External Auditing Exam 4

Alice Rathermel audited LoHo Company's inventory using sampling. She examined 120 items from an inventory compilation list and discovered net overstatement of $480. The audited items had a book (recorded) value of $48,000. There were 1,200 inventory items listed, and the total recorded inventory amount was $490,000. What is the projected misstatement using mean-per-unit estimation?

$10,000

Assume that an account with a recorded balance of $5,000 has an audited value of $3,000. By using monetary unit sampling, if the sampling interval is $1,500, the projected misstatement would be

$2,000.

If the upper limit on misstatements is calculated at $17,800 and the tolerable misstatement is $15,000, what is the minimum amount of adjustment necessary for the audit team to issue an unmodified opinion on the client's financial statements?

$2,800.

A component of an account balance has a recorded balance of $10,000 and an audited value of $8,000. By using monetary unit sampling, if the sampling interval is $20,000, the projected misstatement would be

$4,000.

Tracing a sample of inventory receiving reports to the perpetual inventory record entry achieves the specific ASB balance assertion of

completeness.

Auditors need to determine whether debt _____ have been met.

covenants

Audit software can help confirm _____ in public warehouses by extracting inventory items with a code denoting that they are stored there for future comparison to the confirmation received from the warehouse.

existence

Selecting a sample of notes payable transactions and vouching payments to cancelled checks is a test of the ASB balance assertion of

existence.

Covenant violations should still be disclosed in the ________.

financial statements

Which of the following would not be an example of an inventory record error or fraud?

incorrect sales price.

Sometimes auditors may ______securities on hand.

inspect

Stratification is the technique of dividing a population into subgroups called ______.

strata

Auditors often ______ a population before computing the required sample size.

stratify

At the beginning of the observation of the inventory count, the auditor records the last bill of lading used by the company to

test inventory cut-off.

Audit effectiveness is impacted when the auditor doesn't do enough _______.

testing

An investment committee is a standing committee of _______.

the board of directors

Bond transactions are typically confirmed directly with the _______.

trustee

Covenants are typically calculated as of _____.

year-end

An auditor reviews job cost sheets to test which transaction assertion?

Accuracy.

The auditors should insist that a representative of the client be present during the inspection and count of securities to

Acknowledge the receipt of securities returned.

If the _______ is less than the _______, the audit team would conclude that the account balance is fairly stated.

Upper limit on misstatements; tolerable misstatement.

Which of the following management assertions for long-term liabilities is related to the ASB balance assertion of completeness?

All material long-term liabilities are recorded.

Which of the following would not cause the audit team to select a larger sample of items under a monetary unit sampling application?

An increase in the tolerable misstatement from $30,000 to $60,000.

Which of the following questions would auditors most likely include on an internal control questionnaire for notes payable?

Are direct borrowings on notes payable authorized by the board of directors?

In connection with the audit of an issue of long-term bonds payable, the audit team should

Ascertain that the client has obtained the opinion of counsel on the legality of the issue.

The type of sampling most frequently used by auditors during their study of internal control is referred to as

Attributes sampling.

An audit plan for the examination of the retained earnings account should include a step that requires verification of the (Click the check box next the two answers that apply.)

Authorization for both cash and stock dividends declared and paid. Gain or loss resulting from disposition of treasury shares.

When independent stock transfer agents are not employed and the corporation issues its own stock and maintains stock records, canceled stock certificates should

Be defaced to prevent reissuance and attached to their corresponding stubs.

A related party is a person or entity that

Can exert significant influence over or be influenced by the company.

Variables sampling methods can be used to estimate Amount of Misstatement True Account Balance Choice a Yes Yes Choice b Yes No Choice c No Yes Choice d No No

Choice a

An audit team's purpose in reviewing the documentation concerning the renewal of a note payable shortly after the balance-sheet date most likely is to obtain evidence concerning management's assertions about

Classification.

In auditing for unrecorded long-term bonds payable, an audit team most likely will

Compare interest expense with the bond payable amount for reasonableness.

Which of the following audit procedures would not likely be performed for audits of shareholders' equity?

Compare valuation of stock to published market prices.

Jones was engaged to examine the financial statements of Gamma Corporation for the year ended June 30. Having completed an examination of the investment securities, which of the following is the best method of verifying the accuracy of recorded dividend income?

Comparing recorded dividends with a standard financial reporting service's record of dividends.

ABC Company has issued a bond that pays 5% interest semiannually to bond holders on record June 30 and December 30. Payments are made on July 15 and January 15. ABC Company has a December 31 fiscal year-end. The auditor vouches the January 15, 2018 payment to the liabilities recorded on the December 31, 2017 balance sheet. Which of the following ASB balance assertions is the auditor testing?

Completeness

Which ASB balance assertion is of the most importance to auditors for long-term liabilities?

Completeness

An audit team testing long-term investments would ordinarily use analytical procedures to ascertain the reasonableness of the

Completeness of recorded investment income.

The likelihood that an identified precision interval contains the true (but unknown) population value is the

Confidence.

Which of the following audit procedures would not likely be performed for audits of investments?

Confirm investments with registrar.

Which of the following components of the audit risk model is most closely associated with attributes sampling?

Control risk.

An audit plan to examine long-term debt most likely would include steps that require

Correlating interest expense recorded for the period with outstanding debt.

The primary reason for preparing a reconciliation between interest-bearing obligations outstanding during the year and interest expense in the financial statements is to

Detect unrecorded liabilities.

Which of the following steps involved with determining the upper limit on misstatements is ordinarily performed earliest?

Determine the audited value of the item and compare it to the recorded balance.

Derivative instruments include:

Stock options

The risks of incorrect acceptance in variables sampling and of overreliance in attributes sampling both relate to

Effectiveness of an audit.

Which of the following is the most important audit consideration when examining the stockholders' equity section of a client's balance sheet?

Entries in the capital stock account can be traced to resolutions in the minutes of meetings of the board of directors.

L. Martinez, CPA, was auditing a client, Marvelous Retail Company and selected a sample of inventory items from the perpetual records and vouched additions to receiving reports. This procedure was intended to satisfy which PCAOB assertion?

Existence or occurrence.

To determine the sample size for a classical variables sampling application, an audit team should consider the tolerable misstatement, risk of incorrect acceptance, risk of incorrect rejection, population size, population variability, and

Expected misstatement in the account.

Both the expected misstatement and tolerable misstatement have direct relationships with sample size.

False

If the auditor's estimate of the recorded amount of the account balance falls outside the precision interval, the auditor will conclude that the account balance is not fairly stated.

False

In a first-year engagement, auditors cannot estimate the expected misstatement, since they have no prior historical relationship with the client.

False

Nonstatistical sampling methods are not permitted under generally accepted auditing standards.

False

The segregation of functional responsibilities is relatively easy for the finance and investment cycle.

False

Variables sampling is used primarily during the auditor's analytical procedures.

False

Which cycle is not directly linked to the production cycle?

Finance and investment cycle.

Which of the following approaches is most suitable for auditing the finance and investment cycle?

Gain an understanding of internal controls and perform extensive substantive procedures.

Which of the following courses of action would an audit team most likely follow in planning a sample of cash disbursements if the audit team is aware of several unusually large cash disbursements?

Stratify the cash disbursements population so that the unusually large disbursements are selected.

When the client holds a large amount of negotiable securities, auditors need to plan to guard against

Substitution of securities already counted for other securities that should be on hand but are not.

The projected misstatement is determined by multiplying the sampling interval by the

Tainting percentage.

Which of the following statements is not true with respect to the calculation of the upper limit on misstatements?

If no misstatements are detected, the basic allowance for sampling risk equals zero.

_______ transactions are examined for all large debt agreements.

Individual

All corporate capital stock transactions should ultimately be traced to the

Minutes of the meetings of the board of directors.

Which of the following types of variables sampling plans has a tendency to select higher-dollar items for examination?

Monetary unit sampling.

Which of the following major stages of the audit is most closely related to variables sampling?

Performing substantive procedures.

In an audit sampling application, an auditor

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

The distance from the sample estimate that has a certain likelihood (equal to reliability) of including the true population value is known as the

Precision.

To determine the client's planned amount and timing of production of a product, the auditor reviews the

Production plan.

Which of the following methods for determining inventory cost is not allowed by GAAP?

Standard cost.

An audit team would most likely verify the interest earned on bond investments by

Recomputing the interest earned on the basis of face amount, interest rate, and period held.

A client has a large and active investment portfolio that is kept in a bank safe deposit box. If the auditors are unable to count securities at the balance sheet date, they most likely will

Request the client to have the bank seal the safe deposit box until the auditors can count the securities at a subsequent date.

When determining sample size under monetary unit sampling, an audit team does not need to make a judgment or estimate of

Standard deviation.

When making a decision about the dollar amount in an account balance based on a sample, the audit team considers the risk of incorrect acceptance to be more serious than the risk of incorrect rejection because

The incorrect acceptance decision impairs the effectiveness of the audit.

If the auditors discover that the carrying amount of a client's investments is overstated because of a loss in value that is other than a temporary decline in market value, they should insist that

The loss in value be recognized in the financial statements.

In which of the following scenarios would the use of sampling be most appropriate?

The need for precise information about the population is not important.

When a client company does not maintain its own capital stock records, the auditors should obtain written confirmation from the transfer agent and registrar concerning

The number of shares issued and outstanding.

The unique feature of monetary unit sampling is that

The population is defined as the number of monetary units in an account balance or class of transactions.

When an entity uses a trust company as custodian of its marketable securities, the possibility of concealing fraud most likely would be reduced if the

Trust company has no direct contact with the entity employees responsible for maintaining investment accounting records.

Which of the following statements is correct about monetary unit sampling?

The risk of incorrect acceptance must be specified.

One of the primary advantages of monetary unit sampling is the fact that

The sample selection automatically achieves high-dollar selection and stratification.

ABC Company has 100 shares of IBM stock that it holds as an investment. The stock was purchased three years ago and has been in the client's safe deposit box along with other investment securities. During an inspection of securities held by the client, the auditor noted the 100 shares of IBM stock had a different CUSIP number than the number listed when purchased and the number verified during the previous audit. Which of the following would be the auditor's main concern about this discovery?

There had been unauthorized buying and selling of investment securities.

Loan covenants are used for which of the following reasons?

To protect the lender from the borrower's substantially weakening of the latter's financial position.

When evaluating the results of an MUS application, the audit team should compare the upper limit on misstatements to the

Tolerable misstatement.

Which of the following components is not used in determining the upper limit on misstatements?

Tolerable misstatement.

A significant advantage of MUS is that it typically results in relatively small sample sizes.

True

All investment policies should be approved by the board of directors or its investment committee.

True

If the upper limit on misstatements is less than the tolerable misstatement, the auditor would conclude that the account balance or class of transactions is fairly recorded.

True

In a classical variables sampling application, the precision interval has a (1 minus the risk of incorrect acceptance) probability of including the true population value.

True

In an MUS application, the auditor has a higher level of concern with the risk of incorrect acceptance than the risk of incorrect rejection.

True

It is very common for auditors to perform substantive procedures on 100 percent of the details in finance and investment accounts.

True

MUS samples are selected using a form of systematic random selection.

True

One logical unit can account for more than one sample selection in an MUS application.

True

Sales of capital stock and debt financing transactions usually are authorized by the board of directors.

True

Stratifying the sample allows the auditor to reduce the overall sample size required in a classical variables sampling application.

True

The level of tolerable misstatement assessed by the auditor is based on the recorded balance of the account balance or class of transactions as well as the relationship of the account balance to important financial statement subtotals.

True

The risk of incorrect rejection typically results in an efficiency loss for the auditor.

True

Selecting a sample using a series of random numbers to identify sample items is referred to as

Unrestricted random selection.

Confirmations should include a request that the bank confirm ____ borrowings.

all

An increase in inventory turnover probably indicates

an improvement in inventory management.

Waivers must be dated the same date as the _______.

balance sheet

A waiver needs to be received from the ______.

bank/lender

An important step in testing investments is to ensure all persons with access to investments are properly ______.

bonded

Notes payable to financial institutions are often confirmed together with the _______ accounts.

cash

Strata may be ______to provide an estimate of the population as a whole.

combined

Stratifying a population can also allow the auditor to perform ____ procedures to each stratum.

different

An audit needs to have the correct balance of efficiency and _________.

effectiveness

Audit _______is affected when too much substantive testing is done.

efficiency

Confirmations should be drafted on client ______.

letterhead

Auditors must carefully control the risk of assessing risk too high or _____when performing test of controls.

low

After testing internal controls related to investments, it may be necessary to ______the risk of material misstatement.

modify

A notes payable analysis shows the beginning balance, additional notes, and the ending balance of each individual ______.

note

Low turnover rates for given inventory items may be indicators of ______.

obsolesence

Waivers must extend for a period of ________.

one year

Inventory files contain _______ number and cost per unit.

part

Debits to a mortgage payable account typically are _______ on the account.

payments

A copy of debt agreements is typically housed in the ______ file.

permanent

Actual signed copies of the notes are often put in the auditors' ________ file.

permanent

A client's physical count of inventories was higher than the inventory quantities shown in the perpetual records. This situation could be the result of the failure to record

purchases.

The typical business activity of the finance and investment cycle would not include

reconciliation of cash.

Assessing the control risk too low results in an inappropriate _______ of the extent of substantive procedures.

reduction

Audit ____can be compared to client records.

results

A sample internal control questionnaire question may ask about _________ inherent in the investment policy.

risk

Audit _________ can be selected from client files on a random basis.

samples

Stratified sample results can be used _______or combined.

separately