Combo with "Audit and Assurance 14, 15, 23, 24
Sampling risk may be controlled by: A) Adjusting the sample size Using an appropriate method of selecting sample items Yes Yes B) Adjusting the sample size Using an appropriate method of selecting sample items No No C) Adjusting the sample size Using an appropriate method of selecting sample items Yes No D) Adjusting the sample size Using an appropriate method of selecting sample items No Yes LO 15-1
A) Adjusting the sample size Using an appropriate method of selecting sample items Yes Yes
The auditor uses a proof of cash to determine whether: A) All recorded cash disbursements were paid by the bank. All amounts that were paid by the bank were recorded. Yes Yes B) All recorded cash disbursements were paid by the bank. All amounts that were paid by the bank were recorded. No No C) All recorded cash disbursements were paid by the bank. All amounts that were paid by the bank were recorded. Yes No D) All recorded cash disbursements were paid by the bank. All amounts that were paid by the bank were recorded. No Yes LO 23-4
A) All recorded cash disbursements were paid by the bank. All amounts that were paid by the bank were recorded. Yes Yes
Which of the following is the appropriate point at which the auditor deems authorization to be critical? A) Credit granting Price authorization Shipment of goods Yes Yes Yes B) Credit granting Price authorization Shipment of goods Yes No Yes C) Credit granting Price authorization Shipment of goods No Yes No D) Credit granting Price authorization Shipment of goods Yes No No LO 14-3
A) Credit granting Price authorization Shipment of goods Yes Yes Yes
An auditor can increase the likelihood that a sample is representative by using care in: A) Designing the sampling process Designing the sample selection Yes Yes B) Designing the sampling process Designing the sample selection No No C) Designing the sampling process Designing the sample selection Yes No D) Designing the sampling process Designing the sample selection No Yes LO 15-1
A) Designing the sampling process Designing the sample selection Yes Yes
Which of the following procedures and methods are important in assessing a company's ability to continue as a going concern? A) Discussions with management regarding potential financial difficulties. Evaluation of management's plans to avoid bankruptcy. Yes Yes B) Discussions with management regarding potential financial difficulties. Evaluation of management's plans to avoid bankruptcy. No No C) Discussions with management regarding potential financial difficulties. Evaluation of management's plans to avoid bankruptcy. Yes No D) Discussions with management regarding potential financial difficulties. Evaluation of management's plans to avoid bankruptcy. No Yes LO 24-5
A) Discussions with management regarding potential financial difficulties. Evaluation of management's plans to avoid bankruptcy. Yes Yes
If an auditor concludes there are contingent liabilities, then he or she must evaluate the: A) Materiality of the potential liability. Nature of the disclosure to be included in the financial statements. Yes Yes B) Materiality of the potential liability. Nature of the disclosure to be included in the financial statements. No No C) Materiality of the potential liability. Nature of the disclosure to be included in the financial statements. Yes No D) Materiality of the potential liability. Nature of the disclosure to be included in the financial statements. No Yes LO 24-2
A) Materiality of the potential liability. Nature of the disclosure to be included in the financial statements. Yes Yes
Which of the following is a contingent liability with which an auditor is particularly concerned? A) Notes receivable discounted Product warranties Yes Yes B) Notes receivable discounted Product warranties No No C) Notes receivable discounted Product warranties Yes No D) Notes receivable discounted Product warranties No Yes LO 24-2
A) Notes receivable discounted Product warranties Yes Yes
If a bank does not respond to a bank confirmation request, the auditor would most likely: A) Perform alternative procedures Send a second request Ask the client to communicate with the bank to ask them to complete and return the confirmation No Yes Yes B) Perform alternative procedures Send a second request Ask the client to communicate with the bank to ask them to complete and return the confirmation No No Yes C) Perform alternative procedures Send a second request Ask the client to communicate with the bank to ask them to complete and return the confirmation Yes No Yes D) Perform alternative procedures Send a second request Ask the client to communicate with the bank to ask them to complete and return the confirmation Yes Yes No LO 23-3
A) Perform alternative procedures Send a second request Ask the client to communicate with the bank to ask them to complete and return the confirmation No Yes Yes
Prenumbered documents are intended to help: A) Prevent the failure to bill or record sales Prevent duplicate billings or recordings of sales Yes Yes B) Prevent the failure to bill or record sales Prevent duplicate billings or recordings of sales No No C) Prevent the failure to bill or record sales Prevent duplicate billings or recordings of sales Yes No D) Prevent the failure to bill or record sales Prevent duplicate billings or recordings of sales No Yes LO 14-3
A) Prevent the failure to bill or record sales Prevent duplicate billings or recordings of sales Yes Yes
Which type of subsequent event requires consideration by management and evaluation by the auditor? A) Subsequent events that have a direct effect on the financial statements and require adjustment. Subsequent events that do not have a direct effect on the financial statements but for which disclosure may be required. Yes Yes B) Subsequent events that have a direct effect on the financial statements and require adjustment. Subsequent events that do not have a direct effect on the financial statements but for which disclosure may be required. No No C) Subsequent events that have a direct effect on the financial statements and require adjustment. Subsequent events that do not have a direct effect on the financial statements but for which disclosure may be required. Yes No D) Subsequent events that have a direct effect on the financial statements and require adjustment. Subsequent events that do not have a direct effect on the financial statements but for which disclosure may be required. No Yes LO 24-4
A) Subsequent events that have a direct effect on the financial statements and require adjustment. Subsequent events that do not have a direct effect on the financial statements but for which disclosure may be required. Yes Yes
What is one of the main reasons an attorney may refuse to provide auditors with complete information about contingent liabilities? A) The attorneys refuse to disclose information they consider confidential. The attorneys refuse to respond due to a lack of knowledge about matters involving contingent liabilities. Yes Yes B) The attorneys refuse to disclose information they consider confidential. The attorneys refuse to respond due to a lack of knowledge about matters involving contingent liabilities. No No C) The attorneys refuse to disclose information they consider confidential. The attorneys refuse to respond due to a lack of knowledge about matters involving contingent liabilities. Yes No D) The attorneys refuse to disclose information they consider confidential. The attorneys refuse to respond due to a lack of knowledge about matters involving contingent liabilities. No Yes LO 24-3
A) The attorneys refuse to disclose information they consider confidential. The attorneys refuse to respond due to a lack of knowledge about matters involving contingent liabilities. Yes Yes
Based on the schedule of interbank transfers above, which of the cash transfers would not appear as an outstanding check on the December 31, 2013 bank reconciliation? A) 1 B) 2 C) 3 D) 4 LO 23-4
A) 1
Prices in an active market for identical assets is a level ________fair value estimate. A) 1 B) 2 C) 3 D) 4 LO 23-5
A) 1
As the auditor you are assessing the proper sample size to use in testing controls. When using attributes sampling which of the following is most correct? A) A 10% change in population size will have the least effect on sample size. B) A 10% change in the tolerable deviation rate will have the least effect on sample size. C) A 10% change in the expected deviation rate will have the least effect on sample size. D) A 10% change in the tolerable will have the least effect on sample size. LO 15-7
A) A 10% change in population size will have the least effect on sample size.
If the result obtained from a particular sample for control and substantive tests of transactions is critical to the formation of an audit opinion, which of the following is the most important to the auditor in concluding of the appropriateness and sufficiency of evidence gathered? A) Acceptable risk of overreliance B) Estimated population exception rate C) Tolerable exception rate D) Size of the population LO 15-5
A) Acceptable risk of overreliance
When sales invoices are automatically calculated and posted by a computer, the auditor may be able to reduce substantive tests of transactions for which, if any, assertion? A) Accuracy B) Existence C) Completeness D) None of the above LO 14-3
A) Accuracy
Which one of the following best describes the auditors responsibilities regarding appropriate authorizations in the sales/collections cycle? A) B, C, and D should all be of concern to the auditor. B) Credit must be authorized before the sale. C) Goods must be shipped after the authorization. D) Prices must be authorized. LO 14-3
A) B, C, and D should all be of concern to the auditor.
The audit procedures for the subsequent events review can be divided into two categories: (1) procedures normally integrated as a part of the verification of year-end account balances, and (2) those performed specifically for the purpose of discovering subsequent events. Which of the following procedures is in the second category? A) Correspond with attorneys. B) Test the collectability of accounts receivable by reviewing subsequent period cash receipts. C) Subsequent period sales and purchases transactions are examined to determine whether the cutoff is accurate. D) Compare the subsequent-period purchase price of inventory with the recorded cost as a test of lower of cost or market valuation. LO 24-4
A) Correspond with attorneys.
Which of the following balance-related audit objectives typically is assessed as having high inherent risk for cash? A) Existence B) Cutoff C) Detail tie-in D) Presentation and disclosure LO 23-3
A) Existence
Which of the following is a correct statement regarding block sampling? A) It is acceptable to use block sampling only if a reasonable number of blocks are used. B) Block sampling uses sampling with replacement. C) Block sampling is a probabilistic sampling method. D) There is considerable cost and time involved when block sampling is used. : LO 15-3
A) It is acceptable to use block sampling only if a reasonable number of blocks are used.
Which one the following procedures performed for the billing function provides evidence for the completeness assertion? A) Making sure that all shipments have been billed B) Making sure that no shipment has been billed more than twice C) Making sure that each shipment is billed at the correct amount D) Making sure that each shipment is billed to the proper customer LO 14-3
A) Making sure that all shipments have been billed
________ is an automated fraud detection tool offered by most banks. A) Positive pay B) A bank confirmation C) Fraud buster D) Check matching LO 23-3
A) Positive pay
In connection with the annual audit, which of the following is not a "subsequent events" procedure? A) Prepare any necessary closing journal entries. B) Examine the minutes of stockholders and directors meetings subsequent to the balance sheet date. C) Review journals and ledgers. D) Obtain a letter of representation. LO 24-4
A) Prepare any necessary closing journal entries.
When the computed upper exception rate is greater than the tolerable exception rate, it is necessary for the auditor to take specific action. Which of the following courses of action would be most difficult to justify? A) Reduce the tolerable exception rate so as to accept the sample results. B) Expand the sample size and perform more tests. C) Revise the assessed control risk. D) Write a letter to management which outlines the control deficiencies. LO 15-5
A) Reduce the tolerable exception rate so as to accept the sample results.
Which of the following audit procedures would most likely assist an auditor in identifying conditions and events that may indicate there could be substantial doubt about an entity's ability to continue as a going concern? A) Review compliance with the terms of debt agreements B) Confirmation of accounts receivable from principal customers C) Reconciliation of interest expense with debt outstanding D) Confirmation of bank balances LO 24-5
A) Review compliance with the terms of debt agreements
For which of the following audit procedures would audit sampling not be appropriate? A) Review sales transactions for large and unusual amounts. B) Examine a sample of duplicate sales invoices for credit approval. C) Compare the quantity on duplicate sales invoices with the quantity on related shipping documents. D) Audit sampling is appropriate for each of the above procedures. LO 15-5 and LO 15-7
A) Review sales transactions for large and unusual amounts.
For a firm that practices good internal controls in the sales and collections cycle, the function of indicating credit approval should be recorded on which of the following documents? A) Sales order B) Sales invoice C) Customer order D) Remittance advice LO 14-2
A) Sales order
Which of the following is the risk that an auditor will reach an incorrect conclusion because a sample is not representative of the population? A) Sampling risk B) Nonsampling risk C) Audit risk D) Detection risk LO 15-1
A) Sampling risk
Which of the following statements is most correct about an auditor's required communication with management and those charged with corporate governance? A) The auditor is required to inform those charged with governance about significant errors discovered and subsequently corrected by management. B) Any significant matter reported to those charged with governance must also be communicated to management. C) Communication is required before the audit report is issued. D) Auditor does not have any requirement to communicate with anyone other than the company's senior management. LO 24-7
A) The auditor is required to inform those charged with governance about significant errors discovered and subsequently corrected by management.
Which of the following represents the best description of the tolerable exception? A) The highest exception rate the auditor will permit in the control being tested and still conclude it is operating effectively B) The highest exception rate the auditor expects to find in the population C) The number of exceptions found in the sample divided by the sample size D) The highest estimated exception rate in a population at a given EPER : LO 15-5
A) The highest exception rate the auditor will permit in the control being tested and still conclude it is operating effectively
Which of the following statements is correct when dealing with sampling for exception rates? A) The term exception refers to both deviations from the client's control procedures and amounts that are not monetarily correct. B) When used with sampling, the term deviation is synonymous with the term exception. C) The actual population exception rate is the same as the sample exception rate. D) In using audit sampling for exception rates, the auditor is most concerned with the confidence interval. LO 15-4
A) The term exception refers to both deviations from the client's control procedures and amounts that are not monetarily correct.
________ tests are for omitted transactions, while ________ tests are for nonexistent transactions. A) Tracing, vouching B) Vouching, tracing C) Verifying, tracking D) Tracking, verifying LO 14-3
A) Tracing, vouching
A factor that increases inherent risk for financial instruments is the complexity of the relevant accounting standards. A) True B) False LO 23-5
A) True
A lawsuit has been filed against your client. If, in the opinion of legal counsel, the likelihood your client will lose the lawsuit is remote, no financial statement accrual or disclosure of the potential loss would generally be required. A) True B) False LO 24-2
A) True
A proof of cash disbursements is not effective for discovering checks written for an improper amount, fraudulent checks, or misstatements in which the dollar amount appearing in the cash disbursements records is incorrect. A) True B) False LO 23-4
A) True
A proof of cash helps the auditor determine whether all recorded cash receipts were deposited in the bank and whether all recorded cash disbursements were paid by the bank. A) True B) False LO 23-4
A) True
A proof of cash involves a combination of substantive tests of transactions and tests of details of balances. A) True B) False LO 23-4
A) True
A proof of cash receipts is not useful for uncovering the theft of cash receipts or the recording and deposit of an improper amount of cash. A) True B) False LO 23-4
A) True
A sample of all items in a population will have a zero sampling risk. A) True B) False LO 15-1
A) True
Acceptable risk of overreliance is normally lower for a public company audit than a private company audit. A) True B) False LO 15-5
A) True
After performing all audit procedures in each area, the auditor must integrate the results into an overall conclusion about the financial statements. A) True B) False LO 24-6
A) True
Although the letter of representation is typed on the client's letterhead and signed by the client, it is common for the auditor to prepare the letter. A) True B) False LO 24-5
A) True
An effective procedure to test the existence objective for sales is to vouch sales journal entries to copies of sales orders, shipping documents, and sales invoices. A) True B) False LO 14-3
A) True
An essential part of the auditors responsibility in auditing cash receipts is to identify deficiencies in internal control that increase the likelihood of fraud. A) True B) False LO 14-5
A) True
Assessing internal controls related to financial instruments may be necessary in order to reduce audit risk to an acceptable level. A) True B) False LO 23-5
A) True
Auditing guidance is provided for auditing accounting estimates specifically for fair values estimates as considerable auditor judgment is involved. A) True B) False LO 23-5
A) True
Auditing standards require the auditor's assessment of going-concern issues. A) True B) False LO 24-5
A) True
Auditors are not always required to obtain bank confirmations. A) True B) False LO 23-3
A) True
Auditors must communicate in writing about internal control weaknesses to the audit committee or those charged with governance. A) True B) False LO 24-7
A) True
Auditors of public companies must obtain certain representations from management regarding internal control over financial reporting. A) True B) False LO 24-5
A) True
Because a management representation letter is a written statement from a nonindependent source, it cannot be regarded as reliable evidence. A) True B) False LO 24-5
A) True
Client representation letters are required by professional auditing standards, whereas management letters are optional. A) True B) False LO 24-5 and LO 24-7
A) True
Companies may purchase marketable securities as a way to temporarily invest excess cash. A) True B) False LO 23-1
A) True
Completeness is an important objective for derivative financial instruments. A) True B) False LO 23-5
A) True
Credit should be approved before goods are shipped to a customer. A) True B) False LO 14-2
A) True
Current professional auditing standards make it clear that management, not the auditor, is responsible for identifying and deciding the appropriate accounting treatment for contingent liabilities. A) True B) False LO 24-2
A) True
Current professional auditing standards require the performance of analytical procedures during the planning and completion phases of the audit. A) True B) False LO 24-5
A) True
Cutoff is more important in testing transactions as a client may want to record a gain or a loss on the sale at the end of the year. A) True B) False LO 23-5
A) True
For each significant internal control deficiency identified by the auditor, he or she should design one or more tests of controls to assess the extent of the deficiency and its effect on the financial statements. A) True B) False LO 14-3
A) True
If a particular internal control is not followed by the client exactly 6% of the time, and the auditor's tests of that control find three control violations in a sample of 50, the sample is considered to be representative. A) True B) False LO 15-1
A) True
If an attorney refuses to provide the auditor with information about material existing lawsuits or unasserted claims, current professional standards require that the auditor consider the refusal as a scope limitation. A) True B) False LO 24-3
A) True
If an auditor discovers that previously issued financial statements are misleading, the most desirable approach to follow is to request that the client issue an immediate revision of the financial statements containing an explanation of the reasons for the revision. A) True B) False LO 24-8
A) True
If the auditor concludes that the CUER is 5% at a 8% sampling risk, this means that the exception rate in the population is no greater than 5% with an 8% risk of the exception rate exceeding 5%. A) True B) False LO 15-4
A) True
If the client refuses to prepare and sign a letter of representation, the auditor would be required to issue either a qualified opinion or a disclaimer of opinion. A) True B) False LO 24-5
A) True
In a lockbox system, bank employees are responsible for opening cash receipts and maintaining records of all payments made by customers at the lockbox address. A) True B) False LO 14-2
A) True
In nonstatistical sampling, the calculated sampling error is the difference between the tolerable exception rate and the sample exception rate. A) True B) False LO 15-5
A) True
In practice, auditors do not know whether a sample is representative, even after all testing is complete. A) True B) False LO 15-1
A) True
It is equally acceptable under professional auditing standards for auditors to use either statistical or nonstatistical sampling methods. A) True B) False LO 15-2
A) True
It is virtually impossible to reduce sampling risk to zero. A) True B) False LO 15-1
A) True
Management's assertions for sales and collection activities remain the same whether sales are generated through traditional or e-commerce activities. A) True B) False LO 14-3
A) True
Many of the audit procedures for finding contingencies are usually performed as an integral part of various segments of the audit rather than as a separate activity near the end of the audit. A) True B) False LO 24-2
A) True
Nonprobabilistic sampling methods are not based on mathematical probabilities and therefore the representativeness of the sample may be difficult to determine. A) True B) False LO 15-3
A) True
One way to control sampling risk is to increase sample size. A) True B) False LO 15-1
A) True
Ordinarily, all deposits-in-transit listed on the year-end bank reconciliation should appear as deposits on the cutoff bank statement. A) True B) False LO 23-3
A) True
Presentation and disclosure objectives are important when auditing financial instruments. A) True B) False LO 23-5
A) True
Results from the final analytical procedures may indicate that additional audit evidence is necessary. A) True B) False LO 24-5
A) True
Sales returns and allowances are often ignored by auditors because they are often immaterial. A) True B) False LO 14-4
A) True
Sales should be billed and recorded as soon as possible after the shipment takes place. A) True B) False LO 14.2, 14.3, and 14.5
A) True
Sales transactions are the result of the following five functions in the sales and collection cycle: processing customer orders, granting credit, shipping goods, billing customers, and recording sales. A) True B) False LO 14-2
A) True
Securities and contracts will typically be held by the broker-dealer. A) True B) False LO 23-5
A) True
Separation of duties in the sales/collection cycle should mandate that the credit-granting function be separate from the sales function. A) True B) False LO 14-3
A) True
Tests related to realizable value will vary according to the type of security and the associated accounting standard. A) True B) False LO 23-5
A) True
The appropriate test of controls for separation of duties are ordinarily restricted to the auditor's observations of activities and discussions with personnel. A) True B) False LO 14-3
A) True
The auditor must extend the audit procedures in the audit of year-end cash when there are inadequate internal controls. A) True B) False LO 23-4
A) True
The auditor needs to have an understanding of the client's internal controls over determining fair value estimates. A) True B) False LO 23-5
A) True
The bank reconciliation control is enhanced when a qualified employee reviews the monthly reconciliation as soon as possible after its completion. A) True B) False LO 23-3
A) True
The estimation of bad debts expense relates to the write-off of uncollectible accounts. A) True B) False LO 14-6
A) True
The issuance of bonds by the client subsequent to the balance sheet date would require a footnote disclosure in, but no adjustment to, the financial statements under audit. A) True B) False LO 24-4
A) True
The most difficult type of cash embezzlement for the auditor to detect is when the cash is stolen before it can be recorded in the cash receipts journal. A) True B) False LO 14-5
A) True
The only way to know with certainty whether a sample is representative is to subsequently audit the entire population. A) True B) False LO 15-1 and LO 15-5
A) True
The overall objective in the audit of the sales and collection cycle is to evaluate whether the account balances affected by the cycle are fairly presented in accordance with accounting standards. A) True B) False LO 14-1
A) True
The receipt of a customer order from a customer is the starting point for the entire sales and collection cycle. A) True B) False LO 14-2
A) True
The sales and collection cycle applies to businesses that transfer goods to customers or provides services to businesses. A) True B) False LO 14-1
A) True
The sales journal is generated from the sales transaction file. A) True B) False LO 14-2
A) True
The shipping point is critical because it is the first point at which company assets are released to another party. A) True B) False LO 14-2
A) True
The tolerable exception rate is the rate that the auditor will permit in the population and still be willing to conclude a control is effective. A) True B) False LO 15-5
A) True
The transfer of money from one bank account to another and improperly recording the transfer so that the amount is recorded as an asset in both banks is referred to as kiting. A) True B) False LO 23-4
A) True
There is significant potential for misstatements and misclassification of financial instruments. A) True B) False LO 23-5
A) True
There should generally be correspondence in the client's file establishing the uncollectibility of their account. A) True B) False LO 14-6
A) True
Tolerable exception rate (TER) is inversely related to sample size. A) True B) False LO 15-5
A) True
Tracing outstanding checks to subsequent period bank statements tests the cutoff audit objective. A) True B) False LO 23-3
A) True
Violations of the existence objective for sales are of greater concern to the auditor than violations of the completeness objective. A) True B) False LO 14-3
A) True
When auditing financial instruments, interest income and dividends can be recomputed and compared to a public source. A) True B) False LO 23-5
A) True
When auditing the year-end cash balance, one of the areas of focus is on the accuracy objective. A) True B) False LO 23-3
A) True
When auditors evaluate sales returns and allowances, a primary emphasis is on the objective of occurrence. A) True B) False LO 14-4
A) True
When preparing a standard inquiry of client's attorney letter, the client's letterhead should be used, and the letter should be signed by the client company's officials. A) True B) False LO 24-3
A) True
When selecting a sample, random numbers may be obtained either with replacement or without replacement. Although both selection methods are theoretically sound, auditors rarely use replacement sampling. A) True B) False LO 15-3
A) True
When subsequent events are used to evaluate the amounts included in the year-end financial statements, auditors must distinguish between conditions that existed at the balance sheet date and those that came into being after the balance sheet date. A) True B) False LO 24-4 AACSB: Reflective thinking
A) True
When the sample exception rate is greater than the tolerable exception rate in attributes sampling, one possible appropriate course of action is to increase sample size. A) True B) False LO 15-5
A) True
Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this fraud and be least likely to be detected by an auditor? A) Understating the sales journal by not recording cash sales B) Overstating the accounts receivable control account by intentionally misstating prices charged for goods sold C) Overstating the accounts receivable subsidiary ledger by not recording payments made by customers D) Understating the cash receipts journal by purposely recording incorrect amounts LO 14-5
A) Understating the sales journal by not recording cash sales
LO 23-3 The starting point for the verification of the balance in the general bank account is to obtain: A) a bank reconciliation from the client. B) the client's cash account from the general ledger. C) a cutoff bank statement directly from the bank. D) the client's year-end bank statement.
A) a bank reconciliation from the client.
Credit memos are normally issued to: A) adjust the customers balance to the amount owed to the company because of returned goods or an allowance. B) assist in the aging of accounts receivable. C) reduce customer frustration and sales losses. D) inform the customer of the balance due. LO 14-2
A) adjust the customers balance to the amount owed to the company because of returned goods or an allowance.
The auditor has completed her assessment of subsequent events. The proper accounting for subsequent events that have a direct effect on the financial statements is to: A) adjust the financial statements for the year under audit. B) disclose in the notes to financial statement the amount of the adjustment. C) duly note in the audit workpapers that next year's financial statements need to be adjusted. D) make no adjustment of the financial statements for the year under audit. LO 24-4
A) adjust the financial statements for the year under audit.
A commitment is best described as: A) an agreement to commit the firm to a set of fixed conditions in the future. B) an agreement to commit the firm to a set of fixed conditions in the future that depends on company profitability. C) an agreement to commit the firm to a set of fixed conditions in the future that depends on current market conditions. D) a potential future obligation to an outside party for an as yet to be determined amount. LO 24-2
A) an agreement to commit the firm to a set of fixed conditions in the future.
Auditing standards require auditors to evaluate whether there is a substantial doubt about a client's ability to continue as a going concern. One of the most important audit procedures to perform to assess the going concern question is: A) analytical procedures. B) confirmations from creditors. C) statistical sampling procedures. D) inquiries of client and its legal counsel. LO 24-5
A) analytical procedures.
When the auditor decides to select less than 100 percent of the population for testing, the auditor is said to use: A) audit sampling. B) representative sampling. C) poor judgment. D) estimation sampling. LO 15-1
A) audit sampling.
In the evaluation of the results of an attributes sample, the fact that the exception rate in the sample was 2% rather than the estimated population exception rate of 4% would cause the computed upper exception rate to: A) be less than the tolerable exception rate. B) equal the tolerable exception rate. C) exceed the tolerable exception rate. D) cannot be determined from the information given. LO 15-7
A) be less than the tolerable exception rate.
The ________ is a contract between a carrier (e.g., a trucking company) and the seller of goods that dictates the details surrounding the shipment of goods. A) bill of lading B) sales invoice C) picking ticket D) remittance advice LO 14-2
A) bill of lading
A document that initiates shipment of goods and indicates the description of the merchandise, the quantity shipped, and customer name and address is the: A) bill of lading. B) sales invoice. C) picking ticket. D) vendor invoice. LO 14-2
A) bill of lading.
If an auditor judgmentally selects a sample of one hundred items from a population and finds two exceptions, the auditor: A) can conclude that the sample exception rate is 2%. B) can conclude that the population exception rate is 2%. C) can calculate the highest exception rate expected in the population. D) cannot make any conclusions about either the sample or the population. LO 15-5
A) can conclude that the sample exception rate is 2%.
Auditors often use the ________ to determine the estimated population exception rate. A) current year's audit results B) tolerable exception rate C) preceeding year's audit results D) estimated computed by management LO 15-5
A) current year's audit results
The test of details of balances procedure that requires the auditor to trace the book balance on the reconciliation to the general ledger is an attempt to satisfy the audit objective of: A) detail tie-in. B) existence. C) completeness. D) accuracy. LO 23-3
A) detail tie-in.
In attributes sampling, an estimate of the expected population exception rate is necessary to plan the sample size. The relationship of expected population exception rate (EPER) to sample size is: A) direct (small EPER = small sample). B) inverse (small EPER = large sample). C) a variable (sometimes small, sometimes large) dependent on other factors present. D) indeterminate. LO 15-5 and LO 15-7
A) direct (small EPER = small sample).
An auditor's decision concerning whether or not to dual date an audit report is primarily based on the auditor's decision to: A) extend appropriate audit procedures. B) assume responsibility for events after the date of the auditor's report. C) assume responsibility for event from fiscal year end to the date of the audit report. D) roll the dice and hope for a successful outcome. LO 24-4
A) extend appropriate audit procedures.
An auditor's decision concerning whether or not to "dual date" the audit report is based upon the auditor's willingness to: A) extend auditing procedures and assume responsibility for a greater period of time. B) accept responsibility for subsequent events. C) permit inclusion of a footnote captioned: event (unaudited) subsequent to the date of the auditor's report. D) assume responsibility for events subsequent to the issuance of the auditor's report. LO 24-4
A) extend auditing procedures and assume responsibility for a greater period of time.
If the auditor decides to assess control risk at the moderate level in a private company audit, when in previous years the auditor set control risk at the maximum level, then tests of controls for the current year would be: A) increased in number. B) reduced in number. C) not performed. D) unchanged from prior planned settings. LO 15-5
A) increased in number.
The advantage of systematic sample selection is that: A) it is easy to use. B) there is limited possibility of it being biased. C) it is unnecessary to determine if the population is arranged randomly. D) it automatically selects items material to the financial statements. : LO 15-3
A) it is easy to use.
Listing all bank transfers made a few days before and after the balance sheet date and tracing each to the accounting records for proper recording is a useful approach to test for: A) kiting. B) lapping. C) income smoothing. D) channel stuffing. LO 23-4
A) kiting.
The process of transferring money from one bank account to another and improperly recording the transaction is referred to as: A) kiting. B) lapping. C) scamming. D) embezzling. LO 23-4
A) kiting.
Auditors are likely to prepare a proof of cash when the client has: A) material control weaknesses in cash receipts and cash disbursements. B) material control weaknesses in accounts receivable and revenue. C) material control weaknesses in accounts payable and inventory. D) material control weaknesses in payroll. LO 23-4
A) material control weaknesses in cash receipts and cash disbursements.
An advantage of using statistical sampling techniques is that such techniques: A) mathematically measure risk. B) eliminate the need for judgmental decisions. C) define the values of precision and reliability required to provide audit satisfaction. D) have been established in the courts to be superior to judgmental sampling. : LO 15-2
A) mathematically measure risk.
The auditor is testing for the balance-related audit objective of detail tie-in when they: A) prove the schedule of investment activity as to additions and subtractions. B) perform a physical inspection of the security. C) verify the quoted market prices. D) test management's assumptions related to valuation. LO 23-5
A) prove the schedule of investment activity as to additions and subtractions.
Refusal by a client to prepare and sign the representation letter would require the auditor to issue a: A) qualified opinion or a disclaimer of opinion. B) adverse opinion or a disclaimer of opinion. C) qualified or an adverse opinion. D) unqualified opinion with an explanatory paragraph. LO 24-5
A) qualified opinion or a disclaimer of opinion.
Auditors who prefer statistical to nonstatistical sampling believe that the principal advantage of statistical sampling flows from its ability to: A) quantify sampling risk. B) promote a more legally defensible procedural approach. C) define the precision required to provide audit satisfaction. D) establish conclusive audit evidence with decreased audit effort. LO 15-2
A) quantify sampling risk.
A sample in which every possible combination of items in the population has an equal chance of constituting the sample is a: A) random sample. B) statistical sample. C) judgment sample. D) representative sample. LO 15-3
A) random sample.
When choosing the appropriate acceptable risk of overreliance, the auditor needs to: A) rely on his/her professional judgment. B) err on the side of conservatism. C) consult the professional standards. D) follow SEC guidelines. LO 15-5
A) rely on his/her professional judgment.
An auditor is reviewing the minutes of board meetings to determine whether any securities are pledged as collateral. This test of the detail of balances relates to the audit objective of: A) rights. B) cutoff. C) realizable value. D) classification. LO 23-5
A) rights.
Whenever auditors use sampling, they risk making incorrect conclusions about the population. The risk that the auditor concludes that controls are nore effective than they actually are is known as the: A) risk of overreliance. B) risk of underreliance. C) risk that the sample is not representative of the population. D) risk that the sample conclusions cannot be useful because of nonprobability sampling. LO 15-5
A) risk of overreliance.
The document used to indicate to the customer the amount of a sale and payment due date is the: A) sales invoice. B) bill of lading. C) purchase order. D) sales order. LO 14-2
A) sales invoice.
A ________ is a document that is matched with the customer order to assure that the correct quantity and type of goods are shipped. A) sales order B) customer order C) vendor invoice D) sales invoice LO 14-2
A) sales order
In systematic sample selection, the population size is divided by the number of sample items desired in order to determine the: A) sampling interval. B) tolerable exception rate. C) computed upper exceptions rate. D) mean. LO 15-3
A) sampling interval.
Which one of the following statements is true? In deciding on substantive tests of transactions: A) some procedures are commonly employed on every audit regardless of the circumstances. B) all procedures are dependent on the adequacy of the controls and the results of the tests of controls. C) results obtained in the prior year's audit will not affect the procedures used this year. D) the materiality of the item will not influence the choice of procedures used. LO 14-3
A) some procedures are commonly employed on every audit regardless of the circumstances.
In determining the level of audit efficiency, once the auditor has identified the key internal controls and identified any deficiencies in order to determine the level of control risk appropriate for a private company client, it is appropriate to decide whether: A) substantive tests can be reduced sufficiently to justify costs of performing tests of controls. B) substantive tests can be increased sufficiently to justify costs of performing tests of controls. C) tests of controls can be increased sufficiently to justify costs of performing substantive tests. D) tests of controls can be reduced sufficiently to justify costs of performing substantive tests. LO 14-3
A) substantive tests can be reduced sufficiently to justify costs of performing tests of controls.
One way to evaluate sampling risk when nonstatistical sampling is used is to: A) subtract the sample exception rate from the tolerable exception rate. B) add the sample exception rate and the tolerable exception rate. C) subtract the sample exception rate from the acceptable risk of overreliance. D) add the sample exception rate and the acceptable risk of overreliance. LO 15-5
A) subtract the sample exception rate from the tolerable exception rate.
When auditors wish to evaluate a sample statistically, an acceptable selection method is: A) systematic sample selection. B) judgmental selection. C) haphazard selection. D) block sample selection. LO 15-2
A) systematic sample selection.
When auditing financial instruments, analytical procedures can be used to: A) test the reasonableness of interest and dividend income. B) test the year-end balance. C) determine if the financial instruments were properly valued. D) determine if the gain or loss on the sales were properly computed. LO 23-5
A) test the reasonableness of interest and dividend income.
In using audit sampling for exception rates: A) the auditor wants to know the most the exception rate is likely to be. B) sampling error is the likelihood that the auditor will miss a monetary misstatement. C) the upper limit of the interval estimate is known as the sampling risk. D) CUER cannot be considered in the context of specific audit objectives. LO 15-4
A) the auditor wants to know the most the exception rate is likely to be.
An auditor performs interim work at various times throughout the year. The auditor's subsequent events work should be extended to the date of: A) the auditor's report. B) a post-dated footnote. C) the next scheduled interim visit. D) the final billing for audit services rendered. LO 24-4
A) the auditor's report.
In addition to confirming bank balances of your audit client, a bank confirmation would normally contain: A) the client's bank loans with due date, interest rate, and collateral requested. B) the client's credit history as regards to paying back loans. C) the client's managements bank account information. D) the client's business prospects. LO 23-3
A) the client's bank loans with due date, interest rate, and collateral requested.
Nonprobabilistic selection methods are not based on mathematical probabilities; therefore: A) the extent to which a sample is representative of the population may be difficult to determine. B) they are discouraged by the AICPA. C) they are not allowed by the Statements on Auditing Standards. D) they are not as effective as statistical sampling. LO 15-2
A) the extent to which a sample is representative of the population may be difficult to determine.
Contingent liability disclosure in the footnotes of the financial statements would normally be made when: A) the outcome of the accounting event is deemed probable, but a reasonable estimation as to the amount cannot be made by the client or auditor. B) a reasonable estimation of the loss can be made, but the outcome is not probable. C) the outcome of the accounting event is deemed probable, and a reasonable estimation as to the amount can be made. D) the outcome of the accounting event as well as a reasonable estimation of the loss cannot be made. LO 24-2
A) the outcome of the accounting event is deemed probable, but a reasonable estimation as to the amount cannot be made by the client or auditor.
The exception rate the auditor will permit in the population and still be willing to reduce the assessed level of control risk is called the: A) tolerable exception rate. B) estimated population exception rate. C) acceptable risk of overreliance. D) sample exception rate. LO 15-5
A) tolerable exception rate.
An auditor plans to examine a sample of 40 canceled checks for a countersignature which is prescribed in the client's control procedures manual. Two of the checks in sample cannot be located by the company or the auditor. The auditor would most likely: A) treat the missing checks as a deviation when evaluating the results of the sample. B) draw a conclusion on a sample size of 38. C) substitute two more checks to get to a sample size of 40. D) recalculate the sample excluding the original 40 checks. LO 15-4 and LO 15-5
A) treat the missing checks as a deviation when evaluating the results of the sample.
The auditor's objectives for the sales and cash collections activities when the client is primarily an e-commerce business as compared to a "bricks and mortar" business are: A) unchanged. B) expanded. C) mitigated. D) decreased. LO 14-1
A) unchanged.
Which of the following methods of sample selection is appropriately used when selecting a random sample? A) Auditor's judgmental selection of items Use of random number generators Generalized audit software Yes No Yes B) Auditor's judgmental selection of items Use of random number generators Generalized audit software No Yes Yes C) Auditor's judgmental selection of items Use of random number generators Generalized audit software Yes No No D) Auditor's judgmental selection of items Use of random number generators Generalized audit software No Yes No LO 15-3
B) Auditor's judgmental selection of items Use of random number generators Generalized audit software No Yes Yes
If the auditor determines that a subsequent event that affects the current period financial statements occurred after fieldwork was completed but before the audit report was issued, what date(s) may the auditor use on the report? A) The date of the original last day of fieldwork only. The date of the subsequent event only. The date on which the last day of fieldwork occurred along with the date of the subsequent event. Yes Yes No B) The date of the original last day of fieldwork only. The date of the subsequent event only. The date on which the last day of fieldwork occurred along with the date of the subsequent event. No Yes Yes C) The date of the original last day of fieldwork only. The date of the subsequent event only. The date on which the last day of fieldwork occurred along with the date of the subsequent event. No Yes No D) The date of the original last day of fieldwork only. The date of the subsequent event only. The date on which the last day of fieldwork occurred along with the date of the subsequent event. No No Yes LO 24-4
B) The date of the original last day of fieldwork only. The date of the subsequent event only. The date on which the last day of fieldwork occurred along with the date of the subsequent event. No Yes Yes
Level ________ estimates use observable inputs other than quoted prices. A) 1 B) 2 C) 3 D) 4 LO 23-5
B) 2
Which of the following is most correct when using audit sampling for exception rates? A) Auditor is concerned with the lowest rate. B) Auditor is concerned with the highest rate. C) Auditor is concerned with the average on previous audits. D) This doesn't impact the auditor's decision. LO 15-4
B) Auditor is concerned with the highest rate.
Which of the following subsequent events is most likely to result in an adjustment to a company's financial statements? A) Merger or acquisition activities B) Bankruptcy (due to deteriorating financial condition) of a customer with an outstanding accounts receivable balance C) Issuance of common stock D) An uninsured loss of inventories due to a fire LO 24-4
B) Bankruptcy (due to deteriorating financial condition) of a customer with an outstanding accounts receivable balance
The auditors test the client's monthly bank reconciliation to verify whether the client's recorded bank balance is the same amount as the actual cash in the bank. Which of the following would not explain a difference between the company's cash balance and the bank's balance for the client? A) Deposits in transit B) Checks are written by the client in the same month the checks clear the bank. C) Other reconciling items D) Outstanding checks LO 23-3
B) Checks are written by the client in the same month the checks clear the bank.
What critical event must take place before goods can be shipped in order to assure payment can be reasonably expected? A) Determination of correct delivery address B) Credit approval C) Matching of shipping document with sales invoice D) Receipt of sales order from the customer LO 14-2
B) Credit approval
The date of the management representation letter received from the client should coincide with which of the following? A) Date of latest subsequent event disclosed in the notes to the financial statements B) Date of the auditor's report C) Balance sheet date D) Engagement agreement LO 24-5
B) Date of the auditor's report
Which of the following occurrences would be least likely to warrant further audit attention for the auditor? A) Deviations from client's established control procedures B) Deviations from client's budgeted values C) Monetary misstatements in populations of transaction data D) Monetary misstatements in populations of account balance details LO 15-4
B) Deviations from client's budgeted values
Which of the following is not a term related to evaluating results in audit sampling until after a sample is tested and evaluated? A) Sample exception rate B) Estimated population exception rate C) Computed upper exception rate D) Exception LO 15-5
B) Estimated population exception rate
Which of the following is the exception rate that the auditor expects to find before testing? A) Sample exception rate B) Estimated population exception rate C) Computed exception rate D) Tolerable exception rate LO 15-5
B) Estimated population exception rate
Which of the following is not a common audit procedure used to search for contingent liabilities? A) Examine letters of credit. B) Examine payroll reports. C) Review internal revenue agent reports. D) Analyze legal expense. LO 24-2
B) Examine payroll reports.
Which of the following would normally be discovered as part of the audit of the bank reconciliation? A) Failure to bill a customer B) Failure to include a deposit in transit on the bank reconciliation C) Duplicate payment of a vendor's invoice D) Payment to an employee for more hours than she worked LO 23-2
B) Failure to include a deposit in transit on the bank reconciliation
A bill of lading is a special type of sales invoice used when goods are shipped interstate. A) True B) False LO 14-2
B) False
A bill of lading is a written contract between the seller and the buyer. A) True B) False LO 14-2
B) False
A credit memo is a document used internally that indicates authority to write-off an account receivable as uncollectible. A) True B) False LO 14-2
B) False
A proof of cash includes a reconciliation of cash receipts deposited in the bank with the cash disbursements records for a given period. A) True B) False LO 23-4
B) False
A sales invoice is a document that usually indicates credit approval. A) True B) False LO 14-2
B) False
Acceptable risk of overreliance is the risk that the auditor is willing to take in accepting a control as effective when the true population exception rate is greater than the estimated population exception rate. A) True B) False LO 15-5
B) False
Although systematic sample selection is easy to use, its primary disadvantage is that it is not a probabilistic sampling method. A) True B) False LO 15-3
B) False
An independent review must be performed of all audits. A) True B) False LO 24-6
B) False
Analytical procedures may be used to assess the year-end balances for financial instruments. A) True B) False LO 23-5
B) False
At the completion of the audit, management is typically asked to make a written statement as a part of the engagement letter that it is aware of no undisclosed contingent liabilities. A) True B) False LO 24-5
B) False
Auditors are required to communicate either orally or in writing with the audit committee about internal control weaknesses. A) True B) False LO 24-7
B) False
Auditors are required to obtain a letter of representation that describes management's planned solutions to all internal control weaknesses identified during an audit. A) True B) False LO 24-5
B) False
Auditors usually design bank confirmations that address the client's specific circumstances. A) True B) False LO 23-3
B) False
Business risks associated with financial instruments are the same for all companies. A) True B) False LO 23-5
B) False
Credit should be approved before a customer's order is received. A) True B) False LO 14-2
B) False
Current professional auditing standards mandate the use of analytical procedures during the testing phase of the audit. A) True B) False LO 24-5
B) False
Directed sample selection, block sample selection, and haphazard sample selection are three types of probabilistic sample selection methods. A) True B) False LO 15-2
B) False
Examples of cash equivalents include time deposits, certificates of deposit, and marketable securities. A) True B) False LO 23-1
B) False
If a company uses a periodic inventory system, the shipping records are used to update the inventory quantities. A) True B) False LO 14-2
B) False
If an auditor does a test in the wrong direction, sampling risk will increase. A) True B) False LO 15-1
B) False
If, during the completion phase of the audit, the auditor determines that he or she has not obtained sufficient evidence to draw a conclusion about the fairness of the client's financial statements, there are two choices: accumulate additional evidence or issue either a qualified or an adverse opinion. A) True B) False LO 24-6
B) False
In a standard inquiry of client's attorney letter, the attorney is requested to communicate about contingencies up to the balance sheet date. A) True B) False LO 24-3
B) False
In converting from a design format audit program to a performance format audit program, procedures are combined. A) True B) False LO 14-3
B) False
Level 1 estimates require more management judgment than level 2 or level 3 estimates. A) True B) False LO 23-5
B) False
Many of the auditor's audit procedures in the audit of cash center around the client's bank confirmations. A) True B) False LO 23-3
B) False
Misstatements involving the completeness objective for sales lead to overstatements of assets and income. A) True B) False LO 14-3
B) False
Sampling risk results from the auditor's failure to recognize exceptions in transaction data. A) True B) False LO 15-1
B) False
Statistical sampling eliminates any professional judgment for the auditor. A) True B) False LO 15-7
B) False
Subsequent discoveries of facts requiring the reissuance of financial statements arise from events occurring after the date of the auditor's report. A) True B) False LO 24-8
B) False
Subsequent events which require adjustment to the financial statements provide additional information about significant conditions/events which did not exist at the balance sheet date. A) True B) False LO 24-4
B) False
Tests for kiting are performed using only a schedule of intrabank transfers. A) True B) False LO 23-4
B) False
The auditor is generally concerned about the realizable value and the rights to cash. A) True B) False LO 23-3
B) False
The auditor must use the same TER and ARO levels for all attributes of an audit test. A) True B) False LO 15-5
B) False
The client may mail the bank confirmation requests if the auditor believes doing so will increase the likelihood that the confirmation will be returned promptly. A) True B) False LO 23-3
B) False
The conjoined sample exception rate is the auditor's "best estimate" of the actual exception rate in the entire population. A) True B) False LO 15-5
B) False
The letter of representation is prepared on the CPA firm's letterhead, addressed to the client's chief executive officer, and signed by the audit engagement partner. A) True B) False LO 24-5
B) False
The majority of financial instruments are valued at the lower of cost or market. A) True B) False LO 23-5
B) False
The most important objectives for financial instruments are existence and consistency. A) True B) False LO 23-5
B) False
The prelisting of cash receipts should be prepared by the individual who has primary responsibility for the recording of cash receipts. A) True B) False LO 14-2
B) False
The preparation of a sales invoice is the final step in the sales and collection cycle. A) True B) False LO 14-2
B) False
The starting point for testing the ending balance of financial instruments accounts is to obtain a gain or loss schedule for the year. A) True B) False LO 23-5
B) False
The starting point for the verification of the balance in the general bank account is to obtain a bank cut-off statement. A) True B) False LO 23-3
B) False
The three most important audit objectives for cash are accuracy, existence, and classification. A) True B) False LO 23-3
B) False
The upper limit of the interval estimate is also known as the confidence interval. A) True B) False LO 15-4
B) False
The use of haphazard sample selection is encouraged under professional auditing standards. A) True B) False LO 15-2
B) False
To test the client's list of outstanding checks on the bank reconciliation for completeness, the auditor should trace from the list to the checks included with the cutoff bank statement. A) True B) False LO 23-3
B) False
Tracing from source documents to the journal is useful for testing the existence objective. A) True B) False LO 14-3
B) False
When an auditor is verifying quoted market prices, they are concerned about the balance-related audit objective of accuracy. A) True B) False LO 23-5
B) False
When auditing sales returns and allowances, the emphasis is normally on testing the completeness objective. A) True B) False LO 14-4
B) False
When auditing the general cash account, receipt of a standard bank confirmation is the starting point for verifying the company's general cash account balance. A) True B) False LO 23-3
B) False
When the SER exceeds the TER, the auditor should decide whether to increase sample size or to revise assessed control risk on the basis of cost versus benefit. A) True B) False LO 15-5
B) False
When using nonstatistical sampling, the sample must be a probabilistic one. A) True B) False LO 15-2
B) False
When audit procedures have been completed for an attributes sampling application, the auditor must generalize from the sample to the population. Which of the following statements would be incorrect regarding this process? A) The auditor would use an attributes sampling table to determine the computed upper exception rate. B) If the sample size is not equal to those provided for in the attributes sampling evaluation tables, the auditor cannot use attribute sampling. C) It would be wrong for the auditor to conclude that the population exception rate is exactly the same as the sample exception rate. D) In selecting the table corresponding to the ARO, it should be the same as the ARO used for determining the initial sample size. LO 15-7
B) If the sample size is not equal to those provided for in the attributes sampling evaluation tables, the auditor cannot use attribute sampling.
Which of the following results in a larger sample size? A) Decrease the estimated population exception rate and decrease the tolerable exception rate. B) Increase the estimated population exception rate and decrease the tolerable exception rate. C) Decrease the estimated population exception rate and increase the tolerable exception rate. D) Increase the estimated population exception rate and increase the tolerable exception rate. LO 15-1 and LO 15-5
B) Increase the estimated population exception rate and decrease the tolerable exception rate.
Which of the following cycles does not affect cash in bank? A) Capital acquisitions cycle B) Inventory and warehousing C) Payroll and personnel cycle D) Acquisitions and disbursements LO 23-2
B) Inventory and warehousing
Which of the following statements is not correct regarding probabilistic and nonprobabilistic sample selection? A) In probabilistic selection, every population item has a known chance of being selected. B) It is acceptable to evaluate a nonprobabilistic sample using statistical methods. C) Probabilistic selection is required for all statistical sampling methods. D) Both methods are acceptable and commonly used. LO 15-2
B) It is acceptable to evaluate a nonprobabilistic sample using statistical methods.
An imprest petty cash fund would least likely be used to pay for which of the following items? A) Minor office supplies B) Monthly interest expense C) Stamps for small mailings D) Small contributions to a local charity : LO 23-1
B) Monthly interest expense
Which of the following is the risk that audit tests will not uncover existing exceptions in a sample? A) Sampling risk B) Nonsampling risk C) Audit risk D) Detection risk LO 15-1
B) Nonsampling risk
Which of the following test of controls is useful to test the completeness objective for cash receipts? A) Compare shipping documents with sales records. B) Observe endorsement of incoming checks. C) Examine evidence that the receivable master file is reconciled to the general ledger. D) Observe if the client reconciles the bank account. LO 14-5
B) Observe endorsement of incoming checks.
Management furnishes the independent auditor with information concerning litigation, claims, and assessments. Which of the following is the auditor's primary means of initiating action to corroborate such information? A) Request that client lawyers undertake a reconsideration of matters of litigation, claims, and assessments with which they were consulted during the period under examination. B) Request that client management send a letter of inquiry to those lawyers with whom management consulted concerning litigation, claims, and assessments. C) Request that client lawyers provide a legal opinion concerning the policies and procedures adopted by management to identify, evaluate, and account for litigation, claims, and assessments. D) Request that client management engage outside attorneys to suggest wording for the text of a footnote explaining the nature and probable outcome of existing litigation, claims, and assessments. LO 24-3
B) Request that client management send a letter of inquiry to those lawyers with whom management consulted concerning litigation, claims, and assessments.
Which one of the following is of the least concern to the auditor when designing substantive tests of transactions for the sales/collection cycle? A) Sales being included in the journal for which no shipment was made B) Sales to related parties, such as officers and subsidiaries C) Sales recorded more than once D) Shipments being made to nonexistent customers and recorded as sales LO 14-3
B) Sales to related parties, such as officers and subsidiaries
Which one of the choices below is most correct regarding a cause of sampling risk? A) Ineffective use of audit procedures B) Testing less than the entire population C) Use of extensive tests of controls D) The use of random sampling LO 15-1
B) Testing less than the entire population
The auditor's responsibility with respect to events occurring between the balance sheet date and the end of the audit examination is best expressed by which of the following statements? A) The auditor is fully responsible for events occurring in the subsequent period and should extend all detailed procedures through the last day of fieldwork. B) The auditor is responsible for determining that a proper cutoff has been made and performing a general review of events occurring in the subsequent period. C) The auditor's responsibility is to determine that a proper cutoff has been made and that transactions recorded on or before the balance sheet date actually occurred. D) The auditor has no responsibility for events occurring in the subsequent period unless these events affect transactions recorded on or before the balance sheet date. LO 24-4
B) The auditor is responsible for determining that a proper cutoff has been made and performing a general review of events occurring in the subsequent period.
Subsequent events affecting the realization of assets ordinarily will require adjustments of the financial statements under examination because such events typically represent: A) the culmination of conditions that existed at the balance sheet date. B) additional new information related to events that were in existence on the balance sheet date. C) final estimates of losses relating to casualties occurring in the subsequent events period. D) preliminary estimate of losses relating to new events that occurred subsequent to the balance sheet date. LO 24-4
B) additional new information related to events that were in existence on the balance sheet date.
To determine that sales are accurately recorded, the unit prices on the duplicate sales invoices are normally compared with: A) the original invoices. B) an approved master price list. C) the amounts recorded in the sales journal for that transaction. D) the amounts posted to the customer's account in the accounts receivable master file. LO 14-3
B) an approved master price list.
When reviewing the summary of misstatements found in the audit: A) an adjusting journal entry must be made by the auditor for all material misstatements. B) auditors must combine individually immaterial misstatements to evaluate whether the combined amount is material. C) the auditor is not required to consider the impact on the current financial statements of misstatements in the prior year that were not corrected. D) auditors only need to consider the misstatements that impact the income statement. LO 24-6
B) auditors must combine individually immaterial misstatements to evaluate whether the combined amount is material.
When designing tests of controls and substantive tests of transactions for cash receipts, it is important to remember that: A) the test of controls are designed to test for monetary misstatements. B) auditors use the same methodology for designing tests of controls and substantive tests of transactions for cash receipts as they use for sales. C) the tests of controls are not dependent on the controls the auditor identifies. D) the tests of controls is not dependent on whether the company being audited is publicly traded/ LO 14-5
B) auditors use the same methodology for designing tests of controls and substantive tests of transactions for cash receipts as they use for sales.
When deciding the acceptability of the population: A) the methodology for deciding the acceptability of the population for attributes differs from determining the acceptability for nonstatistical sampling. B) before the population can be considered acceptable, the CUER determined on the basis of the actual sample results must be less than or equal to TER when both are based on the same ARO. C) when the CUER is greater than the TER, the auditor must increase the sample size. D) the CUER is compared with the TER in total, not for each attribute. LO 15-7
B) before the population can be considered acceptable, the CUER determined on the basis of the actual sample results must be less than or equal to TER when both are based on the same ARO.
A document prepared to initiate shipment of the goods sold by an independent shipper is the: A) sales order. B) bill of lading. C) sales invoice. D) customer order. LO 14-2
B) bill of lading.
Attributes sampling is based on the ________ distribution, in which each possible sample in the population has one of two possible values, such as yes or no. A) random B) binomial C) statistical D) nonstatistical LO 15-6
B) binomial
The auditor traces items from the source documents to the journals in order to accumulate audit evidence that will satisfy the: A) existence objective. B) completeness objective. C) ownership objective. D) valuation objective. LO 14-3
B) completeness objective.
Auditors, as part of completing the audit, will request the client to send a letter of inquiry to those attorneys the company has been consulting with during the year under audit regarding legal matters of concern to the company. The primary reason the auditor requests this information is to: A) determine the range of probable loss for asserted claims. B) corroborate of information supplied by management concerning litigation, claims, and assessments. C) outside opinion of probability of losses in determining accruals for contingencies. D) outside opinion of probability of losses in determining the proper footnote disclosure. LO 24-3
B) corroborate of information supplied by management concerning litigation, claims, and assessments.
Which is not an important objective for financial instruments? A) existence B) cutoff C) accuracy D) realizable value LO 23-5
B) cutoff
The reason for testing the client's bank reconciliation is to verify whether the client's recorded bank balance is the same amount as the actual cash in bank, except for deposits in transit, checks outstanding, and other reconciling items. The information needed to complete the tests of the reconciliation are provided by the: A) client's records and ledgers for the year under audit. B) cutoff bank statement. C) client's records and ledgers for the subsequent year. D) canceled checks for the year under audit. LO 23-3
B) cutoff bank statement.
The letter of representation obtained from an audit client should be: A) dated as of the end of the period under audit. B) dated as of the audit report date. C) dated as of any date decided upon by the client and auditor. D) dated as of the issuance of the financial statement. LO 24-5
B) dated as of the audit report date.
When using statistical sampling, the auditor would most likely require a smaller sample if the: A) population increases. B) desired reliability decreases. C) desired precision interval narrows. D) expected exception rate increases. LO 15-5
B) desired reliability decreases.
Whenever subsequent events are used to evaluate the amounts included in the statements, care must be taken to distinguish between conditions that existed at the balance sheet date and those that come into being after the balance sheet date. The subsequent information should not be incorporated directly into the statements if the conditions causing the change in valuation: A) took place before the balance sheet date. B) did not take place until after the balance sheet date. C) occurred both before and after the balance sheet date. D) are reimbursable through insurance policies. LO 24-4
B) did not take place until after the balance sheet date.
You are auditing Rodgers and Company. You are aware of a potential loss due to non-compliance with environmental regulations. Management has assessed that there is a 40% chance that a $10M payment could result from the non-compliance. The appropriate financial statement treatment is to: A) accrue a $4 million liability. B) disclose a liability and provide a range of outcomes. C) since there is less than a 50% chance of occurrence, ignore. D) since there is greater that a remote chance of occurrence, accrue the $10 million. LO 24-2
B) disclose a liability and provide a range of outcomes.
The general cash account is considered a significant account in almost all audits: A) where the ending balance is material. B) even when the ending balance is immaterial. C) except those of not-for-profit organizations. D) where either the beginning or ending balance is material. LO 23-2
B) even when the ending balance is immaterial.
Auditors will generally send a standard inquiry letter to: A) only those attorneys who have devoted substantial time to client matters during the year. B) every attorney that the client has been involved with in the current or preceding year, plus any attorney the client engages on occasion. C) those attorneys whom the client relies on for advice related to substantial legal matters. D) only the attorney who represents the client in proceeding where the client is defendant. LO 24-3
B) every attorney that the client has been involved with in the current or preceding year, plus any attorney the client engages on occasion.
On the last day of the fiscal year, the cash disbursements clerk drew a company check on bank A and deposited the check in the company account in bank B to cover a previous theft of cash. The disbursement has not been recorded. The auditor will best detect this form of kiting by: A) examining the composition of deposits in both bank A and bank B subsequent to year-end. B) examining paid checks returned with the bank statement of the next account period after year-end. C) preparing, from the cash disbursements records, a summary of bank transfers for one week prior to and subsequent to year-end. D) comparing the detail of cash receipts as shown by the client's cash receipts records with the detail on the confirmed duplicate deposit tickets for three days prior to and subsequent to year-end. LO 23-4
B) examining paid checks returned with the bank statement of the next account period after year-end.
The auditor's primary concern in performing audit procedures of the write-off of uncollectible accounts relates to the risk that the client writes offs customer accounts that have already been collected. The primary control for preventing this fraud is: A) examining authorized credit memos. B) examining the uncollectible account authorization form. C) examining debit memos. D) examining the vouchers payable register. LO 14-6
B) examining the uncollectible account authorization form.
When the auditor sends a confirmation to the broker-dealer, they are testing the balance-related audit objective of: A) detail tie-in. B) existence. C) cutoff. D) rights. LO 23-5
B) existence.
The majority of financial instruments are valued using: A) cost. B) fair value estimates. C) lower of cost or market. D) realizable value. LO 23-5
B) fair value estimates.
When the auditor goes through a population and selects items using nonprobabilistic selection methods, without regard to their size, source, or other distinguishing characteristics, it is called: A) block sample selection. B) haphazard selection. C) systematic sample selection. D) statistical selection. LO 15-3
B) haphazard selection.
One of the causes of nonsampling risk is: A) improper supervision and instruction of the client's employees. B) ineffective audit procedures. C) inadequate sample size. D) exceptions being found in the sample. LO 15-1
B) ineffective audit procedures.
Because cash is the most desirable asset for people to steal, it has a higher: A) control risk. B) inherent risk. C) detection risk. D) liquidity risk. LO 23-3
B) inherent risk.
As part of their internal control procedures, management needs to have procedures in place to properly classify financial instruments as trading, available-for-sale, or held-to-maturity, based on: A) cost. B) intent. C) maturity. D) probable future gain or loss. LO 23-5
B) intent.
The relationship of tolerable exception rate (TER) to sample size is: A) direct (larger TER = larger sample). B) inverse (larger TER = smaller sample). C) variable (sometimes larger, sometimes smaller). D) not determinable. LO 15-5
B) inverse (larger TER = smaller sample).
There is a(n) ________ relationship between acceptable risk of overreliance and planned sample size. A) direct. B) inverse. C) proportional. D) exponential. LO 15-5
B) inverse.
An audit procedure that compares the name, amount, and dates shown on remittance advices, either paper of electronic via direct deposit, with cash receipts journal entries and with related duplicate deposit slips would be effective in detecting: A) kiting. B) lapping. C) illicit write-offs of customers as uncollectible accounts. D) sales without proper credit authorization. LO 14-5
B) lapping.
When an employee who is authorized to make customer entries in the accounts receivable subsidiary ledger, purposefully enters cash received into the wrong customer's account that employee may be suspected of: A) kiting. B) lapping. C) floating. D) shorting. LO 14-5
B) lapping.
A document sent to each customer showing his or her beginning accounts receivable balance and the amount and date of each sale, cash payment received, any debit or credit memo issued, and the ending balance is the: A) accounts receivable subsidiary ledger. B) monthly statement. C) remittance advice. D) sales invoice. LO 14-2
B) monthly statement.
If a potential loss on a contingent liability is remote, the liability usually is: A) disclosed in footnotes, but not accrued. B) neither accrued nor disclosed in footnotes. C) accrued and indicated in the body of the financial statements. D) disclosed in the auditor's report but not disclosed on the financial statements. LO 24-2
B) neither accrued nor disclosed in footnotes.
In many audits of sales transactions substantive tests of transactions can be reduced in determining the completeness objective because: A) understatements of assets and income are a greater concern than overstatements. B) overstatements of assets and income are a greater concern than understatements. C) it doesn't matter if income is understated because the savings on income tax offsets the reduced revenue and net income is correct. D) the unrecorded sales cause a reduction of accounts receivable; therefore, the ratios of the two financial statements will not be misleading. LO 14-3
B) overstatements of assets and income are a greater concern than understatements.
When assessing risk control, the auditor must do all of the following except: A) assess control risk for each objective by evaluating the controls and deficiencies for each objective. B) perform the detailed test of balances. C) identify the key internal controls and deficiencies. D) associate the key controls and deficiencies with the objectives. LO 14-3
B) perform the detailed test of balances.
Determining if the financial instruments included in the schedule of investment activity at year end are stated at appropriate amounts in accordance with accounting standards is the balance-related audit objective of: A) materiality. B) realizable value. C) consistency. D) classification. LO 23-5
B) realizable value.
The audit and accounting concern addressed in a monthly proof of cash is with: A) adjusting account balances. B) reconciling the amounts recorded in the books with the amounts included in the bank statement. C) determining the month-end balance. D) identifying cash transfers. LO 23-4
B) reconciling the amounts recorded in the books with the amounts included in the bank statement.
The document that accompanies the customer's payment is the: A) credit memo. B) remittance advice. C) vendor invoice. D) monthly statement. LO 14-2
B) remittance advice.
When using the probability threshold for contingencies, the likelihood of the occurrence of the event is classified as: A) not likely, likely, or highly likely. B) remote, reasonably possible, or probable. C) slight, moderate, great. D) remote, likely, possible. LO 24-2
B) remote, reasonably possible, or probable.
A sample in which the characteristics of the sample are the same as those of the population is a(n): A) variables sample. B) representative sample. C) attributes sample. D) random sample. LO 15-1
B) representative sample.
Smith Manufacturing Company's accounts receivable clerk has a friend who is also a Smith's customer. The accounts receivable clerk has issued fictitious credit memos to his friend for goods supposedly returned. The most effective procedure for preventing this activity is to: A) prenumber and account for all credit memorandums. B) require receiving reports that provide evidence of returned inventory items to support all credit memorandums before they are approved. C) have independent sales and accounts receivable departments. D) mail monthly statements to customers. LO 14-4
B) require receiving reports that provide evidence of returned inventory items to support all credit memorandums before they are approved.
To test for recorded sales for which there were no actual shipments, the auditor vouches from the: A) bill of lading to the sales journal. B) sales journal to the shipping documents. C) sales journal to the accounts receivable subsidiary ledger. D) bill of lading to the supporting customer order and sales order. LO 14-3
B) sales journal to the shipping documents.
An effective procedure to test for unbilled shipments is to trace from the: A) sales journal to the shipping documents. B) shipping documents to the sales journal. C) sales journal to the accounts receivable ledger. D) sales journal to the general ledger sales account. LO 14-3
B) shipping documents to the sales journal.
The bank reconciliation: A) must be done on a daily basis if the client uses electronic banking. B) should be performed by someone independent of the handling or recording of cash receipts. C) should be performed by someone who handles cash disbursements. D) ensures that no cash has been embezzled. LO 23-3
B) should be performed by someone independent of the handling or recording of cash receipts.
When a population is divided into subpopulations, usually by dollar size, and larger samples are taken from the subpopulation with the larger sizes, ________ is being used. A) sampling with probability proportional to size B) stratified sampling C) block sampling D) haphazard sampling : LO 15-3
B) stratified sampling
When dealing with contingencies: A) all material contingencies must be disclosed or footnoted. B) the auditor must exercise considerable professional judgment when evaluating whether the client has applied the appropriate treatment. C) it is easy for the auditor to uncover contingencies without management's cooperation. D) the review for contingent liabilities is only performed at the beginning and the end of the audit. LO 24-2
B) the auditor must exercise considerable professional judgment when evaluating whether the
When processing and recording cash receipts, an important fact to consider is: A) the most important concern is depositing cash at least twice daily. B) the most important concern is the possibility of theft. C) theft can occur only after the receipts are entered in the records. D) it the customer fails to include a remittance advice, the check should be returned to the customer. LO 14-2
B) the most important concern is the possibility of theft.
Prenumbered documents will only be useful for control purposes if: A) a different numerical sequence is used for each company. B) the sequence is accounted for periodically. C) employees are allowed to use documents out of numerical sequence. D) the same numerical sequence is used each accounting period. LO 14-3
B) the sequence is accounted for periodically.
When analyzing exceptions, the auditor should keep in mind that: A) all exceptions must be reported to management. B) they should determine the breakdown in the internal controls that allowed the exceptions to occur. C) the nature of an exception and its causes have no effect on the qualitative evaluation of the system. D) exceptions do not need to be analyzed if it is too costly. LO 15-5
B) they should determine the breakdown in the internal controls that allowed the exceptions to occur.
In testing controls, an overreliance on internal controls that reduces substantive tests and increases the likelihood of not detecting a material misstatement occurs because: A) true deviation in the population was less than the sample. B) true deviation in the population was greater than the sample. C) auditor judgment was flawed. D) it is inherent in the audit risk model. LO 15-5
B) true deviation in the population was greater than the sample.
An attorney is aware of a violation of a patent agreement that could result in a significant loss to the client if it were known. This is an example of a(n): A) commitment. B) unasserted claim. C) pending litigation. D) subsequent event. LO 24-3
B) unasserted claim.
The audit procedure referred to as proof of cash receipts is particularly useful to test: A) time lags in making deposits. B) whether all recorded cash receipts have been deposited in the bank. C) whether there are cash receipts that have not been recorded in the journals. D) the client's reconciliation between cash receipts and bank deposits. LO 14-5
B) whether all recorded cash receipts have been deposited in the bank.
What needs to be included in a letter of inquiry sent to a client's legal counsel? A) Any pending threatened litigation with which the attorney has had significant involvement The amount of legal fees paid by the client to the attorney Yes Yes B) Any pending threatened litigation with which the attorney has had significant involvement The amount of legal fees paid by the client to the attorney No No C) Any pending threatened litigation with which the attorney has had significant involvement The amount of legal fees paid by the client to the attorney Yes No D) Any pending threatened litigation with which the attorney has had significant involvement The amount of legal fees paid by the client to the attorney No Yes LO 24-3
C) Any pending threatened litigation with which the attorney has had significant involvement The amount of legal fees paid by the client to the attorney Yes No
When posting items from the sales journal, details of the journal and journal totals are posted to which items? A) Details of the journal are posted to Journal totals are posted to The sales account The general ledger B) Details of the journal are posted to Journal totals are posted to The sales account The accounts receivable subsidiary ledger C) Details of the journal are posted to Journal totals are posted to The accounts receivable master file The general ledger D) Details of the journal are posted to Journal totals are posted to The accounts receivable account in the general ledger The sales account in the general ledger LO 14-2
C) Details of the journal are posted to Journal totals are posted to The accounts receivable master file The general ledger
To prevent fraud, management should deny cash access to anyone responsible for: A) Opening mail from customers Entering sales transactions Entering cash receipts transactions Yes Yes Yes B) Opening mail from customers Entering sales transactions Entering cash receipts transactions No No Yes C) Opening mail from customers Entering sales transactions Entering cash receipts transactions No Yes Yes D) Opening mail from customers Entering sales transactions Entering cash receipts transactions Yes No No LO 14.2, 14.3, and 14.5
C) Opening mail from customers Entering sales transactions Entering cash receipts transactions No Yes Yes
The following information applies to the questions below: Listed below are four interbank cash transfers, indicated by the numbers 1, 2, 3, and 4, of a client for late December 2013 and early January 2014: Bank Account One Disbursing Date (Month/Day) Per Bank Per Books 1. 12/31 12/30 2. 1/2 12/30 3. 1/3 12/31 4. 1/3 12/31 Bank Account Two Receiving Date (Month/Day) Per Bank Per Books 12/31 12/30 12/31 12/31 1/2 1/2 1/2 12/31 Based on the schedule of interbank transfers above, which of the cash transfers indicates an error in cash cutoff at December 31, 2013? A) 1 B) 2 C) 3 D) 4 LO 23-4
C) 3
The use of unobservable inputs such as a pricing model or discounted cash flow is an example of a level ________ estimate. A) 1 B) 2 C) 3 D) 1 and 3 LO 23-5
C) 3
Place the following steps in their proper order: 1. Analyze exceptions 2. Select the sample 3. Define attributes and exception conditions 4. State the objectives of the audit test 5. Specify the tolerable exception rate A) 1, 3, 2, 4, 5. B) 4, 3, 1, 2, 5. C) 4, 3, 5, 2, 1. D) 1, 2, 3, 4, 5. LO 15-5
C) 4, 3, 5, 2, 1.
Which of the following statements is correct? A) A letter of representation is documentation of management's acceptance of responsibility for the financial statements and is deemed to be reliable evidence. B) A letter of representation is not deemed to be reliable evidence because of the potential incompetence of management. C) A letter of representation is not deemed to be reliable evidence because of the lack of independence of the preparers. D) A letter of representation is documentation of the CPA's acceptance of responsibility for the audit of the financial statement and is deemed to be reliable. LO 24-5
C) A letter of representation is not deemed to be reliable evidence because of the lack of independence of the preparers.
Which event that occurred after the end of the fiscal year under audit but prior to issuance of the auditor's report would not require disclosure in the financial statements? A) Sale of a bond or capital stock issue B) Loss of plant or inventories as a result of fire or flood C) A significant decline in the market price of the corporation's stock D) A merger or acquisition LO 24-4
C) A significant decline in the market price of the corporation's stock
With which of the following client personnel would it generally not be appropriate to inquire about commitments or contingent liabilities? A) Controller B) President C) Accounts receivable clerk D) Vice president of sales LO 24-2
C) Accounts receivable clerk
Who is generally responsible for opening receipts when a company uses a lockbox to speed the handling of cash receipts? A) Company personnel B) Temporary employees in the town where the lockbox is located C) Bank employees D) Company controller LO 14-2
C) Bank employees
Which of the following statements is correct? A) Bank personnel are responsible for providing reasonable assurance that a response to a bank confirmation is accurate. B) Bank personnel are responsible for providing complete assurance that a bank confirmation is complete. C) Bank personnel are not responsible for searching their records for bank balances or loans beyond those included on the bank confirmation. D) Bank personnel are not responsible for providing information related to interest on the bank confirmation. LO 23-3
C) Bank personnel are not responsible for searching their records for bank balances or loans beyond those included on the bank confirmation.
Which of the following is likely to be detected as part of the audit of the bank reconciliation? A) Failure to bill a customer B) Duplicate payment of a vendor invoice C) Cash received by the client after year end, but included in cash receipts in the current year D) An embezzlement of cash by intercepting cash receipts from customers before they are recorded LO 23-2
C) Cash received by the client after year end, but included in cash receipts in the current year
When designing audit procedures, tracing of source documents to the customers subsidiary ledger and subsequently to the general ledger is done to satisfy what assertion? A) Valuation B) Cutoff C) Completeness D) Classification LO 14-3
C) Completeness
The test of details of balances procedure that requires the auditor to foot the outstanding check list and deposits in transit is an attempt to satisfy which audit objective? A) Cutoff B) Presentation and disclosure C) Detail tie-in D) Completeness LO 23-3
C) Detail tie-in
Attributes sampling would be an appropriate method to use on which one of the following procedures in an audit program? A) Review sales transactions for large and unreasonable amounts. B) Observe whether the duties of the accounts receivable clerk are separate from handling cash. C) Examine a sample of duplicate sales invoices for credit approval by the credit manager. D) Review the aged schedule of accounts receivable to determine if receivables from officers are included. LO 15-6
C) Examine a sample of duplicate sales invoices for credit approval by the credit manager.
Which of the following misstatements is most likely to be uncovered during an audit of a client's bank reconciliation? A) Duplicate payment of a vendor's invoice B) Billing a customer at a lower price than indicated by company policy C) Failure to record a collection of a note receivable by the bank on the client's behalf D) Payment to an employee for more than the hours actually worked LO 23-2
C) Failure to record a collection of a note receivable by the bank on the client's behalf
All of the following are correct statements regarding business risk and financial instruments except for: A) Business risks associated with financial instruments will vary depending of the aggressiveness of a company's investing activity. B) Business risk will be higher for companies investing in less liquid securities. C) Financial services firms are exposed to very little risk with their financial instruments. D) Business risk for a company will be higher when investments represent a greater proportion of total assets. LO 23-5
C) Financial services firms are exposed to very little risk with their financial instruments.
The audit objective of determining that cash in bank, as stated on the reconciliation, foots correctly and agrees with the general ledger can be tested by which of the following procedures? A) Performing tests for kiting B) Receiving and testing a cutoff bank statement C) Footing the outstanding checks list and the list of deposits in transit D) Examining the minutes of the board of directors for restrictions on the use of cash LO 23-3
C) Footing the outstanding checks list and the list of deposits in transit
Which of the following would offer the best protection for a company that wishes to prevent a reoccurrence of a previously detected "lapping" problem with trade accounts receivable? A) Segregate duties so that the bookkeeper in charge of the general ledger has no access to incoming mail. B) Segregate duties so that no employee has access to both checks from customers and currency from daily cash receipts. C) Have customers send payments directly to the company's depository bank. D) Request that customer's payment checks be made payable to the company and addressed to the treasurer. LO 14-5
C) Have customers send payments directly to the company's depository bank.
Which of the following is a correct statement? A) A proof of cash receipts is a test of the balance in the cash account at a point in time. B) The proof of cash disbursements is effective for discovering a check written for the incorrect amount for which the dollar amount in cash disbursements is also incorrect. C) It is extremely difficult for an auditor to detect thefts of cash, especially omitted transactions and account balances. D) Segregation of duties is not an important control procedure for cash in a small business. LO 23-4
C) It is extremely difficult for an auditor to detect thefts of cash, especially omitted transactions and account balances.
Which of the following statements is most correct with respect to the evaluation of nonprobabilistic sample results? A) It is acceptable to make nonprobabilistic evaluations only when probabilistic sample selection is used. B) It is acceptable to make nonprobabilistic evaluations only if the auditor cannot quantify sampling risk. C) It is never acceptable to evaluate a nonprobabilistic sample using statistical methods. D) All of the above are correct. LO 15-2
C) It is never acceptable to evaluate a nonprobabilistic sample using statistical methods.
Which of the following groups has the responsibility for identifying and deciding the appropriate accounting treatment for recording or disclosing contingent liabilities? A) Auditors B) Legal counsel C) Management D) Management and the auditors LO 24-2
C) Management
Which of the following would the auditor expect to find in the client's management representation letter? A) Management's recommendations for internal control effectiveness improvements B) Management's plans for improving product quality C) Management's compliance with contractual arrangements that impact the financial statements D) Management's goals for improving earnings per share LO 24-5
C) Management's compliance with contractual arrangements that impact the financial statements
Which of the following statements regarding block sampling is least likely to be true? A) Block sampling is the selection of several items in sequence. B) It is acceptable to use block sampling for tests of transactions only if a reasonable number of blocks is used. C) Only one block should be selected to increase the probability of a representative sample. D) Once the first item in the block is selected, the remainder of the block is chosen automatically. LO 15-3
C) Only one block should be selected to increase the probability of a representative sample.
Which of the following items would not normally appear on bank reconciliations? A) Balance per bank B) List of deposits in transit C) Outstanding deposits D) Outstanding checks LO 23-3
C) Outstanding deposits
In an effort to satisfy the completeness objective, the auditor could perform which of the following test of details of balance procedures? A) Trace the book balance on the reconciliation to the general ledger. B) Trace outstanding checks to subsequent period bank statements. C) Perform a four-column proof of cash. D) Review financial statements to make sure that material savings accounts and certificates of deposit are disclosed separately. LO 23-3
C) Perform a four-column proof of cash.
Which of the following is a business function related to sales returns and allowances? A) Processing customer orders B) Writing off uncollectible accounts C) Processing and recording credit memos D) Granting credit LO 14-2
C) Processing and recording credit memos
Which of the following is not a business function within the "Sales" class of transactions? A) Processing customer orders B) Granting credit C) Processing and recording sales returns and allowances D) Shipping goods Answer: C LO 14-2
C) Processing and recording sales returns and allowances
Which of the following statements is most correct with concerning the quantification of sampling risk? A) Sampling risk cannot be quantified. B) Sampling risk can be quantified only when nonprobabilistic selection techniques are used to select the sample. C) Sampling risk can be quantified only when probabilistic selection techniques are used to select the sample. D) None of the above. LO 15-2
C) Sampling risk can be quantified only when probabilistic selection techniques are used to select the sample.
Which of the following material events occurring subsequent to the balance sheet date would require an adjustment to the financial statements before they could be issued? A) Loss of a plant as a result of a flood B) Sale of long-term debt or capital stock C) Settlement of litigation in excess of the recorded liability D) Major purchase of a business that is expected to double the sales volume LO 24-4
C) Settlement of litigation in excess of the recorded liability
The audit procedures for the subsequent events review can be divided into two categories: (1) procedures integrated as a part of the verification of year-end account balances, and (2) those performed specifically for the purpose of discovering subsequent events. Which of the following procedures is in the first category? A) Inquire of client regarding contingent liabilities. B) Obtain a letter of representation written by client. C) Subsequent period sales and purchases transactions are examined to determine whether the cutoff is accurate. D) Review journals and ledgers of year 2 to determine the existence of any transactions related to year 1. LO 24-4
C) Subsequent period sales and purchases transactions are examined to determine whether the cutoff is accurate.
Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom? A) The cashier prepares the daily deposit. B) The cashier makes the daily deposit at a local bank. C) The cashier posts the receipts to the accounts receivable subsidiary ledger cards. D) The cashier endorses the checks. LO 14-3
C) The cashier posts the receipts to the accounts receivable subsidiary ledger cards.
When should auditors generally assess a client's ability to continue as a going concern? A) Upon completion of the audit B) During the planning stages of the audit C) Throughout the entire audit process D) During testing and completion phases of the audit LO 24-5
C) Throughout the entire audit process
Which of the following verifications would generally not be performed by the auditor in the month subsequent to the balance sheet date? A) Foot the lists of all canceled checks, debit memos, deposits, and credit memos. B) Verify the bank statement balances when the footed totals are used. C) Verify the book statement balances tie to the cash receipts and disbursements journals for the year under audit. D) Review the items included in the footings to make sure that they were cancelled by the bank LO 23-3
C) Verify the book statement balances tie to the cash receipts and disbursements journals for the year under audit.
An auditor must obtain written client representations that might be signed by all but which of the following? A) Treasurer B) Chief financial officer C) Vice president of operations D) Chief executive officer LO 24-5
C) Vice president of operations
A client has a calendar year-end. Listed below are four events that occurred after December 31. Which one of these subsequent events might result in adjustment of the December 31 financial statements? A) Sale of a major subsidiary B) Adoption of accelerated depreciation methods C) Write-off of a substantial portion of inventory as obsolete D) Collection of 90% of the accounts receivable existing at December 31 LO 24-4 AACSB: Analytic skills
C) Write-off of a substantial portion of inventory as obsolete
A partial-period bank statement and the related canceled checks, duplicate deposit slips, and other documents included in bank statements, mailed by the bank directly to the CPA firm's office, is called: A) a four-column proof of cash. B) a year-end bank statement. C) a cutoff bank statement. D) a short-period bank statement. LO 23-3
C) a cutoff bank statement.
A proof of cash represents: A) a test of controls and substantive test of transactions. B) a substantive test of transactions. C) a substantive test of transactions and test of details of balances. D) a test of details of balances. LO 23-4
C) a substantive test of transactions and test of details of balances.
While there is no professional requirement to do so on audit engagements, CPAs frequently issue a formal "management" letter to clients. The primary purpose of this letter is to provide: A) evidence indicating whether the auditor is reasonably certain that internal accounting control is operating as prescribed. B) a permanent record of the internal accounting control work performed by the auditor during the course of the engagement. C) a written record of discussions between auditor and client concerning the auditor's observations and suggestions for improvements. D) a summary of the auditor's observations that resulted from the auditor's special study of internal control. LO 24-7
C) a written record of discussions between auditor and client concerning the auditor's observations and suggestions for improvements.
The risk which the auditor is willing to take in accepting a control as being effective when the true population exception rate is greater than a tolerable rate is the: A) finite correction factor. B) tolerable exception rate. C) acceptable risk of overreliance. D) estimated population exception rate. LO 15-5
C) acceptable risk of overreliance.
After the balance sheet date, but prior to the issuance of the audit report, the client suffers an uninsured loss of their inventory as a result of a fire. The amount of the loss is material. The auditor should: A) adjust the financial statements for the year under audit. B) add a paragraph to the audit report. C) advise the client to disclose the event in the notes to the financial statements. D) advise the client to delay issuing the financial statements until the economic loss can be determined. LO 24-4
C) advise the client to disclose the event in the notes to the financial statements.
Before goods are shipped on account, a properly authorized person must: A) prepare the sales invoice. B) approve the journal entry. C) approve the customer's credit. D) verify that the unit price is accurate. LO 14-2
C) approve the customer's credit.
To determine if a sample is truly representative of the population, an auditor would be required to: A) conduct multiple samples of the same population. B) never use sampling because of the expense involved. C) audit the entire population. D) use systematic sample selection. LO 15-1
C) audit the entire population.
An auditor has the responsibility to actively search for subsequent events that occur subsequent to the: A) balance sheet date. B) date of the auditor's report. C) balance sheet date, but prior to the audit report. D) date of the management representation letter. LO 24-4
C) balance sheet date, but prior to the audit report.
Preparation of a proof of cash would not be useful in discovering differences between the actual and reported cash balances if the differences were due to: A) deposits in transit. B) collections on the company's behalf by the bank which are deposited directly to the company's account. C) cash receipts that were not recorded in the relevant accounting records. D) service charges. LO 14-5
C) cash receipts that were not recorded in the relevant accounting records.
In many audits, no substantive tests of transactions are made for the ________ assertion on the grounds that understatement of sales is not a concern. A) accuracy B) existence C) completeness D) none of the above LO 14-3
C) completeness
The auditor's primary concern relative to presentation and disclosure-related objectives is: A) accuracy. B) existence. C) completeness. D) occurrence. LO 24-1
C) completeness.
The document that requires adjustments to the customers subsidiary ledger account is the: A) bill of lading. B) sales invoice. C) credit memo. D) monthly statement. LO 14-2
C) credit memo.
A ________ is a document that indicates a request for merchandise by a customer. A) sales invoice B) vendor invoice C) customer order D) sales order LO 14-2
C) customer order
Most companies recognize sales revenue when: A) sales are invoiced. B) payment is received from the customer. C) goods are shipped. D) the customer's order is received. LO 14-2
C) goods are shipped.
Some companies have customers send payments directly to an address maintained by a bank. This is called a(n) ________ system. A) direct deposit B) funds transfer C) lockbox D) interbank transfer LO 14-2
C) lockbox
In performing a review of a client's cash disbursements, an auditor uses systematic sample selection with a random start. The primary disadvantage of this technique is population items: A) may occur twice in the sample. B) must be reordered in a systematic pattern before the sample can be drawn. C) may occur in a systematic pattern, thus negating the randomness of the sample. D) must be replaced in the population after sampling to permit valid statistical inference. : LO 15-3
C) may occur in a systematic pattern, thus negating the randomness of the sample.
The auditor is responsible for communicating significant internal control deficiencies to the audit committee, or those charged with governance. This communication: A) may be oral or written. B) must be oral. C) must be written. D) must be oral via direct communication. LO 24-7
C) must be written.
The audit firm issues an audit report for its client. The auditor's have NO obligation to make further inquiries with respect to the client's audited financial statements unless: A) a development occurs that may affect the company's long term viability as a company. B) final resolution was made on disclosed contingency for which no liability needed to be accrued. C) new information comes to the auditor's attention concerning an event that occurred prior to the date of the audit report that, if known, would have impacted the audit opinion. D) a lawsuit, in which the risk of loss was considered remote, was resolved in the company's favor. LO 24-8
C) new information comes to the auditor's attention concerning an event that occurred prior to the date of the audit report that, if known, would have impacted the audit opinion.
To make a final evaluation as to whether sufficient appropriate evidence has been accumulated, the auditor will do all of the following except: A) review the audit documentation for the entire audit to determine whether all material classes of transactions have been adequately tested. B) make sure that all parts of the audit program have been accurately completed and documented. C) obtain the management representation letter. D) decide whether the audit program is adequate. LO 24-6
C) obtain the management representation letter.
Auditing standards require that the auditor evaluate whether there is a substantial doubt about a client's ability to continue as a going concern for at least: A) one quarter beyond the balance sheet date. B) one quarter beyond the date of the auditor's report. C) one year beyond the balance sheet date. D) one year beyond the date of the auditor's report. LO 24-5
C) one year beyond the balance sheet date.
All of the following would not be uncovered by a bank reconciliation except for: A) duplicate payment of a vendor's invoice. B) improper payments of officers' personal expenditures. C) payments on notes payable debited directly to the the bank account by the bank but not recorded on the books. D) payment to an employee for more hours than he worked. LO 23-2
C) payments on notes payable debited directly to the the bank account by the bank but not recorded on the books.
There are three phases in both statistical and nonstatistical sampling. The first phase is to: A) generate random numbers for the sample. B) evaluate the results. C) plan the sample. D) select the sample. LO 15-2
C) plan the sample.
The difference between the tolerable exception rate and the estimated population exception rate is called: A) accuracy of the initial sample estimate. B) inflation factor of the initial sample estimate. C) precision of the initial sample estimate. D) reliability of the initial sample estimate. LO 15-5
C) precision of the initial sample estimate.
One of the primary approaches in dealing with uncertainties in loss contingencies uses a ________ threshold. A) monetary B) materiality C) probability D) analytical LO 24-2
C) probability
Auditing standards require the auditor to ________ other information included in annual reports pertaining directly to the financial statements. A) audit B) express an opinion on C) read D) analyze LO 24-5
C) read
The direct receipt of a confirmation from every bank with which the client does business is: A) required by auditing standards for every audit. B) not necessary unless material fraud is suspected. C) recommended but not required by auditing standards. D) necessary for every audit except when there are an unusually large number of active accounts. LO 23-3
C) recommended but not required by auditing standards.
The acceptable risk of overreliance: A) is the risk that the auditor will erroneously conclude that the controls are less effective than they actually are. B) is less of a concern to the auditors than the risk of underreliance. C) represents the auditor's measure of sampling risk. D) is determined by a statistical formula, and not by professional judgment. LO 15-5
C) represents the auditor's measure of sampling risk.
A client representation letter is: A) prepared on the CPA's letterhead. B) addressed to the client. C) signed by high-level corporate officials. D) dated as of the balance sheet date. LO 24-5
C) signed by high-level corporate officials.
The process which requires the calculation of an interval and then selects the items based on the size of the interval is: A) statistical sampling. B) random sample selection. C) systematic sample selection. D) computerized sample selection. LO 15-3
C) systematic sample selection.
When an audit client uses a service organization to manage their investment activity: A) the auditor can always rely on the internal controls of the service organization. B) the auditor must state in their audit opinion that the client uses a service organization. C) the auditor can rely on the internal controls of the service organization if the service organization's auditor issues a report on their internal control. D) the auditor must rely on the service organization to determine the fair level 1, 2, and 3 estimates. LO 23-5
C) the auditor can rely on the internal controls of the service organization if the service organization's auditor issues a report on their internal control.
When auditing financial instruments: A) the auditor usually performs more extensive substantive testing to reduce reliance on controls. B) analytical procedures are critical in assessing the year-end balances for financial instruments. C) the auditor relies on statements and broker's advices from investment managers to test purchases and sales as long as controls were deemed effective. D) tests of transactions are generally not performed. LO 23-5
C) the auditor relies on statements and broker's advices from investment managers to test purchases and sales as long as controls were deemed effective.
When communicating with the audit committee and management: A) only material fraud and illegal acts are required by auditing standards to be communicated. B) all internal control deficiencies are required by auditing standards to be communicated. C) the communications should be made in a timely manner to allow those charged with governance to take appropriate actions. D) all communications with the audit committee and management must be in writing. LO 24-7
C) the communications should be made in a timely manner to allow those charged with governance to take appropriate actions.
The highest estimated exception rate in the population at a particular acceptable risk of assessing control risk too low is: A) the upper exception rate. B) estimated population exception rate. C) the computed upper exception rate. D) the tolerable exception rate. : LO 15-4
C) the computed upper exception rate.
Factors that impact inherent risk of financial instruments do not include: A) management's objectives related to investment activity. B) the complexity of the securities. C) the cost of the securities. D) the company's prior experience with certain investments. LO 23-5
C) the cost of the securities.
The sample exception rate equals: A) the number of exceptions in the population divided by the sample size. B) the number of items in the population multiplied by the number of exceptions in the sample. C) the number of exceptions in the sample divided by the sample size. D) the number of exceptions in the population divided by the population size. LO 15-5
C) the number of exceptions in the sample divided by the sample size.
Inquiries of management regarding the possibility of unrecorded contingencies will be useful in uncovering: A) Management's intentional failure to disclose existing contingencies. When management does not comprehend accounting disclosure requirements. Yes Yes B) Management's intentional failure to disclose existing contingencies. When management does not comprehend accounting disclosure requirements. No No C) Management's intentional failure to disclose existing contingencies. When management does not comprehend accounting disclosure requirements. Yes No D) Management's intentional failure to disclose existing contingencies. When management does not comprehend accounting disclosure requirements. No Yes LO 24-2
D) Management's intentional failure to disclose existing contingencies. When management does not comprehend accounting disclosure requirements. No Yes
Which of the following balance-related objectives applies to auditing the general cash account? A) Rights Classification Realizable value Yes No Yes B) Rights Classification Realizable value No Yes No C) Rights Classification Realizable value Yes Yes Yes D) Rights Classification Realizable value No No No LO 23-3
D) Rights Classification Realizable value No No No
Auditors often integrate procedures for presentation and disclosure objectives with: A) Tests for planning objectives Tests for balance-related objectives Yes Yes B) Tests for planning objectives Tests for balance-related objectives No No C) Tests for planning objectives Tests for balance-related objectives Yes No D) Tests for planning objectives Tests for balance-related objectives No Yes LO 24-1
D) Tests for planning objectives Tests for balance-related objectives No Yes
A danger in setting the acceptable risk of overreliance too low is: A) The risk that the auditor is willing to take of accepting a control as ineffective when it is effective The risk that the auditor is willing to take of accepting a control as effective when it is ineffective Yes Yes B) The risk that the auditor is willing to take of accepting a control as ineffective when it is effective The risk that the auditor is willing to take of accepting a control as effective when it is ineffective No No C) The risk that the auditor is willing to take of accepting a control as ineffective when it is effective The risk that the auditor is willing to take of accepting a control as effective when it is ineffective Yes No D) The risk that the auditor is willing to take of accepting a control as ineffective when it is effective The risk that the auditor is willing to take of accepting a control as effective when it is ineffective No Yes LO 15-5
D) The risk that the auditor is willing to take of accepting a control as ineffective when it is effective The risk that the auditor is willing to take of accepting a control as effective when it is ineffective No Yes
Based on the schedule of interbank transfers above, which of the cash transfers would appear as a deposit in transit on the December 31, 2013 bank reconciliation? A) 1 B) 2 C) 3 D) 4 LO 23-4
D) 4
The standard bank confirmation form has been agreed upon by the: A) SEC and FASB. B) AICPA and the SEC. C) SEC and the American Bankers' Association. D) AICPA and the American Bankers' Association. LO 23-3
D) AICPA and the American Bankers' Association.
Which of the following is an account that is not affected by the sales and collection cycle? A) Cash B) Accounts receivable C) Allowance for doubtful accounts D) Accounts payable LO 14-1
D) Accounts payable
Which of the following statements best expresses the impact that the performance of audit procedures has on statistical vs. nonstatistical sampling? A) Audit procedures on the sample item will vary as a result of using either statistical or nonstatistical sampling. B) The audit procedures will be the same for either statistical or nonstatistical sampling but they must be performed differently for each. C) Statistical sampling requires quantitative audit procedures, whereas nonstatistical sampling requires judgmental audit procedures. D) Audit procedures on the sample item will not vary as a result of using either statistical or nonstatistical sampling. : LO 15-2
D) Audit procedures on the sample item will not vary as a result of using either statistical or nonstatistical sampling.
Which of the following statements is correct? A) Auditors must obtain bank confirmations for audits of non-public entities. B) Auditors are required to obtain bank confirmations under international auditing standards. C) Auditing standards do not address specific requirements regarding bank confirmations. D) Auditing standards do not require bank confirmations. LO 23-3
D) Auditing standards do not require bank confirmations.
A proof of cash is effective at identifying which of the following misstatements? A) Checks written for incorrect amounts B) Checks issued to invalid vendors C) Fraudulent checks D) Checks recorded in the books for an amount different from that on the check LO 23-4
D) Checks recorded in the books for an amount different from that on the check
Which of the following statements is a valid criticism of nonstatistical sampling? A) Many audit tests, such as footing of journals, must be performed outside a statistical sampling context. B) The cost of performing random selection or testing often exceeds the benefits. C) Nonstatistical sampling does not differ substantially from statistical sampling methods. D) Conclusions may be drawn in more precise ways when using statistical sampling methods. LO 15-2
D) Conclusions may be drawn in more precise ways when using statistical sampling methods.
What event initiates a transaction in the sales and collection cycle? A) Receipt of cash B) Delivery of product to a customer C) Identification of a new customer D) Customer request for goods LO 14-2
D) Customer request for goods
Which of the following would be a subsequent discovery of facts which would not require a response by the auditor? A) Discovery of the inclusion of material nonexistent sales B) Discovery of the failure to write off material obsolete inventory C) Discovery of the omission of a material footnote D) Discovery of management's intent to increase selling prices in the future LO 24-4
D) Discovery of management's intent to increase selling prices in the future
Which of the following is not considered a commitment? A) Agreements to purchase raw materials B) Pension plans C) Agreements to lease facilities at set prices D) Each of the above is a commitment. LO 24-2
D) Each of the above is a commitment.
Which of the following is not one of the five classes of transactions included in the sales and collection cycle? A) Sales returns and allowances B) Write-off of uncollectible accounts C) Bad debt expense D) Interest Income LO 14-2
D) Interest Income
Which of the following is not a reason why the auditor requests that the client provide a letter of representation? A) Professional auditing standards require the auditor to obtain a letter of representation. B) It impresses upon management its responsibility for the accuracy of the information in the financial statements. C) It provides written documentation of the oral responses already received to inquiries of management. D) It determines the type of opinion the auditor will issue on the financial statements. LO 24-5
D) It determines the type of opinion the auditor will issue on the financial statements.
Which of the following statements regarding the letter of representation is not correct? A) It is prepared on the client's letterhead. B) It is addressed to the CPA firm. C) It is signed by high-level corporate officials, usually the president and chief financial officer. D) It is optional, not required, that the auditor obtain such a letter from management. LO 24-5
D) It is optional, not required, that the auditor obtain such a letter from management.
Which of the following is not a "cash equivalent"? A) Time deposits B) Certificates of deposit C) Money market funds D) Marketable securities LO 23-1
D) Marketable securities
Which of the following is not one of the categories of items included in the client letter of representation? A) Subsequent events B) Completeness of information C) Recognition, measurement, and disclosure D) Materiality LO 24-5
D) Materiality
Transaction-related audit objectives are essentially the same for processing credit memos as for sales with certain differences. Which of the following are two key differences? A) Risk and emphasis on the completeness objective. B) Materiality and emphasis on the accuracy objective C) Risk and emphasis on the classification objective D) Materiality and emphasis on the occurrence objective LO 14-4
D) Materiality and emphasis on the occurrence objective
The most important balance-related audit objectives in the audit of cash include all but which of the following? A) Existence B) Accuracy C) Completeness D) Occurrence LO 23-3
D) Occurrence
Which of the following would have the least impact in determining sample size? A) Acceptable risk of overreliance B) Risk of assessing control risk too low C) Tolerable exception rate D) Population size LO 15-5
D) Population size
In using sampling distribution for attributes, which one of the following must be known to evaluate the sample results? A) Estimated dollar value of the population B) Standard exception of the values in the population C) Actual exception rate of the attribute in the population D) Sample size LO 15-7
D) Sample size
Which of the following would least concern an auditor regarding the lack of a specific authorization to conduct the sales transaction? A) Granting of credit B) Shipment of goods C) Determination of discounts D) Selling of goods for cash LO 14-3
D) Selling of goods for cash
A proof of cash is not an effective procedure for identifying which of the following types of misstatements? A) All recorded disbursements were paid by the bank. B) All recorded cash receipts were deposited. C) All amounts that were paid by the bank were recorded. D) Some checks were written for incorrect amounts. LO 23-4
D) Some checks were written for incorrect amounts.
Which of the following is correct regarding supplementary information? A) The auditor must express an opinion on the supplementary information. B) When reporting on supplementary information, the auditor uses a different materiality threshold from that used in forming an opinion on the basic financial statements. C) If the auditor's report on the audited financial statements contains an adverse opinion, the auditor can still issue an unqualified opinion on the supplementary information. D) The auditor can issue a separate report on the supplementary information; it does not need to be part of the report on the financial statements. LO 24-5
D) The auditor can issue a separate report on the supplementary information; it does not need to be part of the report on the financial statements.
If the auditor concludes that there are contingent liabilities, he or she must evaluate the significance of the potential liability and the nature of the disclosure needed in the financial statements. Which of the following statements is not true? A) The potential liability is sufficiently well known in some instances to be included in the financial statements as an actual liability. B) Disclosure may be unnecessary if the contingency is highly remote or immaterial. C) A CPA firm often obtains a separate evaluation of the potential liability from its own legal counsel rather than relying on management or management's attorneys. D) The client's attorneys must remain independent when evaluating the likelihood of losing the lawsuit. LO 24-2
D) The client's attorneys must remain independent when evaluating the likelihood of losing the lawsuit.
Which of the following statements is most correct? A) A sample of all items of a population will eliminate sampling risk, but increase nonsampling risk. B) The use of an appropriate sample selection technique ensures a representative sample. C) The auditor's failure to recognize an exception is a significant cause of sampling risk. D) The use of inappropriate audit procedures is a significant cause of nonsampling risk. LO 15-1
D) The use of inappropriate audit procedures is a significant cause of nonsampling risk.
You are determining the significance of the following: you set a 5% risk of assessing control risk to low and your computation of the upper deviation risk is 7%. What could you conclude? A) There is a 95% chance the deviation rate is the population is less than 5%. B) There is a 5% chance the deviation rate in the population is less than 7%. C) There is a 95% chance the deviation rate in the population exceeds 95%. D) There is a 5% chance the deviation rate in the population exceeds 7%. LO 15-4
D) There is a 5% chance the deviation rate in the population exceeds 7%.
Which of the following must be set prior to testing a sample? A) Sample exception rate B) Achieved upper precision limit C) Computed exception rate D) Tolerable exception rate LO 15-5
D) Tolerable exception rate
Generally, when is the earliest point in the sales and collection cycle in which revenue can be recognized? A) When the sale is approved B) When the credit approval process is finalized C) When the cash is collected D) When the goods have been shipped LO 14-2
D) When the goods have been shipped
In the accounts receivable subsidiary ledger the length of time the account has been due can be useful to the client and the auditor in preparing the: A) trial balance. B) working trial balance. C) accounts receivable trial balance. D) aged accounts receivable trial balance. LO 14-2
D) aged accounts receivable trial balance.
When defining the population: A) it may be necessary to define separate populations for different audit procedures. B) the auditor may generalize only about the population that has been sampled. C) auditors can define the population to include any items they want. D) all of the above. Objective: LO 15-5
D) all of the above.
When assessing planned control risk for sales: A) the key internal controls and deficiencies for sales will be the same for every company. B) the audit objectives for sales will differ from company to company. C) a flowchart is required to help assess control risk for sales. D) assessing control risk for sales is a highly subjective decision. LO 14-3
D) assessing control risk for sales is a highly subjective decision.
Rodgers CPA believes that the rate of client billing errors is 4% and has established a tolerable deviation rate of 6%. In auditing client invoices Rodgers should use: A) stratified sampling. B) classical sampling. C) proportional sampling. D) attributes sampling. LO 15-6
D) attributes sampling.
The total of the individual account balances in the accounts receivable subsidiary ledger should equal the: A) total sales for the period. B) balance of the sales account in the general ledger. C) total sales less the total cash received for the period. D) balance of the accounts receivable account in the general ledger. LO 14-2
D) balance of the accounts receivable account in the general ledger.
The auditor's responsibility for "reviewing the subsequent events" of a public company that is about to issue new securities is normally limited to the period of time: A) beginning with the balance sheet date and ending with the date of the auditor's report. B) beginning with the start of the fiscal year under audit and ending with the balance sheet date. C) beginning with the start of the fiscal year under audit and ending with the date of the auditor's report. D) beginning with the balance sheet date and ending with the date the registration statement becomes effective. LO 24-4
D) beginning with the balance sheet date and ending with the date the registration statement becomes effective.
The standard letter of inquiry to the client's legal counsel should be prepared on: A) plain paper (no letterhead) and be unsigned. B) lawyer's stationery and signed by the lawyer. C) auditor's stationery and signed by an audit partner. D) client's stationery and signed by a company official. LO 24-3
D) client's stationery and signed by a company official.
The audit procedure which requires the auditor to record the last check number used on the last day of the year and subsequently trace to the outstanding checks and the cash disbursements records is performed to satisfy the audit objective of: A) detail tie-in. B) existence. C) completeness. D) cutoff. LO 23-3
D) cutoff.
When the auditor believes the year-end bank reconciliation may be intentionally misstated, it is appropriate to perform extended tests of the year-end bank reconciliation. Assuming the client has a October 31 year-end, these extended tests would not include: A) comparing all September 30 reconciling items with canceled checks and other documents in the October bank statement. B) comparing all canceled checks and deposit slips in the October bank statement with the October cash disbursements and receipts records. C) carrying out all proper procedures subsequent to the end of the year with the use of the bank cutoff statement. D) determining that all outstanding checks had cleared by the date of the bank cutoff statement. LO 23-4
D) determining that all outstanding checks had cleared by the date of the bank cutoff statement.
A major consideration in the audit of the general cash balance is the possibility of fraud. The auditor must extend his or her procedures in the audit of year-end cash to determine the possibility of a material fraud when there are: A) large cash balances at the end of the year. B) large cash receipts and disbursements during the year. C) no imprest accounts used for payroll. D) inadequate internal controls. LO 23-4
D) inadequate internal controls.
If an auditor waits until the subsequent period bank statement is available to verify reconciling items, it is primarily a test for: A) errors. B) omissions. C) kiting. D) intentional misstatements. LO 23-3
D) intentional misstatements.
Simple random sampling: A) is used when there is a need to emphasize one or more types of population items. B) requires both input and output parameters to be set when using a random number generator. C) is generally used with replacement sampling. D) is a probabilistic sampling method. LO 15-3
D) is a probabilistic sampling method.
An imprest petty cash fund: A) is a bank account. B) is used for large, unusual purchases. C) is usually reimbursed at least once a week for good internal control. D) is being replaced by pre-approved purchase cards in many companies. LO 23-1
D) is being replaced by pre-approved purchase cards in many companies.
The most serious shortcoming of the haphazard sample selection method is: A) it is not subject to statistical sampling methods. B) it is time consuming to use. C) it is costly to use. D) it is difficult to remain completely unbiased in the selection. : LO 15-3
D) it is difficult to remain completely unbiased in the selection.
At the completion of the audit, management is asked to make a written statement that it is not aware of any undisclosed contingent liabilities. This statement would appear in the: A) management letter. B) letter of inquiry. C) letters testamentary. D) management letter of representation. LO 24-5
D) management letter of representation.
An attorney is responding to an independent auditor as a result of the client's letter of inquiry. The attorney may appropriately limit the response to: A) asserted claims and litigation. B) asserted, overtly threatened, or pending claims and litigation. C) items which have an extremely high probability of being resolved to the client's detriment. D) matters to which the attorney has given substantive attention in the form of legal consultation or representation. LO 24-3
D) matters to which the attorney has given substantive attention in the form of legal consultation or representation.
An auditor needs to determine whether all customers of an electric utility company are being billed. The auditor should test from the: A) sales register to the accounts receivable ledger. B) sales register to the meter department records. C) accounts receivable ledger to the sales register. D) meter department records to the sales register. LO 14-3
D) meter department records to the sales register.
After an auditor has issued an audit report on a nonpublic entity, there is no obligation to make any further audit tests or inquiries with respect to the audited financial statements covered by that report unless: A) material adverse events occur after the date of the auditor's report. B) final determination or resolution was made of a contingency which had been disclosed in the financial statements. C) final determination or resolution was made on matters which had resulted in a qualification in the auditor's report. D) new information comes to the auditor's attention concerning an event that occurred prior to the date of the auditor's report that may have affected the auditor's report. LO 24-4
D) new information comes to the auditor's attention concerning an event that occurred prior to the date of the auditor's report that may have affected the auditor's report.
Audit procedures related to contingent liabilities are initially focused on: A) accuracy. B) completeness. C) existence. D) occurrence. LO 24-2
D) occurrence.
When dealing with financial instruments, the most difficult balance-related audit objective to test is: A) existence. B) accuracy. C) rights. D) realizable value. LO 23-5
D) realizable value.
Auditing standards require the auditor to communicate all management frauds and illegal acts to the audit committee: A) only if the act is immaterial. B) only if the act is material. C) only if the act is highly material. D) regardless of materiality. LO 24-7
D) regardless of materiality.
The document that the accounting staff will use as the primary basis for recording sales transactions and updating the customers accounts receivable subsidiary ledger is the: A) sales order. B) bill of lading. C) sales journal. D) sales invoice. LO 14-3
D) sales invoice.
A principal advantage of statistical methods of attributes sampling over nonstatistical methods is that they provide a scientific basis for establishing the: A) risk of assessing control risk too low. B) tolerable exception rate. C) expected population exception rate. D) sample size. LO 15-7
D) sample size.
The auditor has a responsibility to review transactions and activities occurring after the balance sheet date to determine whether anything occurred that might affect the statements being audited. The procedures required to verify these transactions are commonly referred to as the review for: A) contingent liabilities. B) subsequent year's transactions. C) late unusual occurrences. D) subsequent events. LO 24-4
D) subsequent events.
A schedule of investment activity will include all but: A) the purchases and sales. B) ending balances. C) the gains and losses. D) the opinion of management as to the suitability of the investment to the company. LO 23-5
D) the opinion of management as to the suitability of the investment to the company.
Sales should be recorded, at the earliest, when: A) the order is received. B) the order is received and credit is approved. C) credit is approved and it is verified that there is enough inventory to fill the order. D) the shipment takes place. LO 14-2
D) the shipment takes place.
When auditing financial instruments , a confirmation is sent to the broker-dealer: A) only if the client has poor internal controls. B) to confirm interest and dividends. C) to provide assurance on realizable value. D) to confirm year-end holdings. LO 23-5
D) to confirm year-end holdings.
The exception rate that the auditor will permit in the population and still be willing to use the preliminary control risk assessment is called the: A) acceptable exception rate. B) estimated population exception rate. C) sample exception rate. D) tolerable exception rate. : LO 15-5
D) tolerable exception rate.