Auditing Exam 4: Chapter 7,8 Mod E
A client's purchasing system ends with the recording of a liability and its eventual payment. Which of the following best describes auditors' primary concern with respect to liabilities resulting from the purchasing system?
Accounts payable are not materially understated.
_____considering information about the client and its environment, the auditors must assess the risks of material misstatement related to assertions about inventory.
After
While performing an audit of accounts payable, Clayton, CPA, is using variables sampling to determine the audited value of the account based on selected purchase orders. Which of the following options is most likely to reduce the necessary sample size?
An increase in the necessary risk of incorrect acceptance
Are all credit sales approved by the credit department prior to shipment?
Are all credit sales approved by the credit department prior to shipment?
Select the description that best illustrates sampling risk.
Choosing a sample which has proportionately more errors than the population
Trace debits arising from accounts payable transactions for proper account.
Classification
________ needs to be assured in order to recognize revenue.
Collectibility
Which of the following functional responsibilities would not typically relate to salaried employees?
Collecting timekeeping data
Which of the following procedures would an auditor most likely perform in searching for unrecorded payables?
Compare cash payments occurring after the balance sheet date with the accounts payable trial balance.
Which of the following would detect the understatement of a purchase discount?
Compare purchase disbursement records and checks with invoice terms
Alpha Brewery Corporation recorded sales through January 4, 2005, dating them December 31, 2004. This situation is an example of a violation of which of the following assertions?
Completeness
Are prenumbered bill of lading prepared in the shipping department?
Completeness
Are sales invoice blanks prenumbered?
Completeness
Prenumbering invoices, shipping documents, and sales orders is a practice to achieve which of the following assertions?
Completeness
Scan a sample of vouchers for missing numbers.
Completeness
For which of the following accounts would the matching concept be the most appropriate?
Cost of Goods Sold
Does the accounting manual contain instructions to date sales invoices on the shipment date?
Cutoff
Which of the following would be an indicator of potential fraud?
Photocopies of invoices in the voucher file Vendor invoices in numerical order Vendors with only post office box addresses (All of these indicate potential fraud.)
Which of the following accounts would most likely be audited in connection with a related balance sheet account?
Property Tax Expense
Which of the following accounts is not normally part of the revenue and collection cycle?
Purchases Returns and Allowances
An auditor is most likely to use statistical sampling under which of the following situations?
Random numbers can be associated with population items.
Which of the following is not an advantage of statistical sampling?
Statistical sampling deploys audit procedures that allow auditors to more effectively evaluate evidence.
Which of the following is not true with respect to the use of statistical and nonstatistical sampling?
Statistical sampling does not require auditors to utilize extensive judgment during the sampling process.
Which of the following controls should prevent an invoice for the purchase of merchandise from being paid twice?
The check signer reviews and cancels the voucher packets.
Which of the following is not a valid reason for an auditor deciding not to send accounts receivable confirmations?
The client requests alternative procedures be performed instead.
What is the primary drawback with respect to the use of sampling?
The conclusion reached by examining a sample of items may differ from the conclusion that would be reached if the entire population were examined.
Which of the following statements is correct concerning the use of negative confirmation requests?
Unreturned negative confirmation requests rarely provide significant explicit evidence.
Cash disbursements are authorized by
a complete voucher package.
A voucher would typically contain
a purchase requisition, purchase order, vendor invoice, receiving report, and check copy.
Side _________ can substantially alter the terms of a sale.
agreements
The upper limit on misstatement is
an adjustment of the sample estimate of misstatement to reflect the desired level of sampling risk.
A voucher typically does not have attached to it a copy of which of the following documents?
check register.
The primary consideration when planning whether to send confirmations of accounts receivable before the balance sheet date is the
client's internal control over transactions affecting receivables.
Property tax payments are typically ______ in number.
few
Management may have fraudulently overstated revenue by making __________ journal entries.
inappropriate
After obtaining an understanding of the client and its environment, auditors must identify the ______ risks related to the accounts.
inherent
The typical functions of the personnel and payroll cycle would not include
labor relations.
R. Budd, the purchasing agent of Lake Hardware Wholesalers, has a relative who owns a retail hardware store. Budd arranged for hardware to be delivered by manufacturers to the retail store on a cash-on-delivery (COD) basis, thereby enabling his relative to buy at Lake's wholesale prices. Budd was probably able to accomplish this because of Lake's poor internal control over
purchase orders.
Many instances of misstatement are based on the inappropriate recognition of ______.
revenue
The sum of customers' unpaid balances that is compared to the general ledger balance comes from
the accounts receivable trial balance.
Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because
the auditor cannot infer that all nonrespondents have verified their account information.
Revenues are normally considered to have been earned when
the company has substantially accomplished what it must to be entitled to the benefits.
Auditors use attributes sampling in assessing the effectiveness of a client's internal controls to determine
the extent to which internal controls are operating as intended to prevent or detect misstatements.
A liability for a long-term purchase contract should generally be recognized when
the goods are received.
Scanning sales invoices for missing numbers in the sequence would be an activity intended to satisfy what assertion?
Completeness
Select a sample of receiving reports and trace to inventory record posting of additions.
Completeness
Which of the following client control activities is not usually performed in the vouchers payable (accounts payable) department?
Controlling the mailing of the check and remittance advice
Which of the following is the best reason for prenumbering in sequence such documents as sales orders, shipping documents, and sales invoices?
Enables personnel to check the numerical sequence for missing documents and unrecorded transactions
Which of the following would the auditor NOT be testing for by examining lease agreements?
Estimates
Which of the following steps in the sampling process is ordinarily performed last?
Evaluate the sample results
Which of the following activities is least likely to result in the audit team's exposure to sampling risk?
Evaluating confirmations returned from the client's customers and following up on any discrepancies noted by the customers
Which of the following is the best audit procedure for determining the existence of unrecorded liabilities?
Examine a sample of cash disbursements in the period subsequent to year-end.
Which of the following is not an alternative procedure when a confirmation is not received?
Examine payments received before the end of the period.
Confirmations of accounts receivable provide the most evidence for which of the following assertions?
Existence
Which of the following characteristics of substantive procedures is most closely associated with the use of sampling?
Extent of further audit procedures
Which of the following would not overstate current-period net income?
Failing to record a check paying an item in vouchers payable
Which of the following would be the best protection for a company that wishes to prevent the "lapping" of trade accounts receivable?
Have customers send payments directly to the company's depository bank.
Which of the following situations represents an internal control weakness in the payroll department?
Paychecks are distributed by the employees' immediate supervisor.
Which of the following expense accounts would not normally be tested by listing all debits and examining any significant items?
Payroll Expense
Which of the following departments most likely would approve changes in pay rates and deductions from employee salaries?
Personnel
A furniture company ordered 84 tables from a supplier. The supplier accidentally sent only 48 tables, but the receiving department at the furniture company accepted the tables. The invoice was eventually received but was for the 84 tables ordered. The furniture company paid the entire amount. Which of the following controls would have been least likely to have prevented this erroneous payment?
Personnel in the furniture company's purchasing department should compare the purchase requisition to the purchase order.
The numeric distance from the estimated population value in which the true (but unknown) population value may lie with a given probability.
Precision
You are considering the use of sampling to determine the average age of persons attending a movie at different times during the day. Assume that you have controlled sampling risk to 10 percent and estimate that the average age is 43 years with an associated precision of 10 years. A. Form a precision interval based on your sampling application. (Enter the lower bound and the upper bound of the precision interval.)
Precision interval 33 years to 53 years Explanation: A. Precision interval = 43 years + or - 10 years Precision interval = 33 years to 53 years Based on the confidence level and precision interval, there is a 90 percent probability that the true average age of moviegoers is between 33 years and 53 years.
Which of the following controls is designed to meet the completeness assertion?
Prenumbering invoices, shipping documents, and sales orders.
In the revenue and collection cycle, the order of the activities in the cycle is best illustrated by
Processing customer orders, granting credit, delivering goods, and billing customers.
What evidence is appropriate to determine whether recorded purchase transactions are valid and the vendors charged the correct prices?
Receiving reports and purchase orders
When evaluating the effectiveness of a client's internal controls with a tolerable rate of deviation of 5 percent, the audit team determined the upper limit rate of deviation to be 4 percent. Based on this information, which of the following decisions would the audit team most likely make?
Rely on internal controls as planned.
Which of the following accounts would most likely be reviewed by the auditor to gain reasonable assurance that additions to the equipment account are not understated?
Repairs and maintenance expense
Which of the following audit procedures is best for identifying unrecorded accounts payable?
Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period
An audit plan for accounts payable would not include which of the following procedures?
Reviewing cash receipts for period after year-end.
An audit plan for accounts payable would not include which of the following procedures?
Reviewing cash receipts for the period after year end
Which of the following sampling risks is associated with the use of variables sampling?
Risk of assessing control risk too high: No; Risk of incorrect rejection: Yes
The audit team decided to reduce planned reliance on internal controls based on the results of attributes sampling. However, the actual rate of deviation in the population is lower than the tolerable rate of deviation. Which type of risk and loss is the audit team exposed to?
Risk of assessing control risk too high; efficiency loss
Which of the following does not have a direct relationship with sample size?
Risk of assessing control risk too low
Which of the following risks expose the auditor to effectiveness losses?
Risk of assessing control risk too low, risk of incorrect acceptance
The risk that may result in the auditor issuing an unmodified opinion on financial statements that are materially misstated is the:
Risk of incorrect acceptance.
Which of the following accounts does not appear in the acquisition and expenditure cycle?
Sales Returns
To conceal defalcations involving receivables, a dishonest bookkeeper might charge which of the following accounts?
Sales returns
Which of the following situations is true with respect to sampling?
Sampling is more appropriate when the number of items comprising the population is relatively large.
Which of the following characteristics is appropriately related to the process of sampling?
Sampling requires various judgments on the part of the individual.
Which of the following procedures is least likely to be performed before the balance-sheet date?
Search for unrecorded liabilities
Which of the following appropriately describes the effect of sample size on sampling risk?
Selecting a smaller sample increases sampling risk.
Which of the following practices is not used to control sampling risk?
Selecting all items in the population for examination.
A client has a separate sales group for its largest "preferred" customers. This is a select group of customers that normally make purchases in excess of $250,000 and often have accounts receivable balances in excess of $1 million. Which of the following audit procedures would the auditor most likely perform?
Send out positive confirmations on a large sample of these customers.
Which of the following internal control activities most likely would deter lapping of collections from customers?
Separation of duties between receiving cash and posting the accounts receivable ledger
In which of the following types of sampling applications is the auditor exposed to sampling risk?
Statistical sampling: Yes; Nonstatistical sampling: Yes
Nonsampling risk can occur in which of the following types of sampling plans?
Statistical sampling: Yes; Nonstatistical sampling: Yes
Which of the following types of sampling applications can appropriately be used under generally accepted auditing standards?
Statistical sampling: Yes; Nonstatistical sampling: Yes
Which of the following would be an example of an action that exposes an auditor to nonsampling risk?
The audit team uses an inappropriate type of audit procedure to evaluate sample evidence.
Which of the following is not true with respect to the risk of incorrect acceptance?
The auditor can measure the exposure to this risk when using statistical sampling applications.
Why does the risk of incorrect rejection result in an efficiency loss to the auditor?
The auditor typically expands the sample to examine additional components or transactions of the account balance.
Which of the following is the most likely outcome when the upper limit rate of deviation is less than the tolerable rate of deviation?
The auditor would be exposed to the risk of assessing control risk too low.
Which of the following is the least likely outcome when the upper limit on misstatement exceeds the tolerable misstatement?
The auditor would conclude that the account balance is fairly stated.
While performing interim audit procedures of accounts receivable, numerous unexpected errors are found resulting in a change of risk assessment. Which of the following audit responses would be most appropriate?
Use more experienced audit team members to perform year-end testing.
Which of the following statements is true about haphazard selection?
Under haphazard selection, bias in selecting items (either conscious or unconscious) often exists.
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?
Understating the sales journal
Auditors sometimes use comparisons of ratios as audit evidence. An unexplained decrease in the ratio of gross profit to sales may suggest which of the following possibilities?
Unrecorded sales
Which of the following most likely would be detected by an auditor's review of a client's sales cutoff?
Unrecorded sales at year-end
Which of the following selection methods is characterized by identifying a series of random numbers and "matching" those numbers to items within the population?
Unrestricted random selection.
Which of the following does not affect the sample size in an attributes sampling application?
Upper limit rate of deviation
Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities?
Vouch a sample of cash disbursements recorded just after year-end to receiving reports and vendor invoices.
When considering the results of an attributes sampling application, the auditor compares which of the following two measures?
Upper limit rate of deviation; tolerable rate of deviation
Favorite Soda Company distributes beverages in the Portland, Oregon area. Which of the following would be the test to determine that shipments made were actual sales?
Vouch bills of lading to the customer order documents.
Testing the reconciliation for accounts receivable to the general ledger ensures that the software is programmed _________.
correctly
Overstatement may occur when sales for the next period are recorded in the _______ period.
current
The confirmation of customers' accounts receivable rarely provides reliable evidence about the completeness assertion because
customers may not be inclined to report understatement errors in their accounts.
One way to avoid misstatement of revenue is to ensure the client has proper ________.
cutoff policies
An auditor most likely would assess control risk at the maximum if the payroll department supervisor is responsible for
distribute payroll checks to all employees.
When an audit team does not receive a response on a positive accounts receivable confirmation, auditors should do all of the following except
do nothing for immaterial balances.
Tests performed by auditors that examine evidence for both control attributes and monetary misstatements are known as
dual purpose tests.
When auditors find unrecorded liabilities, before adjusting they must consider _______.
materiality
An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor to
measure the sufficiency of the evidence gathered.
Which of the following would not typically be a specific relevant assertion about fixed asset accounts?
net carrying book values in the accounts are reflected at current market values.
An auditor should normally perform alternative procedures to substantiate the existence of accounts receivable when
no reply to a positive confirmation request is received.
In determining the adequacy of the allowance for uncollectible accounts, the least valuable evidence would be obtained from
no reply to negative confirmations.
An auditor wishes to perform tests of controls on a client's purchasing procedures. If the control activities leave no audit trail of documentary evidence, the auditor most likely will test the procedures by
observation and inquiry.
In determining the effectiveness of an entity's policies and procedures relating to the occurrence assertion for payroll transactions, auditors most likely would inquire about and
observe the separation of duties concerning personnel responsibilities and payroll disbursement.
Inventories with a high risk of ______ may be warranted as a significant risk.
obsolescence
The assertion that auditors will probably emphasize in the revenue and collection cycle is
occurrence.
An auditor most likely would extend substantive tests of payroll when
overpayments are discovered in performing tests of controls.
Improperly capitalizing an expense item results in
overstatement of profit in the current year and understatement in future years.
The probability that an auditor's conclusion based on a sample might be different from the conclusion based on the entire population identifies the concept of
sampling risk.
To test the transaction assertion of occurrence in the area of payroll, the auditor most likely would
select a sample of payroll register entries and vouch hours worked to clock time cards.
A weakness in internal control over recording retirements of equipment may cause an auditor to
select certain items of equipment from the accounting records and locate them in the plant.
The auditor decided to test accounts payable by sending open-ended (blank) confirmations to selected vendors. The auditor's best approach in selecting the vendor accounts to confirm is to
select vendor accounts based on the number of purchases from vendors during the year.
When accounts receivables are confirmed at an interim date, auditors need not be concerned with
sending negative confirmations to all the customers as of the year-end date.
When an audit team traces a sample of shipping documents to the related sales invoice copies, they are trying to find relevant evidence that
shipments to customers were invoiced.
Tracing shipping documents to prenumbered sales invoices provides evidence that
shipments to customers were properly invoiced.
Auditors need to consider _____ terms for determining ownership and whether a liability should be recorded.
shipping
Small Corporation uses a Wages Clearing Account for its payroll disbursements. At the end of February, a reasonably large debit balance remained in this account. The most likely reason for this is that
some labor cost had not been properly classified in the expense accounts.
To provide assurance that each voucher is submitted and paid only once, an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is
stamped "paid" by the check signer.
All of the following are advantages of statistical sampling except
statistical sampling eliminates the auditors' exposure to nonsampling risk.
The review phase of the transaction flow in the acquisition and expenditure cycle does not include
substantive procedures.
The method of sample selection in which a random starting point is selected and a fixed number of items are bypassed prior to the next item being selected is referred to as
systematic random selection.
Elm Tree Inc. has a December 31 year end. On October 15, the auditor evaluated and tested Elm Tree's internal control procedures over the sales recording process and finds the controls to be effective. At a minimum, the auditor's year-end procedures for testing internal control procedures must include
tests of the client's internal control procedures from October 15 through the year end.
All of the following are correct regarding variables sampling, except
the risk of incorrect rejection is of more concern to auditors than the risk of incorrect acceptance.
Custody of inventory is transferred to the shipping area upon authorization of
the shipping order.
Write-offs of doubtful accounts should be approved by
the treasurer.
A disadvantage of using a systematic random selection procedure is that
this type of procedure requires that the population be arranged in a random order.
The maximum rate of deviation that may exist in the operation of a control policy or procedure before the auditors would reduce reliance on internal control is referred to as
tolerable rate of deviation.
When an account receivable is considered uncollectible, the person who generally authorizes the write-off is the client's
treasurer.
In performing variables sampling, the auditor will conclude that the account balance is not materially misstated if the ____ is less than or equal to ____.
upper limit on misstatement; tolerable misstatement
In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivables to support management's financial statement assertion of
valuation or allocation.
The type of sampling most frequently used by the auditors during their substantive procedures is referred to as
variables sampling.
When goods are received, the receiving clerk should match the goods with the
vendor's shipping document and the purchase order.
When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely would be
vendors with whom the entity has previously done business.
The usual source for journal entries posted to the general ledger to record the purchase of inventory is
vouchers payable journal from the accounts payable department.
The precision interval has a ____ percent probability of including the ____.
1 minus sampling risk; true population value
Place the following steps in the sampling process in the order in which they are performed. 1 = Measure sample items 2 = Select sample items 3 = Define the population
3, 2, 1
Failure to record a liability generally results in
an overstatement of profit.
An auditor most likely would perform substantive procedures on payroll transactions and balances when
analytical procedures indicate unusual fluctuations in recurring payroll entries.
Receivables that have been sold should not remain as a(n) _____ on the company's books.
asset
A CPA learns that his client has paid a vendor twice for the same shipment—once based upon the original invoice and once based upon the monthly statement sent from the vendor. A control procedure that should have prevented this duplicate payment is
attachment of the receiving report to the disbursement report.
The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the
authorization of transactions from the custody of related assets.
An audit team most likely would assess control risk at the maximum if the payroll department supervisor is responsible for
authorizing payroll rate changes for all employees.
If the auditor obtains sufficient competent evidence on the client's accounts receivable balance by alternative procedures because it is impractical to confirm accounts receivable, the auditor's opinion should be unqualified and could be expected to
avoid mentioning the alternative procedures.
A small business owner can best offset the lack of separation of duties by
being actively involved in the accounting process.
A sample selection method in which a series of contiguous items are selected from the population is referred to as
block selection.
Auditors test effectiveness of controls to ensure they can justify their planned levels of ______ risk.
control
After the auditor has defined the population to be examined, the next step would be to
determine the sample size.
Which of the following responses to an accounts receivable confirmation at December 31 would cause an audit team the most concern?
"These goods were returned for credit on November 15th."
A person who has access to both cash and accounts receivable records may be able to take cash receipts by
A lapping operation.
In which of the following circumstances would the use of the negative form of accounts receivable confirmation most likely be justified?
A small number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.
The positive form of confirmation is best used when
Account balances are relatively large.
When confirming accounts payable, emphasis should be put on what kind of accounts?
Accounts with small or zero balances
Are invoice quantities compared to shipped quantities?
Accuracy
Are periodic sales data reported directly to general ledger accounting independent of accounts receivable accounting?
Accuracy
Are sales prices and terms based on approved standards?
Accuracy
Are summary journal entries approved before posting?
Accuracy
Test a sample of cash disbursement voucher documents for accurate mathematics.
Accuracy
The control activity "credit sales approved by credit department" is directed toward which transaction assertion?
Accuracy
Trace a sample of voucher debits to general and subsidiary ledger accounts.
Accuracy
If a golf professional is interested in determining whether a golf ball can be hit over 300 yards, which of the following relationships between the adjusted sample estimate of distance and the actual distance would represent sampling risk?
Adjusted estimate = 310 yards, Actual = 295 yards
To determine whether sales transactions have been recorded in the proper accounting period, the auditor performs cutoff tests. Which of the following best describes the overall approach used when performing cutoff tests?
Analyze transactions occurring within a few days before and after year-end.
An internal control questionnaire for payroll processing occurrence assertion would not include which of the following questions?
Are all wage rates determined by contract or approved by a personnel officer?
The internal control questionnaire for receipt of purchases completeness objective would not include which of the following questions?
Are competitive bids received and reviewed for certain items?
An auditor is reviewing a sample of cash disbursements to ensure that the appropriate supporting documents were received prior to payment. Which type of sampling approach would the auditor use to perform this test?
Attributes sampling
Which of the following personnel department procedures reduces the risk of payroll fraud and represents an appropriate responsibility for the department?
Authorizing the addition or deletion of employees from the payroll
If you were interested in estimating each of the following, in which case would you be least likely to use attributes sampling?
Average age of students in a class.
Which of the following would not be included in the supporting documents for a voucher?
Blank check
Selecting the first five sales orders processed each month for examination is an example of which of the following types of selection method?
Block selection
An auditor is determining the appropriate sample size for a variables sampling application. Compared to prior engagements, the auditor concludes that the population variability has increased. In addition, the partner on the engagement is requiring lower levels of the risk of incorrect acceptance than those used in previous audits. What effect will these changes have on the auditor's determination of sample size?
Both of these changes will increase sample size.
In the revenue and collection cycle, the auditor checks the numerical sequence of shipping documents. This procedure is related to which of the following assertions?
Completeness
Which of the following internal control activities most likely would ensure that all billed sales are correctly posted to the accounts receivable ledger?
Daily sales summaries are compared to daily postings to the accounts receivable ledger.
Assume that the audit team wishes to determine the extent to which a particular control policy was functioning as intended. Identifying applications of the control throughout the period under audit would be most closely related to which of the following steps in sampling?
Defining the population
Which of the following components of the audit risk model is most closely associated with variables sampling?
Detection risk
Which of the following sampling activities is not performed during the planning stage of the audit?
Determine the sample size
Which of the following allow the auditor to limit the exposure to sampling risk?
Determining an appropriate sample size: Yes; Performing an appropriate audit procedure: No
In which of the following circumstances would the auditor most likely use variables sampling?
Determining whether the client's accounts receivable balance is correctly recorded
Effective control over the cash payroll function would mandate which of the following?
Each employee should be asked to sign a receipt for wages received.
The permanent reference files (master files) in a personnel and payroll database ordinarily do not include which of the following?
Employee earning record
Which of the following stages of the sampling process does not necessarily differ between statistical and nonstatistical sampling?
Identifying the population.
Which of the following is not correct with respect to sample size?
In a statistical sampling application, the determination of sample size is used to control the auditor's exposure to sampling risk.
An auditor discovers that an account balance believed not to be materially misstated based on an audit sample was materially misstated based on the total population of the account balance. This is an example of which of the following types of sampling risks?
Incorrect acceptance
Which of the following might be detected by auditors' cutoff review and examination of sales journal entries for several days prior to the balance sheet date?
Inflating sales for the year
The financial records of the Movitz Company show that Mr. Dennis owes $4,100 on an account receivable. An independent audit is being carried out and the auditors send a positive confirmation to Mr. Dennis. What is the most likely reason as to why a positive confirmation rather than a negative confirmation was used here?
Inherent risk was particularly high for accounts receivable.
Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests?
Inspect the shipping records documenting the merchandise sold to the debtors.
For which of the following audit tests would an auditor most likely use attributes sampling?
Inspecting purchase orders for proper approval by supervisors
Which of the following is an example of a control activity that satisfies the accuracy control objective for sales invoices?
Invoice quantities are compared to shipment and customer order quantities.
An internal control questionnaire for evaluating the occurrence objective of revenues would not include which of the following questions?
Is customer credit approved before orders are shipped?
Which of the following questions included in an internal control questionnaire would evaluate the valuation objective of revenues?
Is customer credit approved before orders are shipped?
An audit team would most likely examine the detail support for which of the following charges?
Legal expense
Which of the following fraud detection steps could not be performed by CAATs?
Look for photocopies in invoice files.
Which of the following is not a major control risk in the payroll cycle?
Losing employees to competitors
Which of the following would typically result in nonsampling risk?
Making a mistake in recording sample results
Which of the following most closely represents an unrestricted random selection procedure?
Matching items in the population to a series of randomly selected numbers
Which of the following would not typically be a specific relevant assertion about fixed asset accounts?
Net carrying book values in the accounts are reflected at current market values.
Which of the following statements about audit sampling risks is correct?
Nonsampling risk can arise because an auditor failed to recognize misstatements.
Mistakes made in evaluating sample items that were appropriately selected from the population are an example of:
Nonsampling risk.
Which of the following statements best describes nonstatistical sampling?
Nonstatistical sampling does not allow the auditor to measure the exposure to sampling risk.
"All purchase orders are supported by requisitions from proper persons" is a specific example of which management assertion?
Occurrence
"Recorded vouchers (accounts payable entries) in the voucher register (e.g., purchases journal) supported by completed voucher documentation" is a specific example of which management assertion?
Occurrence
Are returned sales credits supported by documentation?
Occurrence
Is access to sales invoice blanks restricted?
Occurrence
Select a sample of open accounts payable and vouch to supporting documents of purchase.
Occurrence
The auditor selects a sample of recorded sales invoices and vouches them to shipping documents. This procedure is related to which of the following assertions?
Occurrence
Vouch a sample of receiving reports to related purchase orders.
Occurrence
An auditor confirms a representative number of open accounts receivable as of December 31 and investigates respondents' exceptions and comments. By this procedure, the auditor would be most likely to learn of which of the following?
One of the cashiers has been covering a personal embezzlement by lapping.
Which of the following actions can be used to control the audit team's exposure to sampling risk?
Option A: Determining an appropriate sample size: Yes; Performing appropriate types of audit procedures: No
When examining the client's internal control, what is the relationship of each of the following with sample size?
Option B: Expected Rate of Deviation: Direct; Risk of Overreliance: Inverse
Which of the following sample selection techniques can be used with statistical sampling applications?
Option D: Block Selection: No; Haphazard Selection: No
Documentation is required during which of the following stages of the sampling process?
Option D: Measuring Sample Items: Yes; Evaluating Sample Results: Yes
Which of the following controls most likely would help ensure that all credit sales transactions of an entity are recorded?
The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.
In which of the following circumstances should sampling be used?
The individual is not concerned with an extremely precise estimate of the attribute being examined.
Which of the following is not a criterion for using a selection method with statistical sampling?
The method specifically identifies each item in the population with a number.
In which of the following situations would the use of sampling be most appropriate?
The need for precise information is less important.
Which of the following is an internal control activity that could prevent a paid disbursement voucher from being presented for payment a second time?
The official who signs the check should compare the check with the voucher and should stamp PAID on the voucher documents.
In a sampling application to determine the average age of employees in management positions, the sample estimate was 50 years, reliability was 80 percent, and precision was 10 years. Which of the following would most likely result from an increase in the desired level of reliability to 90 percent?
The precision interval would be 35 to 65 years.
Why is the auditor more concerned with the risk of assessing control risk too low rather than the risk of assessing control risk too high?
The risk of assessing control risk too low may result in the auditor failing to perform sufficient substantive procedures.
Which of the following situations indicates a potential material weakness in internal control over acquisition and expenditure?
The same person authorizes voucher packages and signs checks.
Which of the following is an example of sampling risk, if an individual is attempting to determine whether the average income in a given neighborhood exceeds $100,000?
The sample results indicate that the average income is $99,000 when it is $110,000.
An auditor using variables sampling to perform substantive procedures concludes that the account balance is misstated. This conclusion is the result of which of the following?
The upper limit on misstatement is greater than the tolerable misstatement.
Why is appropriately defining the population so important in a sampling application?
To enhance the likelihood of obtaining a representative sample and meet the objective of the sampling application
Why is defining the population so important in a sampling application?
To ensure that the results appropriately represent the entire population
Which of the following has a direct relationship with sample size in a variables sampling application?
Tolerable misstatement: No; Expected error: Yes
Which of the following audit procedures is the most effective in testing sales for understatement?
Trace a sample of shipping documents to sales invoices recorded in the sales journal.
An auditor noted that client sales had increased 10 percent for the year. At the same time, cost of goods sold as a percentage of sales had decreased from 45 percent to 40 percent and year-end accounts receivable had increased by 8 percent. The auditor interviewed the sales manager who stated that the increase in sales without a corresponding increase in cost of goods sold was due to a price increase enacted by the company during the year. How would the auditor best test the sales manager's representation?
Vouch vendor invoices to payments made after year-end.
Which of the following internal control activities will most likely prevent the concealment of a cash shortage by improperly writing off a trade account receivable?
Write-offs must be approved by a responsible officer after review of credit department recommendations and supporting evidence.
Revenues are deemed to be earned when the company has ______ what it must do to fulfill its obligation.
accomplished
Specific balance assertions typical of accounts payable would not include
accounts payable are not pledged as collateral.
When auditing the revenue and collection cycle, auditors normally select balances to confirm from the
accounts receivable listing.
Vouching debits from a sample selection of customers' accounts receivable records to supporting sales invoices is an audit procedure designed to obtain evidence about the assertion of
accuracy
In the study of internal control, the auditor uses sampling to compare the ______________ to the ______________.
adjusted estimate of the deviation rate; tolerable rate of deviation
When searching for unrecorded liabilities, the auditors consider transactions recorded _____ year-end.
after
When auditing merchandise inventory at year-end, the auditor performs a purchase cutoff test to obtain evidence that
all goods owned at year-end are included in the inventory balance.
Accountants should be under orders to record sales and accounts receivable when
all supporting documentation of shipping is in order.
Computer controls that might be found in an advanced on-line acquisition and expenditure system would not include
all vendor invoices are prenumbered and the numbers accounted for.
Computer controls that might be found in an advanced online acquisition and expenditure system would not include
all vendor invoices are prenumbered and the numbers accounted for.
An entity's internal control structure requires for every check request that there be an approved voucher, supported by a prenumbered purchase order and a prenumbered receiving report. To determine whether checks are being issued for unauthorized expenditures, an auditor most likely would select items for testing from the population of all
canceled checks.
The SEC requires all of the following for revenue to be recognized except
cash is collected.
When an auditor decides to confirm accounts receivable balances rather than individual invoices, it most likely would be beneficial to include with the confirmations
client-prepared statements of account that show the details of the account balances.
Auditors ordinarily ascertain whether payroll checks are properly endorsed during the audit of
clock cards.
When testing other accrued liabilities, auditors may independently calculate the amount and ______ it to management's estimate.
compare
When auditing liabilities account balances, auditors are most concerned with management' assertion about
completeness
An auditor is planning the testing of the accounts payable balance. The auditor's main concerns should be
completeness and cutoff.
The auditor traces items from the receiving reports to the accounts payable journal in order to satisfy the
completeness assertion.
Tracing a sample of time clock cards to payroll registers (journals) is a procedure designed to obtain evidence about the transaction assertion(s) of
completeness only.
Cutoff tests designed to detect purchases made before the end of the year that have been recorded in the subsequent year most likely would provide assurance about management's assertion of
completeness.
In a test of controls, auditors may trace receiving reports to vouchers recorded in the voucher register. This is a test for
completeness.
Accounts payable _______ can be mailed to vendors from whom substantial purchases have been made.
confirmations
Auditors must confirm that the ____________ of property, plant, and equipment agree with the general ledger.
detail ledgers
Substantive tests of account balances in the payroll cycle are likely to include the following procedures except
detail vouching of payroll expense entries.
A large retail enterprise has established a policy that requires the paymaster to deliver all unclaimed payroll checks to the internal audit department at the end of each payroll distribution day. This policy was most likely adopted to
detect any fictitious employee who may have been placed on the payroll.
An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal. The purpose of this substantive audit procedure most likely was to
determine that purchases were properly recorded.
To be recognized, revenues must also be realized or realizable and
earned
For the copy of the purchase order that goes to the receiving department, it is best to
eave off the quantity of the goods ordered.
Tests to help identify the _____ of controls help to evaluate the client's internal control structure.
effectiveness
An auditor vouched data for a sample of employees in a payroll register to approved clock card data to provide assurance that
employees work the number of hours for which they are paid.
An audit team is auditing sales transactions. One step is to vouch a sample of debit entries from the accounts receivable subsidiary ledger back to the supporting sales invoices. The purpose of this audit procedure is to establish that
entries in the accounts receivable subsidiary ledger were properly invoiced.
Audit documentation often includes a client-prepared, aged trial balance of accounts receivable as of the balance sheet date. The audit team uses this aging primarily to
estimate credit losses.
When auditing PP&E, the auditor's approach is generally to
examine evidence supporting additions during the year.
In the audit of accounts receivable, the most important emphasis should be on the
existence assertion.
Confirmation of individual accounts receivable balances directly with debtors will, of itself, normally provide the strongest evidence concerning the
existence of the balances confirmed.
An auditor noted that client sales had increased 10 percent for the year. At the same time, cost of goods sold as a percentage of sales had decreased from 45 percent to 40 percent and year-end accounts receivable had increased by 8 percent. The auditor is most likely concerned about
fictitious sales.
Purchasing and cash disbursements can provide opportunity for ______ by employees.
fraud
A sample selection method in which items are selected in a nonsystematic manner is referred to as
haphazard selection.
The inherent risk that accounts payable may be omitted or otherwise understated typically is
high
Based on the results of attributes sampling, the audit team assessed control risk too low and did not modify the nature, timing, and extent of its further audit procedures to reduce detection risk. This situation would most likely result in a(n)
higher level of audit risk than planned.
Purchase cutoff procedures should be designed to produce evidence of whether merchandise is included in the inventory of the client company if the company
holds legal title to the merchandise.
It is important for the auditor to verify that the controls described by the employees during the auditor's survey of controls over property, plant, and equipment have actually been _____.
implemented
While performing an audit of accounts receivable, Allen, CPA, found that the sample results supported the conclusion that the accounts receivable balance was materially misstated. However, the balance was, in fact, not materially misstated. This situation illustrates the risk of
incorrect rejection.
If the upper limit rate of deviation exceeds the tolerable rate of deviation, the auditor would most likely
increase the planned effectiveness of substantive procedures.
In confirming a client's accounts receivable in prior years, an auditor discovered many differences between recorded account balances and confirmation replies. These differences were resolved and were not misstatements. In defining the sampling unit for the current year's audit, the auditor most likely would choose
individual invoices.
In performing a search for unrecorded retirements of fixed assets, an auditor most likely would
inspect the property ledger and the insurance and tax records, and then tour the client's facilities.
The document that generates recording of a sale is the
invoice.
When verifying debits to the perpetual inventory records of a nonmanufacturing company, auditors would be most interested in examining a sample of purchase
invoices
To test collectibility of receivables, auditors may consider credit ratings for debtors of _____receivables.
large
Auditors may conclude that depreciation charges are too small by noting
large and frequent losses on assets retired.
Income taxes withheld from employees but not yet submitted to the government are considered to be a(n) _______.
liability
When testing customer deposits, auditors typically review a(n) ______ of the individual deposits.
list
Matthew Corp. has changed from a system of recording time worked on clock cards to a computerized payroll system in which employees record time in and out with magnetic cards. The computerized system automatically updates all payroll records. Because of this change,
part of the audit trail is altered.
The sampling unit in a test of controls pertaining to the existence or occurrence of payroll transactions ordinarily is a(n)
payroll register (journal) entry.
The file that contains sales transactions that were initiated in the system but are not yet completed is the
pending order master.
The transactions typically classified in the acquisition and expenditure cycle flow do not include
placing the sales order.
The set of items about which a conclusion is made in a sampling application is referred to as a(n)
population
In sampling, an individual makes a statement about a _____ of interest by examining a _____ (or subset) of items.
population; sample
The composition of Oak and Company's accounts receivable are as follows: Over $250,000 - 5 accounts Between $25,000 and $250,000 - 80 accounts Less than $25,000 - 200 accounts The best confirmation strategy for the auditor is:
positive confirmations on a sample of all 285 accounts.
The auditor maintains control of the mailing and receipt of confirmations by typically performing all of the following except
preparing the confirmation letters.
Vouchers should be stamped PAID to
prevent duplicate payment.
A voucher package is used to
provide a source document for recording the purchase of a good or service.
A customer reply on a positive confirmation says "We dispute the $250 charge. We believe it is excessive." This confirmation
provides evidence of existence.
To gain overall assurance as to the reasonableness of accounts payable, the auditor may consider ________.
ratios
To determine whether accounts payable are complete, auditors perform a test to verify that all merchandise received has been recorded. The population for this test consists of all
receiving reports.
Audit procedures for consignment inventory could include a comparison of the physical inventory with the client's _________.
records
Federal and state governments do not specify the exact _____ to be maintained, but do specify the amounts to be withheld.
records
L. Curtis, a maintenance supervisor, submitted maintenance invoices from a phony repair company and received the checks at a post office box. This should have been prevented by
refusal by the purchasing department to approve the vendor.
Smith Manufacturing Company's accounts receivable clerk has a friend who is also Smith's customer. The accounts receivable clerk, on occasion, has issued fictitious credit memorandums to his friend for goods supposedly returned (these returns did not exist). The most effective control for preventing this activity is to
require receiving reports to support all credit memorandums before they are approved.
The most effective audit procedure for determining the collectability of an account receivable is the
review of the subsequent cash collections.
When the auditor concludes that the account balance is not materially misstated when, in fact, it is materially misstated, the auditor has committed the
risk of incorrect acceptance.
"Bill and hold" refers to an arrangement where
sales are recorded but are not shipped.
Sales are normally recorded on the date of the
sales invoice.
When a sample of customer accounts receivable is selected for vouching debits, auditors will vouch them to
sales invoices with shipping documents.
