in determining whether... A. the predecessor's work should be used. B. the company follows the policy of rotating its auditors. C. in the predecessor's opinion, internal control of the company has been satisfactory D. the engagement should be accepted

D. the engagement should be accepted

An auditor should examine minutes of the board of directors' meetings A. through the date of the financial statements B. at the date of the management letter C. at the date of the engagement letter D. through the date of the audit report

D. through the date of the audit report

As general IT controls weaken, the auditor is most likely to (1) reduce testing of automated application controls done by the computer. (2) increase testing of general IT controls to conclude whether they are operating effectively. (3) expand testing of automated application controls used to reduce control risk to cover greater portions of the fiscal year under audit. (4) ignore obtaining knowledge about the design of general IT controls and whether they have been implemented.

(3) expand testing of automated application controls used to reduce control risk to cover greater portions of the fiscal year under audit

Jefferson, CPA, has identified five significant deficiencies in internal control during the audit of Portico Industries, a nonpublic company. Two of these conditions are considered to be material weaknesses. Which best describes Jefferson's communication requirements? (1) Communicate the two material weaknesses to Portico's management and those charged with governance, but not the three significant deficiencies that are not material weaknesses. (2) Communicate all five significant deficiencies to Portico's management and those charged with governance, distinguishing between material weaknesses and significant deficiencies. (3) Communicate all five significant deficiencies to Portico's management and those charged with governance, but only require a management response with respect to the two material weaknesses. (4) Communicate all five significant deficiencies to Portico's management and those charged with governance, without distinction among the deficiencies

(2) Communicate all five significant deficiencies to Portico's management and those charged with governance, distinguishing between material weaknesses and significant deficiencies

For which of the following tests would an auditor most likely use attributes sampling? (1) Selecting accounts receivable for confirmation of account balances. (2) Inspecting employee time cards for proper approval by supervisors. (3) Making an independent estimate of the amount of a LIFO inventory. (4) Examining invoices in support of the valuation of fixed asset additions.

(2) Inspecting employee time cards for proper approval by supervisors

Which of the following is the auditor least likely to consider when developing the overall audit strategy? (1) Complexity of the company's operations (2) Evaluation of accounts receivable confirmations (3) Preliminary judgment about materiality (4) The economic conditions affecting the industry in which the company operates

(2) evaluation of accounts receivable confirmations

A material weakness in internal control represents a control deficiency that (1) more than remotely adversely affects a company's ability to initiate, authorize, record, process, or report external financial statements reliably. (2) results in a reasonable possibility that internal control will not prevent or detect material financial statement misstatements. (3) exists because a necessary control is missing or not properly designed. (4) reduces the efficiency and effectiveness of the entity's operations

(2) results in a reasonable possibility that internal control will not prevent or detect material financial statement misstatements

The auditor's tests of controls revealed that required approvals of cash disbursements were absent for a large number of sample transactions examined. Which of the following is least likely to be the appropriate auditor response? (1) The auditor will communicate the deficiency to those charged with governance. (2) The auditor will increase the planned detection risk. (3) The auditor will not select more sample items to audit. (4) The auditor will perform more extensive substantive tests surrounding cash disbursements.

(2) the auditor will increase the planned detection risk

Which of the following best illustrates the concept of sampling risk? (1) The documents related to the chosen sample may not be available to the auditor for inspection. (2) An auditor may fail to recognize errors in the documents from the sample. (3) A randomly chosen sample may not be representative of the population as a whole for the characteristic of interest. (4) An auditor may select audit procedures that are not appropriate to achieve the specific objective

(3) A randomly chosen sample may not be representative of the population as a whole for the characteristic of interest.

Which of the following is an example of an operation deficiency in internal control? (1) The company does not have a code of conduct for employees to consider. (2) The cashier has online ability to post write-offs to accounts receivable accounts (3) Clerks who conduct monthly reconciliation of intercompany accounts do not understand the nature of misstatements that could occur in those accounts. (4) Management does not have a process to identify and assess risks on a recurring basis.

(3) Clerks who conduct monthly reconciliation of intercompany accounts do not understand the nature of misstatements that could occur in those accounts.

In the financial statement audit of a nonpublic company, the auditor decides to perform tests of the controls related to the occurrence of sales transactions. Which of the following best explains why the auditor decided to test these controls? (1) In a nonissuer financial statement audit, the auditor is required to test the operating effectiveness of internal controls. (2) The auditor wants to obtain an understanding of the design of the internal controls. (3) Control risk is assessed at below the maximum. (4) The auditor wants to obtain an understanding of the implementation of the internal controls.

(3) Control risk is assessed at below the maximum

Which of the following is an example of an application control? (1) The client uses access security software to limit access to each of the accounting applications. (2) Employees are assigned a user ID and password that must be changed every quarter. (3) The sales system automatically computes the total sale amount and posts the total to the sales journal master file. (4) Systems programmers are restricted from doing applications programming functions.

(3) The sales system automatically computes the total sale amount and posts the total to the sales journal master file

The upper precision limit (CUER) in statistical sampling is (1) the percentage of items in a sample that possess a particular attribute. (2) the percentage of items in a population that possess a particular attribute. (3) a statistical measure, at a specified confidence level, of the maximum rate of occurrence of an attribute. (4) the maximum rate of exception that the auditor would be willing to accept in the population without altering the planned reliance on the attribute.

(3) a statistical measure, at a specified confidence level, of the maximum rate of occurrence of an attribute

Before processing, the system validates the sequence of items to identify any breaks in sequence of input documents. This automated control is primarily designed to ensure the (1) accuracy of input. (2) authorization of data entry. (3) completeness of input. (4) restriction of duplicate entries.

(3) completeness of input

If all other factors specified in a sampling plan remain constant, changing the ARO from 5% to 10% will cause the required sample size to (1) increase. (2) remain the same. (3) decrease. (4) become indeterminate.

(3) decrease

In a 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

Which of the following sample planning factors will influence the sample size for a test of details of balances for a specific account? (Expected amount of misstatements, measure of tolerable misstatements) 1) No, no 2) yes, yes 3) no, yes 4) yes, no

2) yes, yes

How would increases in tolerable misstatement and assessed level of control risk affect the sample size in substantive tests of details? (increase in tolerable misstatement, increase in assessed level of control risk) 1) increase sample size, increase sample size 2) increase, decrease 3) decrease, increase 4) decrease decrease

3) decrease, increase

While performing a substantive test of details during an audit, the auditor determined that the sample results supported the conclusion that the recorded account balance was materially misstated. It was, in fact, not materially misstated. 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

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 of 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

Which of the following circumstances would most likely pose the greatest risk in accepting a new audit engagement? A. staff will need to be rescheduled to cover this new client B. there will be a client-imposed scope limitation C. the firm will have to hire a specialist in one audit area D. the client's financial reporting system has been in place for 10 years

B. there will be a client-imposed scope limitation

A successor auditor's inquiries of the predecessor auditor should include questions regarding... A. the number of engagement personnel the predecessor assigned to the engagement B. the assessment of the objectivity of the client's internal audit function C. communications to management and those charged with governance regarding significant deficiencies in internal control D. the response rate for confirmation of accounts receivable

C. communications to management and those charged with governance regarding significant deficiencies in internal control

Which of the following procedures would a CPA least likely perform during the planning stage of the audit? A. determine the timing of testing B. take a tour of the client's facilities C. perform inquiries outside legal counsel regarding pending litigation D. determine the effect of information technology on the audit

C. perform inquiries outside legal counsel regarding pending litigation

Auditing standards _____________ that the basis used to determine the preliminary judgment about materiality be documented in the audit files. A. permit B. do not allow C. require D. strongly encourage

C. require

A client decides not to record an auditor's proposed adjustments that collectively are not material and wants the auditor to issue the report based on the unadjusted numbers. Which of the following statements is correct regarding the financial statement presentation? A. The financial statements contain unadjusted misstatements that will result in a qualified opinion. B. The financial statements do not conform with GAAP and therefore the auditor should withdraw from the engagement. C. The financial statements are free from material misstatement, but disclosure of the proposed adjustment is required in the notes to the financial statements. D. The financial statements are free from material misstatement, and no disclosure is required in the notes to the financial statements.

D. The financial statements are free form material misstatement, and no disclosure is required in the notes to the financial statements.

The auditor determines that the Crestfalls Company occupies the 3rd floor of an office building for which it pays no rent. The most likely explanation is... A. Crestfalls is likely committing fraud B. The landlord delayed rent to pay less IRS tax C. The landlord had weak internal controls over rent invoices D. The landlord is a related party to Crestfalls

D. The landlord is a related party to Crestfalls

Analytical procedures used in planning an audit should focus on identifying A. material weakness in internal control B. the predictability of financial data from individual transactions C. the various assertions that are embodied in the financial statements D. areas that may represent specific risks relevant to the audit

D. areas that may represent specific risks relevant to the audit

A successor would most likely make specific inquiries of the predecessor auditor regarding... A. specialized accounting principles of the client's industry B. the competency of the client's internal audit C. the uncertainty inherent in applying sampling procedures D. disagreements with management as to auditing procedures

D. disagreements with management as to auditing procedures

Which one of the following statements is correct concerning the concept of materiality? A. materiality is determined by reference to guidelines established by the AICPA B. materiality depends only on the dollar amount of an item relative to other items in the financial statements C. materiality depends on the nature of an item rather than the dollar amount D. materiality is a matter of professional judgement

D. materiality is a matter of professional judgement

The sample size of a test of controls varies inversely with: Expected population exception rate ___? Tolerable exception rate ___?

No, Yes

Which of the following factors are included in an entity's control environment? Participation of Those Charged With Governance ___? Integrity and Ethical Values ___? Organizational Structure ___ ?

Yes, Yes, Yes

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. a) I only b) II only c) Both I and II d) Neither I nor II

a) I only

A nonexistent part number was included in the description of goods on a shipping document. Therefore, no charge was made for those goods. a. Completeness b. Posting & Summarization c. Cut-off d. Occurrence e. Accuracy

a. Completeness

After making a preliminary assessment of the risk of material misstatement during planning and beginning to apply audit procedures, an auditor determines that this risk is actually higher than anticipated. Which would be the most likely effect of this finding on the auditor's desired level of detection risk and the overall level of audit risk, as compared to the levels originally planned? Auditor's Desired Level------------- Overall Level of Detection Risk --------------------of Audit Risk a. Decrease ----------------------------Same b. Increase -----------------------------Same c. Same-------------------------------- Higher d. Decrease ----------------------------Lower

a. Decrease ----------------------------Same

Which of the following is not a primary consideration when assessing inherent risk? a. Effectiveness of internal controls b. Existence of related parties c. Susceptibility to misappropriation of assets d. Nature of client's business

a. Effectiveness of internal controls

A conceptually logical approach to the auditor's evaluation of internal control consists of the following four steps: I. Determining the internal controls that should prevent or detect errors and fraud. II. Identifying control deficiencies to determine their effect on the nature, timing, or extent of auditing procedures to be applied and suggestions to be made to the client. III. Determining whether the necessary internal control procedures are prescribed and are being followed satisfactorily. IV. Considering the types of errors and fraud that can occur. a. IV, I, III, and II b. III, IV, I, and II c. I, III, IV, and II d. I, II, III, and IV

a. IV, I, III, and II

Dan, CPA, has been engaged to audit Modern Home, a manufacturing company that specializes in furniture. Which of the following matters related to the year under audit would most likely result in an increase of inherent risk? a. Modern Home recently engaged in a complex derivative transaction. b. The furniture industry has experienced an overall increase in demand. c. Modern Home experienced an increase in working capital. d. Modern Home purchased expensive new equipment in the current year.

a. Modern Home recently engaged in a complex derivative transaction.

A customer order was filled and shipped to a former customer that had already filed bankruptcy. a. Occurrence b. Cut-off c. Accuracy d. Posting & Summarization e. Completeness

a. Occurrence

Which of the following does not increase the need for sufficient appropriate audit evidence? a. a decrease in the assessed inherent risk b. an increase in the assessed control risk c. a lower acceptable level of detection risk d. a lower acceptable audit risk

a. a decrease in the assessed inherent risk

As the acceptable level of detection risk decreases, the auditor may do one or more of the following except change the... a. assurances provided by audit procedures to a lower level. b. nature of audit procedures to more effective procedures. c. extent of audit procedures, by perhaps using larger sample sizes. d. timing of audit procedures, by perhaps performing them at year-end rather than an interim date.

a. assurance provided by audit procedures to a lower level.

Based on evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor could... a. decrease detection risk b. increase materiality levels c. decrease substantive testing d. increase inherent risk

a. decrease detection risk

The risk of material misstatement refers to... a. the combination of inherent risk and control risk. b. inherent risk. c. inherent risk and audit risk. d. control risk and acceptable audit risk.

a. the combination of inherent risk and control risk.