Auditing Midterm 2

Eagle Company, a public company, had a computer failure and lost part of its financial data. As a result, the auditor was unable to obtain sufficient audit evidence relating to Eagle's inventory account. Assuming the inventory account is at least material, the auditor would most likely choose either: a. A qualified opinion or a disclaimer of opinion b. A qualified opinion or an adverse opinion c. An unqualified opinion with no explanatory paragraph or an unqualified opinion with and explanatory paragraph d. A qualified opinion with no explanatory paragraph or a qualified opinion with an explanatory paragraph

A A qualified opinion or a disclaimer of opinion

In auditing a public company, Natalie, an auditor for N. M. Neal & Associates, identifies four deficiencies in ICFR. Three of the deficiencies are unlikely to result in financial misstatements that are material. One of the deficiencies is reasonably likely to result in misstatements that are not material but significant. What type of audit report should Natalie issue? a. An unqualified report b. An adverse report c. A disclaimer of opinion d. An exculpatory opinion

A An unqualified report

When the auditor wants to estimate how often an internal control procedure breaks down, the sampling method that should be used is: a. Attribute sampling b. Monetary-unit sampling c. Classical variable sampling d. Judgmental sampling

A Attribute sampling

The risk of incorrect acceptance relates to the: a. Effectiveness of the audit b. Efficiency of the audit c. Planning materiality d. Allowable risk of tolerable misstatement

A Effectiveness of the audit

Under what basis of accounting are the Group Financial Statements of Astra Zeneca PLC prepared? a. In accordance with International Financial Accounting Standards b. In accordance with standards issued by the Financial Accounting Standards Board c. In accordance with auditing standards issued by the Public Company Accounting Oversight Board d. All of the above

A In accordance with International Financial Accounting Standards

In 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. The situation illustrates the risk of a. Incorrect rejection. b. Incorrect acceptance c. Assessing control risk too high d. Assessing control risk too low.

A Incorrect rejection

An auditor includes a separate paragraph in an otherwise unmodified financial statement audit report to emphasize that the entity being reported upon had significant transactions with related parties. The inclusion of this separate paragraph: a. Is appropriate and would not negate the unmodified opinion b. Is considered an "except for" qualification of the opinion c. Violates generally accepted auditing standards of this information is already disclosed in footnotes to the financial statements d. Necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation"

A Is appropriate and would not negate the unmodified opinion

An auditor should perform alternative procedures to substantiate the existence of accounts receivable when a. No reply to a positive confirmation request is received b. No reply to a negative confirmation request is received c. The collectibility of the receivables is in doubt d. Pledging of the receivables is probable

A No reply to a positive confirmation request is received

When dealing with the revenue process, which assertion is likely to be most scrutinized by the auditors? a. Occurrence b. Completeness c. Authorization d. Classification

A Occurrence

What type of audit procedure is the following: "Compare payables turnover to previous years' data"? a. Substantive analytical procedure b. Test of details of transactions c. Test of details of account balance d. Test of controls e. All of the above

A Substantive analytical procedure

Which of the following statements concerning control deficiencies is true? a. The auditor should communicate to management, in writing, all control deficiencies in internal control identified during the audit b. All significant deficiencies are material weaknesses c. All control deficiencies are significant deficiencies d. An auditor must immediately report material weaknesses and significant deficiencies discovered during an audit to the PCAOB

A The auditor should communicate to management, in writing, all control deficiencies in internal control identified during the audit

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

A Understating the sales journal

Which of the following is most likely to be detected by an auditor's review of an entity's sales cutoff? a. Unrecorded sales for the year b. Lapping of year-end accounts receivable c. Excessive sales discounts d. Unauthorized goods returned for credit

A Unrecorded sales for the year

When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely would be a. Vendors whom the entity has previously done business b. Amounts recorded in the accounts payable subsidiary ledger c. Payees of checks drawn in the month after year-end d. Invoices filedi nets entity's open invoice file

A Vendors whom the entity has previously done business

Blank or Zero-Balance Confirmation

A confirmation request on which the recipient fills in the amount or furnishes the information requested

Significant deficiency

A deficiency, or a combination of deficiencies, in ICFR that is less severe than a material weakness yet important enough to merit attention by those responsible for oversight of the entity's financial reporting

Nonresponse

A failure of the confirming party to respond or fully respond to a positive confirmation request or a confirmation request returned undelivered

ICFR

A process designed by, or under the supervision of, the entity's principal executive and principal financial officers, or persons performing similar functions, and effected y the enemy's board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP

Negative Confirmation Request

A request that that confirming party respond directly to the auditor only if the confirming party disagrees with the information provided on the request

Positive confirmation request

A request that the confirming party respond directly to the auditor by providing the requested information or indicating whether the confirming party agrees or disagrees with the information in the request

Walkthrough

A transaction being traced by an auditor from origination through the entity's information system until it is reflected the entity's financial reports. It encompasses the entire process of initiating, authorizing, recording, processing, and reporting individual transactions and controls for each of the significant processes identified

Control Deficiency

A weakness in the design or operation of a control such that management or employees, in the normal course of performing their assigned functions, fail to prevent or detect misstatements on a timely basis

You are auditing Diverse Carbo, a manufacturer of nerve gas for the military, for the year ended September 30. On September 1, one of its manufacturing plants caught fire, releasing nerve gas into the surrounding area. Two thousand people were killed and numerous other paralyzed. The company's legal counsel indicates that the company is liable and that the amount of the liability can be reasonably estimated, but the company refuses to disclose this information in the financial statements

Adverse

Monetary-unit sampling

Attribute-sampling techniques used to estimate the dollar amount of misstatement for a class of transactions or and account balance

A Public Interest Entity (PIE) is known as ___________ in the United States. a. A governmental entity b. A public company c. A company that does not file reports with the SEC d. A regulated company

B A public company

Which of the following is NOT typically included in the sales cycle? a. Allowance for uncollectible accounts b. Cost of goods sold c. None of the above d. Sales returns

B Cost of goods sold

A control deviation caused by an employee performing a control procedure that he or she is not authorized to perform is always considered a: a. Deficiency in design b. Deficiency in operation c. Significant deficiency d. Material Weakness

B Deficiency in operation

According to SAB No. 101 all of the following are required to recognize revenue EXCEPT: a. Persuasive evidence of an arrangement exists b. Delivery of product or rendering of service will occur within 5 business days c. The seller's price to the buyer is fixed or determinable d. Collectability is reasonably assured

B Delivery of product or rendering of service will occur within 5 business days

Smith Corporation has numerous customers. A customer file is maintained and includes a customer record with a name, an address, a credit limit, and an account balance. The auditor wishes to test this file to determine whether credit limits are being exceeded. The best procedure for the auditor to follow would be to: a. Develop test data that would cause some account balances to exceed the credit limit and determine if the system properly detects such situations b. Develop a program to compare credit limits with account balances and print out the details of any account with a balance exceeding its credit limit c. Request a printout of all account balances so that they can be manually checked against credit limits d. Request a printout of a sample of account balances so that they can be individually checked against the respective credit limits

B Develop a program to compare credit limits with account balances and print out the details of any account with a balance exceeding its credit limit

According the Astra Zeneca Annual report reading assignment, who is responsible for internal control over financial reporting? a. Management b. Directors c. External auditors d. Internal Auditors

B Directors

The testing of accounts receivable through the use of confirmations tests primarily which assertion? a. Rights and Obligations b. Existence c. Completeness d. Valuation and allocation

B Existence

In applying a non-statistical approach to attribute sampling, reducing the planned assessed level of control risk generally results in a a. Higher tolerable deviation rate for tests of controls. b. Larger sample size for tests of controls. c. Smaller sample size for tests of controls d. None of the above

B Larger sample size for tests of controls.

When the auditor wants to estimate how much misstatement there is in a client's financial statement account balance, the auditor will likely choose between classical variables sampling and: a. Attribute sampling b. Monetary-unit sampling c. Multi-pronged Pacioli-adjusted sampling d. Cross-variance Prawzimbelburt sampling

B Monetary-unit sampling

As a result of tests of controls, an auditor unknowingly assessed control risk too low and thus mistakenly decreased substantive testing. This assessment most likely occurred because the true deviation rate in the population was a. More than the risk of assessing control risk too low based on the auditor's sample. b. More than the deviation rate in the auditor's sample. c. Less than the risk of assessing control risk too low based on the auditor's sample. d. Less than the deviation rate in the auditor's sample.

B More than the deviation rate in the auditor's sample.

If the financial reporting risks for a location are low and the entity has good entity-level controls, management may rely on which of the following for its assessment? a. Documentation and test controls over specific risks b. Self-assessment processes in conjunction with entity-level controls c. Documentation and test entity-level controls over the entire entity d. Selective control test at that location

B Self-assessment processes in conjunction with entity-level controls

In which of the following situations would an auditor ordinarily issue an unqualified/unmodified financial statement audit opinion with no explanatory (or emphasis-of-matter/other-matter) paragraph? a. The auditor wishes to emphasize that the entity had significant related-party transactions b. The auditor decides to refere to the report of another auditor as a basis, in part, for the auditor's opinion c. The entity issues financial statements that present financial position and results of operations but omits the statement of cash flows d. The auditor has substantial doubt about the entity's ability to continue as a going concern, but the circumstances are fully disclosed in the financial statements

B The auditor decides to refere to the report of another auditor as a basis, in part, for the auditor's opinion

KPMG, Astra Zeneca's auditor, issued which opinion on the Group's financial statements? a. Unqualified b. Unmodified c. Qualified d. KPMG did not state an opinion

B Unmodified

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 a. Existence b. Valuation and allocation c. Completeness d. Rights and obligations

B Valuation and allocation

AnnaLisa, an auditor for N. M. Neal & Associates, is prevented by the management of Lileah Company from auditing controls over inventory, Lileah is a public company. Management explains that controls over inventory were recently implemented by a highly regarded public accounting firm that the entity hired as a consultant and insists that it is a waste of time for AnnaLisa to evaluate these controls. Inventory is a material account, but procedures performed as part of the financial statement audit indicate the account is fairly stated. AnnLisa found no material weaknesses in any other area of the entity's internal control relating to financial reporting. What kind of report should AnnaLisa issue on the effectiveness of Lileah's internal control? a. An unqualified report b. An adverse report c. A disclaimer of opinion d. An exculpatory opinion

C A disclaimer of opinion

In auditing ICFR for a public company, Emily finds that the entity has a significant subsidiary located a foreign country. Emily's accounting firm has no offices in that country, and the entity has thus engaged another reputable firm to conduct the audit of internal control for that subsidiary. The other auditor's report indicates that there are no material weaknesses in the foreign subsidiary's ICFR. What should Emily do? a. Disclaim an opinion because she cannot rely on the opinion of another auditor in dealing with a significant subsidiary b. Accept the other auditor's opinion and express and unqualified opinion, making no reference to the other auditor's report in her audit opinion c. Accept the other auditor's opinion after evaluating the auditor's work and make reference to the other auditor's report in her audit opinion d. Qualify the opinion because she is unable to conduct the testing herself, and this constitutes a significant scope limitation

C Accept the other auditor's opinion after evaluating the auditor's work and make reference to the other auditor's report in her audit opinion

Which of the following controls would most likely be tested during an interim period? a. Controls over nonroutine transactions. b. Controls over the period-end financial reporting process. c. Controls that operate on a continuous basis d. Controls over transactions that involve a high degree of subjectivity

C Controls that operate on a continuous basis

Entity-level controls can have a pervasive effect on the entity's ability to meet the control criteria. Which one of the following is not an entity-level control? a. Controls to monitor results of operations b. Management's risk assessment process c. Controls to monitor the inventory taking process d. The period-end financial reporting process

C Controls to monitor the inventory taking process

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: a. Accuracy b. Occurence c. Cutoff d. Classification

C Cutoff

An advantage of statistical sampling over non statistical sampling is that statistical sampling helps an auditor to: a. Eliminate the risk of nonsampling errors b. Reduce audit risk and materiality to a relatively low level c. Measure the sufficiency of the evidential matter obtained d. Minimize the failure to detect errors and fraud

C Measure the sufficiency of the evidential matter obtained

Purchase cutoff procedures should be designed to test whether all inventory a. Purchased and received before the end of the year was paid for b. Ordered before the end of the year was received c. Purchased and received before the end of the year was recorded d. Owned by the entity is in the possession of the entity at the end of the year

C Purchased and received before the end of the year was recorded

If an auditor encounters a significant scope limitation in conducting an audit, she or he appropriately can choose between which of the following possible response pairs? a. Disclaimer or adverse, depending on materiality b. Unqualified or adverse, depending on materiality c. Qualified or disclaimer, depending on materiality d. Qualified or adverse, depending on materiality

C Qualified or disclaimer, depending on materiality

To determine whether accounts payable are complete, an auditor performs a test to verify that al merchandise received is recorded. The population of documents for this test consists of all a. Vendor invoices b. Purchase orders c. Receiving reports d. Canceled checks

C Receiving reports

Which of the following procedure is least likely to be performed before the balance sheet date? a. Test of internal control over cash b. Confirmation of receivables c. Search for unrecorded liabilities d. Observation of inventory

C Search for unrecorded liabilities

Which of the following internal controls would be most likely to deter the lapping of collections from customers? a. Independent internal verification of dates of entry in the cash receipts journal with dates of daily cash summaries b. Authorization of write-offs of uncollectible accounts by a supervisor independent of the credit approval function c. Segregation of duties between receiving cash and posting the accounts receivable ledger d. Supervisory compassion of the daily cash summary with the sum of the cash receipts journal entries

C Segregation of duties between receiving cash and posting the accounts receivable ledger

Significant deficiencies and material weaknesses must be communicated to an entity's audit committee because they represent: a. Material fraud or illegal acts perpetrated by high-level management b. Disclosures of information that significantly contradict the auditor's going concern assumption c. Significant deficiencies in the design or operation of internal control d. Potential manipulation or falsification of accounting records

C Significant deficiencies in the design or operation of internal control

Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because a. A majority of recipients usually lack the willingness to reposed objectively b. Some recipients may report incorrect balances that require extensive follow-up c. The auditor cannot infer that all nsonrepondents have verified their account information d. Negative confirmations do not produce evidence that is statistically quantifiable

C The auditor cannot infer that all nsonrepondents have verified their account information

Sampling risk is a. The risk that the auditor will reject the population based on the sample, when the population is accurate. b. Always quantifiable. c. The risk that the sample drawn does not represent the population. d. Only present in nonstatistical sampling.

C The risk that the sample drawn does not represent the population.

A public entity changed from the straight-line method to the declining balance method of depreciation for all newly acquired assets. This change has no material effect on the current year's financial statements but is reasonably certain to have a substantial effect in later years. The client's financial statements contain no material misstatements and the auditor concurs with this change. If the change is disclosed in the notes to the financial statements, the auditor should issue a report with a(n): a. "Except for", qualified opinion b. Explanatory paragraph c. Unqualified opinion d. Consistency modification

C Unqualified opinion

For the control activities to be effective, employees maintaining the accounts receivable subsidiary ledger should not also approve a. Employee overtime wages b. Credit granted to customers c. Write-offs of customer accounts d. Cash disbursements

C Write-offs of customer accounts

Which of the following is not a factor that might affect the likelihood that a control deficiency could result in a misstatement in an account balance? a. the susceptibility of the related assets or liability to loss or fraud. b. the interaction or relationship of the control with other controls c. the financial statement amounts exposed to the deficiency d. the nature of the financial statement accounts, disclosures, and assertions involved

C the financial statement amounts exposed to the deficiency

Computer assisted audit techniques (CAAT's)

Computer programs that allow auditors to test computer files and databases

Confirm that recorded accounts receivable are valid (Existence)

Confirmation of accounts receivable

The negative request form of accounts receivable confirmation is useful particularly when

Control Risk relating to receivables is LOW The number of small balances is HIGH Consideration by the recipient is LIKELY

Entity-level controls

Controls that have a pervasive effect on the entity's system of internal control such as controls related to the control environment; controls over management override' the entity's risk assessment process; centralized processing and controls, including shared service environments' controls to monitor results of operations; controls to monitor other controls, including activities of the internal audit function, audit committee, and self-assessment programs; controls over the period-end financial reporting process; and policies that address significant business control and risk management practices

Which of the following is an inherent risk factor that should affect the auditor's assessment of the revenue process? a. Whether or not the client effectively segregates the credit and billing functions b. The quality of the client's computer systems used to record and track revenue transactions c. Processes used by the client to authorize sales transactions d. Misstatements detected in prior audits

D Misstatements detected in prior audits

Which of the following audit procedures is best for identifying unrecorded trade accounts payable a. Examination of unusual relationships between monthly accounts payable balances and recorded cash payments b. Reconciliation of vendors' statements to the file of receiving reports to identify items received just prior to the balance sheet date c. Investigation of payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports d. Review of cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period

D Review of cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period

A number of factors influence the sample size for a substantive test of details of an account balance. All other factors being equal, which of the following would lead to a larger sample size? a. Greater reliance on internal controls. b. Greater reliance on analytical procedures c. Smaller expected frequency of misstatements d. Smaller amounts of tolerable misstatements

D Smaller amounts of tolerable misstatements

Which of the following will eliminate sampling risk? a. Double the sample size. b. Use monetary-unit sampling. c. Use classical variable sampling with larger tolerable error d. Test all the items in the population

D Test all the items in the population

The Sarbanes-Oxley Act of 2002 requires management to include a report on the effectiveness of ICFR in the entity's annual report. It also requires auditors to report on the effectiveness of ICFR. Which of the following statements concerning these requirements is false? a. The auditor should evaluate whether internal controls over financial reporting are designed and operating effectively. b. Management's report should state its responsibility for establishing and maintaining an adequate internal control system. c. Management should identify material weaknesses in it's report d. The auditor should provide recommendations for improving internal control in the audit report

D The auditor should provide recommendations for improving internal control in the audit report

Which of the following controls is most likely to help ensure that all credit revenue transactions of an entity are recorded? a. The billing department supervisor sends a copy of each approved sales order to the credit department for comparison to the customer's authorized credit limit and current account balance b. The accounting department supervisor independently reconciles the accounts receivable subsidiary ledger to the accounts receivable control account each month c. The accounting department supervisor controls the mailing of monthly statements to customers and investigates any differences reported by customers d. The billing department supervisor matches prenumbered shipping documents with entries in the sales journal

D The billing department supervisor matches renumbered shipping documents with entries in the sales journal

According to the text, all of the following are indicators of a material weakness except a. The commission of fraud by senior management b. A restatement of previous year financial statements to correct a material misstatement. c. An ineffective audit committee. d. The finding of a "known error" in the current year audit that is not material to the financial statements.

D The finding of a "known error" in the current year audit that is not material to the financial statements.

When auditors report on the effectiveness of internal control "as of" a specific date and obtain evidence about the operating effectiveness of controls at an interim date, which of the following items would be the least helpful in evaluating the additional evidence to gather for the remaining period? a. Any significant changes that occurred in internal control subsequent to the interim date. b. The length of the remaining period c. The specific controls tested prior to the "as of" date and the results of those tests. d. The walkthrough of the control system conducted at interim

D The walkthrough of the control system conducted at interim

A walkthrough is one procedure used by an auditor as part of the internal control audit. A walkthrough requires an auditor to: a. Tour the organization's facilities and locations before beginning any audit work. b. Trace a transaction from every class of transactions from origination through the entity's information system. c. Trace a transaction from each major class of transaction from origination through the entity's information system d. Trace a transaction from each major class of transactions from origination through the entity's information system until is is reflected in the entity's financial reports

D Trace a transaction from each major class of transactions from origination through the entity's information system until is is reflected in the entity's financial reports

The FRC does all the following to accomplish its mission except: a. monitor the quality of accounts published by public companies b. oversight of the regulatory activities of the accountancy and actuarial professional bodies c. monitor and report publicly on the quality of the audit of listed and other major public interest entities d. monitor the quality of accounts published by small private companies

D monitor the quality of accounts published by small private companies

When searching for unrecorded liabilities at year-end, an auditor most likely would examine: a. Cash receipts from related parties recorded before year-end. b. Confirmation responses from various creditors including those with small account balances c. Cash disbursements recorded after year-end. d. Invoices dated a few days before and after year-end to ascertain whether they have been properly recorded. e. Two of the above are part of the search for unrecorded liabilities

E Two of the above are part of the search for unrecorded liabilities

Determine whether accounts payable have been properly accumulated from the journal to the general ledger (accuracy)

Obtain a listing of the accounts payable and agree total to general ledger control account

Statistical Sampling

Sampling that uses the laws of probability to select and evaluate the results of an audit sample, thereby permitting the auditor to quantify the sampling risk for the purpose of reaching a conclusion about the population

Attribute sampling

Sampling used to estimate the proportion of a population that possesses a specified characteristic

Verify that all accounts payable are recorded in the correct period (cutoff)

Select a sample of receiving documents for a few days before and after year-end

Determine that recorded accounts receivable include all amounts owed to the client (completeness)

Select a sample of shipping documents, match them with related sales invoices, and determine that they have been included in the sales journal and accounts receivable subsidiary ledger

On January 31, Asare Toy Manufacturing hired your firm to audit the company's financial statements for the prior year. You were unable to observe the client's inventory on December 31. However you were able to satisfy yourself about the inventory balance using other auditing procedures.

Standard Unqualified

Tolerable Misstatement

The amount of planning materiality that is allocated to a financial statement account

Disclaimer of Opinion

The auditor's indication that no opinion is expressed on the financial statements. The auditor will disclaim an opinion if a pervasive scope limitation arises or if it is determined that the auditor lacks independence

Adverse Opinion

The auditor's opinion that the financial statements do not present fairly in accordance with generally accepted accounting principles (or other basis of accounting) due to a pervasively material misstatement

Qualified Opinion

The auditor's opinion that the financial statements present fairly, in all material respects, in accordance with generally accepted accounting principals (or other basis of accounting), except for a material misstatement that does not, however, pervasively affect users' ability to rely on the financial statements. Can also be issued for a scope limitation that is of limited significance.

Expected population deviation rate

The deviation rate that the auditor expects to exist in the population

Remediation

The process of correcting a material weakness as part of management's assessment of the effectiveness of ICFR

Lapping

The process of covering a cash shortage by applying cash from one customer's accounts receivable against another customer's account receivable

Nonsampling risk

The risk that auditors will make judgement errors caused by the use of inappropriate audit procedures or misinterpretation of audit evidence and failure to recognize a misstatement or deviation

Incorrect Rejection

The risk that the sample supports the conclusion that the control is not operating effectively when it actually is or that the recorded account balance is materially misstated when it is not materially misstated

Incorrect Acceptance

The risk that the sample supports the conclusion that the control is operating effectively when it is not or that the recorded account balance is not materially misstated when it is materially misstated

Upper Misstatement Amount

The total of the projected misstatement plus the allowance for sampling risk

Allowance for sampling risk

The uncertainty that results from sampling; the difference between the expected mean of the population and the tolerable deviation or misstatement.

Classical Variables Sampling

The use of normal distribution theory to estimate the dollar amount of misstatement for a class of transaction or an account balance

In planning the audit of Internal Control over Financial Reporting, the auditor uses the same materiality considerations that are used in planning the audit of the financial statements. True False

True

Barefield Corporation, a wholly owned subsidiary of Sandy, Inc., is audited by another CPA firm. As the auditor of Sandy, Inc., you have assured yourself of the other CPA firm's independence and professional reputation. However, you are unwilling to take complete responsibility for its audit work.

Unqualified with modified wording