ACCT 580- exam 3

Assertions about presentation and disclosure typically include _______. 1)completeness, accuracy and valuation, and classification and understandability 2)existence, rights and obligations, and cutoff 3)cutoff, presentation, and disclosure 4)cutoff, accuracy, and valuation

1) completeness, accuracy and valuation, and classification and understandability

Which assertion do auditors test when they trace a sample of sales, cash receipts, and sales adjustment transactions to their recording in the accounting records? 1) Completeness 2) Accuracy 3) Cutoff 4) Classification

1) Completeness

Which of the following purchases must be managed aggressively to minimize inventory obsolescence? 1) Electronic computer manufacturing 2) Hotels and motels 3) Universities and colleges 4) Supermarkets and grocery stores

1) Electronic computer manufacturing

What is a highly-automated business process between suppliers and purchasers to exchange data electronically and electronically execute a purchase transaction called? 1) Evaluated Receipts Settlement 2) Cash disbursements 3) Completeness of cash disbursements 4) Evaluation of Receipts Settlement

1) Evaluated Receipts Settlement

Which of the following is a characteristic of non-statistical sampling? 1) It allows selecting an appropriate sample. 2) It helps determine sample size objectively. 3) It allows selecting sample size quantitatively. 4) It allows a random selection of sample items.

1) It allows selecting an appropriate sample.

Which of the following provides the basis for recording a sale in the sales journal? 1) Sales invoice 2) Packing slip 3) Bill of lading 4)Master price file

1) Sales invoice

Suppose an auditor is preparing for an audit of the payroll process of an entity and has identified that the entity is labor-intensive and depends largely on hourly compensation. The auditor still needs to understand all of the following about the entity, EXCEPT _______. 1) The capital intensiveness of the entity 2) The importance of bonuses or other compensation arrangements 3) The level of variability of pay throughout the period 4) None of the answer choices are correct.

1) The capital intensiveness of the entity

Which of the following ratios, when small, may indicate an inadequate estimation process? 1) Uncollectible accounts expense to accounts receivable write-offs 2) Uncollectible accounts expense to net credit sales 3) Accounts receivable growth to sales growth 4) Accounts receivable turnover in days

1) Uncollectible accounts expense to accounts receivable write-offs

Finding an appropriate combination of audit procedures to minimize an engagement's audit risk _______. 1) can be challenging 2)is generally fairly straightforward 3)is the responsibility of the internal audit function 4)is the responsibility of management

1) can be challenging

Purchases of inventory on credit should involve _______. 1) debits to inventory and credits to payables 2) debits to payables and credits to inventory 3) debits to payables and credits to expenses 4) debits to expenses and credits to cash

1) debits to inventory and credits to payables

Every business has _______. 1) different market forces that place differing demands on the company's cash flow 2) identical market forces that place differing demands on the company's cash flow 3) different market forces that place identical demands on the company's cash flow 4) identical market forces that place similar demands on the company's cash flow

1) different market forces that place differing demands on the company's cash flow

A strong tone at the top about the importance of accurate financial reporting _______. 1) discourages the under accrual of expenses and liabilities 2) discourages the over accrual of expenses and liabilities 3) encourages the under accrual of expenses and liabilities 4) encourages the over accrual of expenses and liabilities

1) discourages the under accrual of expenses and liabilities

Recognizing revenues without shipping would lead to ________ gross margins and _______ accounts receivable turnover in days. 1) increased; low 2) decreased; low 3) increased; high 4) decreased; high

1) increased; low

The first step in planning the use of audit data analytics ________. 1) is determining the overall purpose of the test 2) is collection of evidence 3) is collection of data 4) is to poll management to determine which data they would like included

1) is determining the overall purpose of the test

A common scheme to conceal the misappropriation of cash receipts ________. 1) is known as lapping 2) is known as kiting 3) is usually committed by senior management and members of the board of directors 4) should be handled by the internal audit function, not the external auditors

1) is known as lapping

All of the following are key payroll process assertions for relevant account balances, EXCEPT _______. 1) occurrence 2) completeness 3) existence 4) rights and obligations

1) occurrence

S 2315 and AU-C 530 on Audit Sampling_______. 1) provide guidance on audit sampling 2) provide guidance on client acceptance 3) relate only to private companies 4) relate only to companies with subsidiaries

1) provide guidance on audit sampling

The search for unrecorded liabilities consists of procedures designed specifically to detect _______. 1) significant unrecorded obligations at the balance sheet date (or as of an interim date) 2) insignificant unrecorded obligations at the balance sheet date (or as of an interim date) 3) significant unrecorded obligations at the income statement date (or as of an interim date) 4) significant recorded obligations at the balance sheet date (or as of an interim date)

1) significant unrecorded obligations at the balance sheet date (or as of an interim date)

Stratification is often advantageous because _______. 1) the combined sample size often will be significantly less than a single sample size based on a non-stratified population 2) the combined sample size often will be significantly more than a single sample size based on a non-stratified population 3) it is a cheaper approach and will usually result in lower audit fees for the client 4) it is usually more expensive and will result in higher audit fees for the client

1) the combined sample size often will be significantly less than a single sample size based on a non-stratified population

When auditing a construction company, the auditor might use audit data analytics (ADA) to determine, _______. 1) the gross margin on each construction contract 2) if appropriate receivables balance confirmations have been returned 3) the likelihood of receiving audit fees upon conclusion of the audit 4) the inherent riskiness of the client's industry

1) the gross margin on each construction contrac

Risk of incorrect acceptance is defined as _______. 1) the risk that the auditor concludes that a material misstatement does not exist when it does exist 2) the risk that the auditor concludes that a material misstatement does exist when it does exist 3) the risk that an audit firm incorrectly accepts a client 4) the risk that an audit firm incorrectly issued an unmodified opinion

1) the risk that the auditor concludes that a material misstatement does not exist when it does exist

Gross sales refers to _______. 1) total revenues before any deductions, such as deductions for sales returns and allowances. 2) total revenues, net of deductions for sales returns and allowances 3) earnings before interest and taxes 4) operating income

1) total revenues before any deductions, such as deductions for sales returns and allowances.

Management and the auditor have to be alert to the risk of collusion with _______. 1) vendors and vendor kickbacks to employees 2) customers and vendor kickbacks to employees 3) customers and customer kickbacks to employees 4) vendors and vendor kickbacks to stockholder

1) vendors and vendor kickbacks to employees

An audit must be customized each year because inherent risk factors for a client _______. 1) will vary from year to year 2) should be discussed with regulatory agencies 3) should be fixed over time 4) should be invariant throughout the industry

1) will vary from year to year

Classical variables sampling is best described as: 1)A sampling method that uses normal distribution theory to select a sample and evaluate the characteristics of a population based on the results of a sample drawn from the population. 2)A non-statistical sampling technique 3)A procedure conducted by the internal auditors only 4)A sampling technique only applied to receivables

1)A sampling method that uses normal distribution theory to select a sample and evaluate the characteristics of a population based on the results of a sample drawn from the population.

Which of the following procedures aim to provide sufficient appropriate audit evidence on which to base conclusions at year-end when substantive procedures were performed at an interim date? 1)Roll-forward procedures 2)Analytical procedures 3)Auditing procedures 4)Interim procedures

1)Roll-forward procedures

In which of the following situations is the auditor most likely to use audit data analytics? 1)The available data is reliable and comes from a strong system of internal controls. 2)Internal controls are weak. 3)Certain audit procedures are required by professional standards. 4)The auditor needs to have data that is relevant to the audit test.

1)The available data is reliable and comes from a strong system of internal controls.

In which of the following circumstances must an auditor decide how best to select a sample that is representative of the entire population of items? 1)There are numerous transactions or items within an account balance. 2)An audit population is sufficiently small. 3)A client has a large balance of notes payable and the notes payable are with several banks. 4)There are few transactions or few items within an account balance.

1)There are numerous transactions or items within an account balance.

When the audit population can efficiently be tested using traditional audit tests, the auditor is more likely to use _______. 1)audit sampling 2)audit data analytics 3)substantive procedures 4)none of the above is correct

1)audit sampling

In order to evaluate management's estimation process, _______. 1)auditors use the knowledge gained about the industry and the applicable financial reporting framework during risk assessment 2)auditors use the knowledge gained about other industries and the applicable financial reporting framework during risk assessment 3)auditors compare management estimates with other management estimates at other companies 4)the auditors ask the internal audit function to review and come to a conclusion which can be included in the audit report

1)auditors use the knowledge gained about the industry and the applicable financial reporting framework during risk assessment

An audit strategy is developed _______. 1)in response to the risk assessment for each significant account and assertion using the formula for audit risk 2)in response to the risk assessment for each insignificant account and assertion using the formula for audit risk 3)by the auditor, but must be reviewed and approved by management 4)by the auditor, but must be reviewed and approved by the internal audit function

1)in response to the risk assessment for each significant account and assertion using the formula for audit risk

Once the final outcome of a transaction or event occurs _______. 1)it is expected that there will be a difference between the outcome of the accounting estimate and the amount originally recognized or disclosed in the financial statements 2)it is expected that there will be no difference between the outcome of the accounting estimate and the amount originally recognized or disclosed in the financial statements 3)the amount should be adjusted to match the estimated balance 4)the auditor should not concern themselves with investigating abnormally large variances

1)it is expected that there will be a difference between the outcome of the accounting estimate and the amount originally recognized or disclosed in the financial statements

Segregation of duties ________. 1)should always be considered an important internal control 2) should be of primary concern to larger, more complex companies 3) should be instituted by the auditor 4) refers to ensuring employees take on as many tasks as possible, to save labor costs

1)should always be considered an important internal control

A reliance on controls strategy would involve _______. 1)the auditor performing primarily tests of controls 2)the auditor performing primarily substantive procedures 3)obtaining written assertions and representations from management 4)the external auditor relying on the internal audit function

1)the auditor performing primarily tests of controls

When analytical procedures are used to obtain audit evidence during the risk response phase, _______. 1)they are referred to as "substantive analytical procedures." 2)they are referred to as tests of internal control 3)the audit report is ready to be issued 4)management should be allowed to select the procedures and tests

1)they are referred to as "substantive analytical procedures."

To which of the following tests is the determination of FOB destination and FOB shipping point critical? 1) Vouch revenue transactions 2) Sales cutoff test 3) Details of balances 4) Trace revenue transactions

2) Sales cutoff test

The choice of using audit sampling vs. audit data analytics (ADA) _______. 1) is typically left up to senior management 2) is often a matter of what is most effective and efficient in determining whether an assertion is presented fairly, in all material respects 3) is often a matter of what is most effective and efficient in determining whether a control is presented fairly, in all material respects 4) should be determined by the client's legal counsel

2) is often a matter of what is most effective and efficient in determining whether an assertion is presented fairly, in all material respects

A major risk in processing cash receipts transactions ________. 1) is that the bank often erroneously double-counts entries 2) is the possible theft of cash before or after a record of the receipt is made 3) is the possible theft of cash only before record of the receipt is made 4) relates to inaccuracies caused by only one person counting the cash receipts

2) is the possible theft of cash before or after a record of the receipt is made

When reviewing the results of analytical procedures, the auditor needs to bring an appropriate level of _______. 1) professional confidence 2) professional skepticism 3) statistical sampling 4) nonstatistical sampling

2) professional skepticism

A credit sale should always include debits to accounts receivable and cost of goods sold, and credits to ________. 1) sales discounts and allowances 2) sales and inventory 3) sales and sales discounts 4) sales discounts and inventory

2) sales and inventory

The purchasing or procurement process involves _______. 1) selecting customers, establishing payment terms, negotiating contracts, purchasing goods, receiving goods, and recording of purchases and payment of liabilities 2) selecting vendors, establishing payment terms, negotiating contracts, purchasing goods, receiving goods, and recording of purchases and payment of liabilities 3) selecting vendors, establishing payment terms, negotiating contracts, selling goods, receiving goods, and recording of purchases and payment of liabilities 4) selecting vendors, establishing payment terms, negotiating contracts, purchasing goods, shipping goods, and recording of purchases and payment of liabilities

2) selecting vendors, establishing payment terms, negotiating contracts, purchasing goods, receiving goods, and recording of purchases and payment of liabilities

In non-statistical sampling, _______. 1) the auditor uses the internal audit function to gather samples 2) the auditor determines samples size, sample selection methods, and evaluates the sample results on the basis of the professional judgment and the auditor's own experience. 3)the auditor selects a sample of certain balance sheet accounts and exclusively audits them 4) the auditor determines samples size, sample selection methods, and evaluates the sample results entirely on the basis of predetermined statistical parameters.

2) the auditor determines samples size, sample selection methods, and evaluates the sample results on the basis of the professional judgment and the auditor's own experience.

It is common to use audit sampling _______. 1) if no other non-statistical tests are available or appropriate 2) when performing substantive tests on a population of transactions or account balances 3) when performing tests of controls on a population of transactions or account balances 4) if no other statistical tests are available or appropriate

2) when performing substantive tests on a population of transactions or account balances

Control activities useful in reducing the risk of fraud focus on establishing the validity and occurrence of such transactions and include ________. 1) a portion of sales returns should be authorized by sales management 2)all sales returns should be authorized by sales management 3) the computer should match the debit memo information with the sales order 4) ensuring top management approves all credit memos before agreeing to a reduction in accounts receivable

2)all sales returns should be authorized by sales management

All substantive audit procedures performed _______. 1)are approved by client management beforehand 2)are documented in the working papers 3)are documented in invoices sent to the client's legal counsel 4)should be done before any testing of internal control

2)are documented in the working papers

A representative audit sample _______. 1)should not involve the auditor 2)is likely to provide a reasonable basis for drawing a conclusion about an entire population 3)is unlikely to provide a reasonable basis for drawing a conclusion about an entire population 4)should be agreed upon by management and the auditor

2)is likely to provide a reasonable basis for drawing a conclusion about an entire population

The use of analytical procedures _______. 1)is most effective as part of the testing of the system of internal control 2)is required during risk assessment 3)is prohibited during risk assessment 4)is optional during risk assessment

2)is required during risk assessment

The ultimate purpose of a substantive test is to _______. 1)ensure that all controls are functioning properly 2)obtain reasonable assurance that an assertion is presented fairly in all material respects 3)obtain absolute assurance that an assertion is presented fairly in all material respects 4)guarantee that no error or fraud exists in the financial statements

2)obtain reasonable assurance that an assertion is presented fairly in all material respects

Sometimes an audit population may be sufficiently small so that_______. 1)the auditor can ignore the account in question 2)the auditor can audit every item in the population 3)the account in question can be outsourced to the internal audit function for auditing 4)expressed written assurance from senior management pertaining to the account is satisfactory

2)the auditor can audit every item in the population

The population consists of _______. 1)all accounts in the client's chart of accounts 2)the class of transactions or the account balance to be tested 3)neither the class of transactions nor the account balance to be tested 4)account balances only

2)the class of transactions or the account balance to be tested

The PPS (probability proportional to size) sampling technique is such that _______. 1)the probability that a particular sampling unit will be chosen in the sample is inversely proportionate to the monetary size of the item 2)the probability that a particular sampling unit will be chosen in the sample is proportionate to the monetary size of the item 3)clients with larger balances are less likely to be sampled and audited 4)only large firms can afford the extra cost associated with this procedure

2)the probability that a particular sampling unit will be chosen in the sample is proportionate to the monetary size of the item

Before auditors can use substantive analytical procedures, _______. 1)they must be ready to issue the preliminary audit opinion 2)they must consider the availability and reliability of data to be used to develop their expectation 3)they must consider the availability and reliability of data to be used to develop their audit opinion 4)they must be approved by the internal auditors beforehand

2)they must consider the availability and reliability of data to be used to develop their expectation

The rights and obligations assertion with respect to accounts payable relates to whether the _______. 1) accounts receivable reflect the recorded asset of the entity 2) accounts receivable reflect the recorded liability of the entity 3) accounts payable reflect the recorded liability of the entity 4) accounts payable reflect the recorded asset of the entity

3) accounts payable reflect the recorded liability of the entity

Assume you are involved in an audit and your expectations regarding effective controls are not confirmed. In this situation, you will need to take all of the following steps, EXCEPT _______. 1) determining if the client has a compensating control 2) evaluating the significance of the weaknesses 3) communicating the control weaknesses to management and those charged with governance 4) All of the answer choices are correct.

3) communicating the control weaknesses to management and those charged with governance

Key assertions relating to accounts payable account balances are _______. 1) presentability, rights and obligations, completeness, valuation and allocation 2) existence, rights and obligations, going concern, valuation and allocation 3) existence, rights and obligations, completeness, valuation and allocation 4) existence, rights and obligations, truthfulness, valuation and allocation

3) different market forces that place identical demands on the company's cash flow

The purpose of a disclosure committee _______. 1) is to supervise the internal audit function 2) is to handle all communications with firm attorneys 3) is to work with the CFO or controller to review disclosures 4) is to ensure that the firm receives a 'clean' audit opinion

3) is to work with the CFO or controller to review disclosures

The client should receive both a bank statement from the bank and a statement from vendors on a _______. 1) weekly basis 2) quarterly basis 3) monthly basis 4) yearly basis

3) monthly basis

With respect to performing analytical procedures to understand total revenue, the auditor should understand _______. 1) revenue recognition methods of all firms within the industry 2) how the firm relates its cost of goods sold to revenue recognition 3) the entity's capacity, the maximum volume of sales that it could generate if it fully utilized its facilities and employees to manufacture and deliver products and services 4) how the client firm handles depreciation entries related to contra-revenue accounts

3) the entity's capacity, the maximum volume of sales that it could generate if it fully utilized its facilities and employees to manufacture and deliver products and services

In the performance of which transaction(s) does segregation of duties serve as an important internal control? 1) Cash receipts, not credit sales 2) Credit sales, not cash receipts 3)Both cash receipts and credit sales 4)None of these answer choices are correct.

3)Both cash receipts and credit sales

A significant risk is _______. 1)a risk that the auditor should not attempt to address 2)an identified and assessed risk of immaterial misstatement that, in the auditor's judgment, requires special audit consideration 3)an identified and assessed risk of material misstatement that, in the auditor's judgment, requires special audit consideration 4)a risk for which the auditor should immediately notify the SEC

3)an identified and assessed risk of material misstatement that, in the auditor's judgment, requires special audit consideration

Auditors will assess the risk of fraud by considering _______. 1)fraud risk factors that may not be present, such as pressure and opportunities for management to commit fraud 2)fraud risk factors that may be present, such as a lack of pressure and opportunities for management to commit fraud 3)fraud risk factors that may be present, such as pressure and opportunities for management to commit fraud 4)management's opinion and statements on whether fraud is occurring or not

3)fraud risk factors that may be present, such as pressure and opportunities for management to commit fraud

If the auditor determines that internal controls are not functioning as designed, and a compensating control does not exist, the auditor will assess control risk and the risk of material misstatement (RMM) as_______. 1)low and set detection risk as high 2)low and set detection risk as low 3)high and set detection risk as low 4)high and set detection risk as high

3)high and set detection risk as low

One method of selecting specific items from a population when testing for overstatement is to _______. 1)allow the internal auditors to select them 2)select items that are identical dollar amounts 3)select items that are over a certain dollar amount 4)allow management to select them

3)select items that are over a certain dollar amount

What is a remittance advice? 1) A daily report showing cash recorded in the cash receipts journal identifying customers making payments on account and the amounts received 2) A receipt from the bank showing the total amount deposited to the client's account at the bank 3) A document prepared by the bank showing the details of electronic funds transfers received by the bank from customers 4) A document received from the customer showing the details of payments made by the customer

4) A document received from the customer showing the details of payments made by the customer

An auditor is most likely to use audit data analytics (ADA) when _______. 1) data is available that is relevant to an audit assertion of interest, whether as a risk assessment procedure or a substantive test 2) the available data is reliable and comes from a strong system of internal controls. 3) the available data is relatively clean and does not require significant work to make it usable. 4) All of these answer choices are correct

4) All of these answer choices are correct

Important documents and records used in processing purchase adjustments in traditional or Evaluated Receipts Settlement (ERS) systems include which of the following? 1) Purchase Return Authorization 2) Shipping Report 3) Debit Memo 4) All of these answer choices are correct.

4) All of these answer choices are correct.

Procurement fraud risks include _______. 1) phantom vendors 2) fictitious invoices 3) kickbacks and bid rigging 4) All of these answer choices are correct.

4) All of these answer choices are correct.

Which of the following is a reasonableness test of gross payroll for a group of employees? 1) Revenue per employee 2) Total payroll costs as a percent of revenue 3)Comparing payroll expenses with prior year balances or budgets 4) Average payroll cost per employee classification

4) Average payroll cost per employee classification

In the revenue cycle, which of the following assertions does not apply to the relevant account balances in the revenue cycle? 1) Existence 2) Completeness 3) Valuation 4) Classification

4) Classification

Which of the following is a form showing the description, quantity, and other data pertaining to the goods the vendor has authorized the purchaser to return? 1) Form authorization 2) Return authorization 3) Report return authorization 4) Purchase return authorization

4) Purchase return authorization

If receivables are growing faster than sales, it may be an indication that the company is _________. 1) accomplishing sales growth by taking steps to reduce credit risk 2) slowing down sales growth by taking on increased credit risk 3) slowing down sales growth by taking steps to reduce credit risk 4) accomplishing sales growth by taking on increased credit risk

4) accomplishing sales growth by taking on increased credit risk

The purchase requisition is often prepared _______. 1) manually, and it represents the start of the transaction trail of documentary evidence in support of management's assertion of occurrence of purchase transactions 2) electronically, and it represents the end of the transaction trail of documentary evidence in support of management's assertion of occurrence of purchase transactions 3) manually, and it represents the end of the transaction trail of documentary evidence in support of management's assertion of occurrence of purchase transactions 4) electronically, and it represents the start of the transaction trail of documentary evidence in support of management's assertion of occurrence of purchase transactions

4) electronically, and it represents the start of the transaction trail of documentary evidence in support of management's assertion of occurrence of purchase transactions

An important aspect of selecting a sample _______. 1) involves determining the population and population unit 2) involves determining the population and sampling unit 3) is ensuring certain accounts are selected for audit 4) is ensuring certain accounts are not selected for audit

4) is ensuring certain accounts are not selected for audit

If analytical procedures provide evidence that interest expense is presented fairly, _______. 1) the auditor can appropriately increase the assurance needed from tests of details of transactions and related sample sizes when testing interest expense 2) then there is no need for the auditor to audit any related accounts, such as notes payable 3) then the auditor should direct management to pay the associated expense 4) the auditor can appropriately limit the assurance needed from tests of details of transactions and related sample sizes when testing interest expense

4) the auditor can appropriately limit the assurance needed from tests of details of transactions and related sample sizes when testing interest expense

An analytical procedure related to substantive testing of revenue would be ________. 1) developing an understanding of the client's system of internal control 2) ensuring that all efficiency audits conducted by the internal audit function are properly planned 3) to check revenue and the related accounts payable accounts on a sample basis 4) to analyze ratio results relative to expectations based on prior years

4) to analyze ratio results relative to expectations based on prior years

The common steps in any transaction stream are _______. 1)authorization 2)executing the transaction 3)recording the transaction, and transfer of consideration 4)All of these answer choices are correct.

4)All of these answer choices are correct.

AU-C 330 Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained and AS 2301 The Auditor's Responses to the Risks of Material Misstatement provide which of the following examples of responding to risk at the financial statement level? 1)Emphasize that audit team members should not attempt to maintain professional skepticism 2)Assign less experienced staff to areas of higher risk of material misstatement 3)Provide less supervision 4)Include more elements of unpredictability in the selection of audit procedures

4)Include more elements of unpredictability in the selection of audit procedures

A misstatement is defined as _______. 1)the auditor incorrectly billing the client for work that was not performed 2)there being no difference between what is reported in the client prepared financial statements and what is required for the item to be presented fairly in accordance with the applicable financial reporting framework 3)variances that only occur in the interim financial statements 4)a difference between what is reported in the client prepared financial statements with what is required for the item to be presented fairly in accordance with the applicable financial reporting framework

4)a difference between what is reported in the client prepared financial statements with what is required for the item to be presented fairly in accordance with the applicable financial reporting framework

Roll-forward procedures relate to _______. 1)any procedure carried out by the auditor to update their audit findings through the date of the audit report 2)any substantive procedure performed after the balance sheet date 3)auditors updating their audit findings from year-end through an interim period 4)auditors updating their audit findings from an interim period through year-end

4)auditors updating their audit findings from an interim period through year-end

If internal controls are strong, _______. 1)the auditor does not need to test the controls 2)the auditor can usually assess control risk as high 3)the auditor should allow the internal audit function to conduct any testing 4)the auditor can usually assess control risk as low

4)the auditor can usually assess control risk as low

Which of the following characteristics of an accounting estimate would lead to a lower assessment of inherent risk? a- Estimate is related to routine transactions. b-Estimate is derived from a model developed by the client. c-Estimate is related to complex transactions. d-Estimate involves assumptions that cannot be observed in a public market.

a- Estimate is related to routine transactions.

Which of the following internal controls would be most likely to reduce the risk of diversion of customer receipts by an entity's employees? a-A bank lockbox system. b-Prenumbered remittance advices. c-Monthly bank reconciliations. d-Daily deposit of cash receipts.

a-A bank lockbox system.

In an audit of inventories, an auditor would least likely verify that a-All inventory owned by the client is on hand at the time of the count. b-The client has used proper inventory pricing. c-The financial statement presentation of inventories is appropriate. d-Damaged goods and obsolete items have been properly accounted for.

a-All inventory owned by the client is on hand at the time of the count.

Which of the following statements would most likely be included among the written client representations obtained by the auditor? a-Compensating balances and other arrangements involving restrictions on cash balances have been disclosed. b-Management acknowledges responsibility for illegal actions committed by employees. c-Sufficient evidential matter has been made available to permit the issuance of an unqualified opinion. d-Management acknowledges that there are no material weaknesses in the internal control.

a-Compensating balances and other arrangements involving restrictions on cash balances have been disclosed.

A cutoff test designed to detect credit sales made before the end of the fiscal year that have been recorded in the subsequent year provides assurance about which of the following management assertions? a-Completeness. b-Occurrence. c-Accuracy. d-Classification.

a-Completeness.

An auditor decided to confirm accounts payable to accomplish a low level of detection risk for the completeness assertion. Which of the following is the most reasonable sampling plan? a-Confirm accounts payable with an emphasis on all vendors, including zero and small balances. b-Confirm accounts payable with an emphasis on the largest accounts payable. c-Confirm accounts payable using probability-proportionate-to-size sampling. d-Confirm accounts payable with an emphasis on new vendors, irrespective of the size of the account balance.

a-Confirm accounts payable with an emphasis on all vendors, including zero and small balances.

Misstatements discovered by the auditor were immaterial in the aggregate in prior years. Such misstatements should be a-Considered in the evaluation of audit findings in the current year. b-Disclosed by the client in the current-year financial statements. c-Retested during the current-year tests of controls. d-Removed from the prior-year summary because they were immaterial.

a-Considered in the evaluation of audit findings in the current year.

Which of the following internal control procedures would most likely assure that all billed sales are correctly posted to the accounts receivable ledger? a-Daily sales summaries are compared to daily postings to the accounts receivable ledger. b-Each sales invoice is supported by a prenumbered shipping document. c-The accounts receivable ledger is reconciled daily to the control account in the general ledger. d-Each shipment on credit is supported by a prenumbered sales invoice.

a-Daily sales summaries are compared to daily postings to the accounts receivable ledger.

Which of the following factors would most likely cause an auditor to use audit sampling versus audit data analytics? a-Evidence to support the audit test is not available in electronic form. b-The audit population is large, and the auditor's tests are supported by reliable and relevant data in electronic form, making ADA efficient. c-Relevant data are reliable, and internal controls over the reliability of data are strong. d-Relevant data are clean or can be cleaned up easily.

a-Evidence to support the audit test is not available in electronic form.

Which of the following would most likely be the result of ineffective internal control policies and procedures in the revenue cycle? a-Final authorization of credit memos by personnel in the sales department could permit an employee defalcation scheme. b-Fictitious transactions could be recorded, causing an understatement of revenues and an overstatement of receivables. c-Irregularities in recording transactions in the subsidiary accounts could result in a delay in goods shipped. d-Omission of shipping documents could go undetected, causing an understatement of inventory.

a-Final authorization of credit memos by personnel in the sales department could permit an employee defalcation scheme.

If the auditor is concerned about the risk of fraud in the purchasing process, which of the following best describes the auditor's potential fraud risk assessments? a-Fraudulent financial reporting—high risk; misappropriation of assets—high risk. b-Fraudulent financial reporting—high risk; misappropriation of assets—low risk. c-Fraudulent financial reporting—low risk; misappropriation of assets—high risk. d-Fraudulent financial reporting—low risk; misappropriation of assets—low risk.

a-Fraudulent financial reporting—high risk; misappropriation of assets—high risk.

In performing a search for unrecorded retirements of fixed assets, an auditor most likely would a-Inspect the property ledger and the insurance and tax records, and then tour the client's facilities. b-Tour the client's facilities and then inspect the property ledger and the insurance and tax records. c-Analyze the repair and maintenance account and then tour the client's facilities. d-Tour the client's facilities and then analyze the repair and maintenance account

a-Inspect the property ledger and the insurance and tax records, and then tour the client's facilities.

Which of the following situations would most likely preclude an auditor from performing substantive procedures during an interim period? a-Internal controls are ineffective and the risk of material misstatement is high. b-Internal controls are ineffective and the risk of material misstatement is low. c-Internal controls are effective and the risk of material misstatement is high. d- Internal controls are effective and the risk of material misstatement is low.

a-Internal controls are ineffective and the risk of material misstatement is high.

In a financial statement audit of a nonissuer, an auditor would consider a judgmental misstatement to be a misstatement that a-Involves an estimate. b-Exists because of nonstatistical sampling performed by the auditor. c-Arises from a flaw in the accounting system. d-Arises from a routine calculation.

a-Involves an estimate.

Which of the following statements would an auditor most likely require management to indicate in a written representation letter obtained for an audit? a-Management acknowledges its responsibilities for the design and implementation of programs and controls to detect fraud. b-Management plans to expand into international operations during the next few years. c-Management believes the financial statements are accurately stated in accordance with generally accepted auditing standards (GAAS). d-Management believes the company is the premier company in its industry regarding service to customers.

a-Management acknowledges its responsibilities for the design and implementation of programs and controls to detect fraud.

The term judgmental misstatement would best apply to a-Management's unreasonable accounting estimates for uncollectible receivables. b-Sales transactions that were recorded but not yet shipped as of year-end. c-Unrecorded payables associated with goods received in the last month of the entity's fiscal year. d-The auditor's estimate of a misstatement in a population suggested by audit sampling techniques.

a-Management's unreasonable accounting estimates for uncollectible receivables.

The scope of an audit is not restricted when an attorney's response to an auditor, as a result of a client's letter of audit inquiry, limits the response to a-Matters to which the attorney has given substantive attention in the form of legal representation. b-An evaluation of the likelihood of an unfavorable outcome of the matters disclosed by the entity. c-The attorney's opinion of the entity's historical experience in recent similar litigation. d-The probable outcome of asserted claims and pending or threatened litigation.

a-Matters to which the attorney has given substantive attention in the form of legal representation.

An auditor usually obtains evidence of stockholders' equity transactions by reviewing the entity's a-Minutes of board of directors' meetings. b-Transfer agent's records. c-Cancelled stock certificates. d-Treasury stock certificate book.

a-Minutes of board of directors' meetings.

When planning a classical variables sample, the risk of incorrect acceptance and the risk of incorrect rejection are related to what general factor that influences sample size? a-The desired level of assurance from the sample. b-Tolerable misstatement. c-Expected misstatement. d-The use of stratification when sampling.

a-The desired level of assurance from the sample.

Which of the following procedures would an auditor most likely complete to test the existence assertion of property, plant and equipment? a-Obtaining a listing of all current-year additions, vouching significant additions to original invoices, and determining that they have been placed in service. b-Obtaining a detailed fixed-asset register and ensuring items are appropriately capitalized. c-Obtaining a listing of current-year additions and verifying that items are recorded in the proper period. d-Obtaining a detailed fixed-asset register and ensuring depreciation methods are applied consistently.

a-Obtaining a listing of all current-year additions, vouching significant additions to original invoices, and determining that they have been placed in service.

Which of the following would be a consideration in planning a sample for a test of subsequent cash receipts? a-Preliminary judgments about materiality levels. b-The amount of bad debt write-offs in the prior year. c-The size of the intercompany receivable balance. d-The auditor's allowable risk of assessing control risk is too low.

a-Preliminary judgments about materiality levels.

On receiving a client's bank cut-off statement, an auditor most likely would trace a-Prior-year checks listed in the cut-off statement to the year-end outstanding checklist. b-Deposits in transit listed in the cut-off statement to the year-end bank reconciliation. c-Checks dated after year end listed in the cut-off statement to the year-end outstanding checklist. d-Deposits recorded in the cash receipts journal after year end to the cut-off statement.

a-Prior-year checks listed in the cut-off statement to the year-end outstanding checklist.

Which of the following procedures would an auditor most likely perform in auditing the statement of cash flows? a-Reconcile the amounts included in the statement of cash flows to the other financial statements' amounts. b-Vouch a sample of cash receipts and disbursements for the last few days of the current year. c-Reconcile the cut-off bank statement to the proof of cash to verify the accuracy of the year-end cash balance. d-Confirm the amounts included in the statement of cash flows with the entity's financial institution.

a-Reconcile the amounts included in the statement of cash flows to the other financial statements' amounts.

The purpose of tracing a sample of inventory tags to a client's computerized listing of inventory items is to determine whether the inventory items a-Represented by tags were included on the listing. b-Included on the listing were properly counted. c-Represented by tags were reduced to lower of cost or market. d-Included in the listing were properly valued.

a-Represented by tags were included on the listing.

An auditor most likely would inspect loan agreements under which an entity's inventories are pledged to support management's financial statement assertion of a-Rights and obligations. b-Valuation or allocation. c-Existence or occurrence. d-Completeness.

a-Rights and obligations.

Which of the following is a sampling risk that is associated with the efficiency of an audit? a-Risk of assessing control risk too high. b-Risk of incorrect acceptance. c-Inherent risk. d-Detection risk.

a-Risk of assessing control risk too high.

Tracing bills of lading to sales invoices provides evidence that a-Shipments to customers were invoiced. b-Shipments to customers were recorded as sales. c-Recorded sales were shipped. d-Invoiced sales were shipped.

a-Shipments to customers were invoiced.

In evaluating the reasonableness of an entity's accounting estimates, an auditor normally would be concerned about assumptions that are a-Susceptible to bias. b-Consistent with prior periods. c-Insensitive to variations. d-Similar to industry guidelines.

a-Susceptible to bias.

Which of the following auditing procedures most likely would provide assurance about a manufacturing entity's inventory valuation? a-Testing the entity's computation of standard overhead rates b-Obtaining confirmation of inventories pledged under loan agreements c-Reviewing shipping and receiving cut-off procedures for inventories d-Tracing test counts to the entity's inventory listing

a-Testing the entity's computation of standard overhead rates

Which of the following best identifies the effect of an increase in the risk of material misstatement on detection risk and the extent of substantive procedures? a-The acceptable level of detection risk decreases, and the extent of substantive procedures increases. b-The acceptable level of detection risk increases, and the extent of substantive procedures increases. c-The acceptable level of detection risk decreases, and the extent of substantive procedures decreases. d-The acceptable level of detection risk increases, and the extent of substantive procedures decreases.

a-The acceptable level of detection risk decreases, and the extent of substantive procedures increases.

A lawyer's response to an auditor's inquiry concerning litigation, claims, and assessments may be limited to matters that are considered individually or collectively material to the client's financial statements. Which parties should reach an understanding on the limits of materiality for this purpose? a-The auditor and the client's management. b-The client's audit committee and the lawyer. c-The client's management and the lawyer. d-The lawyer and the auditor.

a-The auditor and the client's management

Which of the following statements is correct regarding accounting estimates? a-The auditor's objective is to evaluate whether accounting estimates are reasonable in the circumstances. b-Accounting estimates should be used when data concerning past events can be accumulated in a timely, cost-effective manner. c-An important accounting estimate is management's listing of accounts receivable greater than 90 days past due. d-Accounting estimates should not be used when the outcome of future events related to the estimated item is unknown.

a-The auditor's objective is to evaluate whether accounting estimates are reasonable in the circumstances.

The use of the ratio estimation sampling technique is most effective when a-The calculated audit amounts are approximately proportional to the client's book amounts. b-A relatively small number of differences exist in the population. c-Estimating populations whose records consist of quantities, but not book values. d-Large overstatement differences and large understatement differences exist in the population.

a-The calculated audit amounts are approximately proportional to the client's book amounts.

Mailing disbursement checks and remittance advices should be controlled by the employee who a-Matches the receiving reports, purchase orders, and vendors' invoices. b-Signs the checks last. c-Prepares the daily voucher summary. d-Agrees the check register to the daily check summary.

b-Signs the checks last.

Which of the following control activities would be a reasonable control over the accuracy of recorded sales? a-The software matches sales invoice quantities with the underlying packing slip and prices with the sales order. b-The software prints a report of unfilled sales orders. c-The software prints a report of all bills of lading not matched with a sales invoice. d-The software matches the customer number on the sale invoice with the customer number on the sales order.

a-The software matches sales invoice quantities with the underlying packing slip and prices with the sales order.

Which of the following is the primary objective of probability proportional to sample size? a-To identify overstatement errors. b-To increase the proportion of smaller-value items in the sample. c-To identify items where controls were not properly applied. d-To identify zero and negative balances.

a-To identify overstatement errors.

Determining that proper amounts of depreciation are expensed most likely provides assurance about which management assertion about account balances related to fixed assets at the end of the period? a-Valuation and allocation. b-Completeness. c-Rights and obligations. d-Existence.

a-Valuation and allocation.

An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support management's financial statement assertion of a-Valuation or allocation. b-Rights and obligations. c-Existence or occurrence. d-Cut-off.

a-Valuation or allocation.

An imprest payroll bank account is: a-a bank account where a company only deposits sufficient funds to process net payroll transactions. b-a bank account that processes all payroll withholding transactions. c-a bank account devoted to all payroll transactions. d-a bank account where a company only deposits sufficient funds to process gross payroll amounts.

a-a bank account where a company only deposits sufficient funds to process net payroll transactions.

An evaluated receipt system is: a-a highly automated business process between suppliers and purchasers to exchange data electronically to execute a purchase transaction. b-a highly automated business process between retailers and customers to receive payment electronically for a purchase transaction. c-a highly automated process between suppliers and purchasers to manage the receipt of goods. d-a highly automated process associated with the initiation of a purchase transaction.

a-a highly automated business process between suppliers and purchasers to exchange data electronically to execute a purchase transaction.

The key documents involved in recording a purchase adjustment involve: a-a purchase return authorization, a shipping report, and a debit memo. b-a vendor's invoice, a receiving report, and a credit memo. c-a purchase order, a vendor's invoice, and a voucher. d- a purchase return authorization, a shipping report, and a credit memo.

a-a purchase return authorization, a shipping report, and a debit memo.

Analytical procedures: a-are required during the planning and completion phases of the audit. b-are substantive procedures and cannot be used at any other stage of the audit. c-are used to test controls and are not substantive procedures. d- can be used as substantive procedures but cannot be used as primary tests of a balance.

a-are required during the planning and completion phases of the audit.

Sampling risk: a-is the risk that the sample chosen by the auditor is not representative of the population of transactions. b-is the risk that the results of the test will be misinterpreted by the auditor. c-can be eliminated by taking a random sample. d-applies only to samples for substantive procedures.

a-is the risk that the sample chosen by the auditor is not representative of the population of transactions.

Sound control activities dictate that defective merchandise returned by customers should be presented initially to: a-the receiving department. b-the sales manager. c-the accounts receivable supervisor. d-the credit manager.

a-the receiving department.

Assume an auditor is testing an IT control over the accuracy of purchases. The auditor is most likely to submit test data for a: a-voucher with quantities different from those on the receiving report. b-purchase order without appropriate authorization. c-voucher with no receiving report. d-purchase order with an invalid vendor number.

a-voucher with quantities different from those on the receiving report.

Which of the following ratios would an engagement partner most likely consider in the overall review stage of an audit? a-Total liabilities/net sales. b-Accounts receivable/inventory. c-Cost of goods sold/average inventory. d-Current assets/quick assets.

c-Cost of goods sold/average inventory.

Designing substantive procedures responds to: a- the risk of material misstatement at the entity level. b- the risk of material misstatement at the assertion level. c- the risk of all types of misstatements at the assertion level. d- the risk of all types of misstatements at the entity level.

b- the risk of material misstatement at the assertion level.

Which of the following statements, extracted from a client's lawyer's letter concerning litigation, claims, and assessments, would be most likely to cause the auditor to request clarification? a-"We believe that the possible liability to the company is nominal in amount." b-"We believe that the action can be settled for less than the damages claimed." c-"We believe that the plaintiff's case against the company is without merit." d-"We believe that the company will be able to defend this action successfully."

b-"We believe that the action can be settled for less than the damages claimed."

In a probability-proportional-to-size sample with a sampling interval of $5,000, an auditor discovered that a selected account receivable with a recorded amount of $10,000 had an audit amount of $8,000. If this were the only error discovered by the auditor, the projected error of this sample would be a-$1,000. b-$2,000. c-$4,000. d-$5,000.

b-$2,000.

The refusal of a client's attorney to provide information requested in an inquiry letter generally is considered a-Grounds for an adverse opinion. b-A limitation on the scope of the audit. c-Reason to withdraw from the engagement. d-Equivalent to a significant deficiency.

b-A limitation on the scope of the audit

In an audit of a nonissuer's financial statements, projected misstatement is a-The likely amount of misstatement in the subsequent period's financial statements if a control is not properly implemented. b-An auditor's best estimate of misstatements in a population extrapolated from misstatements identified in an audit sample. c-The only amount that the auditor considers in evaluating materiality and fairness of the financial statements. d-An auditor's best estimate, before performing audit procedures, of misstatements that the auditor expects to find during the audit.

b-An auditor's best estimate of misstatements in a population extrapolated from misstatements identified in an audit sample.

An auditor's tests of controls for completeness for the revenue cycle usually include determining whether a-Each receivable is collected subsequent to the year-end. b-An invoice is prepared for each shipping document. c-Each invoice is supported by a customer purchase order. d-Each credit memo is properly approved.

b-An invoice is prepared for each shipping document.

An auditor would be most likely to limit substantive audit tests of sales transactions when control risk is assessed as low for the existence or occurrence assertion concerning sales transactions and the auditor has already gathered evidence supporting a-Opening and closing inventory balances. b-Cash receipts and accounts receivable. c-Shipping and receiving activities. d-Cutoffs of sales and purchases.

b-Cash receipts and accounts receivable.

For all (non-trivial) factual misstatements identified by the auditor, the auditor should a-Request management to review their assumptions and methods used to develop a more appropriate accounting estimate. b-Communicate the matters to the appropriate level of management to request correction. c-Obtain an understanding of management's justification and modify the audit report to express an adverse opinion. d-Make the appropriate adjusting journal entries to correct the identified misstatements.

b-Communicate the matters to the appropriate level of management to request correction.

An auditor wants to determine that all sales adjustments are recorded. This relates to which of the following transaction-class assertions? a-Occurrence. b-Completeness. c-Accuracy. d-Classification.

b-Completeness.

Which of the following is not an audit procedure that the independent auditor would perform concerning litigation, claims, and assessments? a-Obtain assurance from management that it has disclosed all unasserted claims that the lawyer has advised are probable of assertion and must be disclosed. b-Confirm directly with the client's lawyer that all claims have been recorded in the financial statements. c-Inquire about and discuss with management the policies and procedures adopted for identifying, evaluating, and accounting for litigation, claims, and assessments. d-Obtain from management a description and evaluation of litigation, claims, and assessments existing at the balance sheet date.

b-Confirm directly with the client's lawyer that all claims have been recorded in the financial statements.

The primary purpose of sending a standard confirmation request to financial institutions with which the client has done business during the year is to a-Detect kiting activities that may otherwise not be discovered. b-Corroborate information regarding deposit and loan balances. c-Provide the data necessary to prepare a proof of cash. d-Request information about contingent liabilities and secured transactions.

b-Corroborate information regarding deposit and loan balances.

When the shipping department returns nonconforming goods to a vendor, the purchasing department should send to the accounting department the a-Unpaid voucher. b-Debit memo. c-Vendor invoice. d-Credit memo.

b-Debit memo.

Employers bond employees who handle cash receipts because fidelity bonds reduce the possibility of employing dishonest individuals and a-Protect employees who make unintentional errors from possible monetary damages resulting from their errors. b-Deter dishonesty by making employees aware that insurance companies may investigate and prosecute dishonest acts. c-Facilitate an independent monitoring of the receiving and depositing of cash receipts. d-Force employees in positions of trust to take periodic vacations and rotate their assigned duties.

b-Deter dishonesty by making employees aware that insurance companies may investigate and prosecute dishonest acts.

All of the following are risk assessment procedures for the audit of accounting estimates except: a-Gain an understanding of what is required by the applicable financial reporting framework. b-Develop an auditor's estimate. c-Inquire about the outcome of prior-period estimates. d-Determine if an identified risk should be assessed as a significant risk.

b-Develop an auditor's estimate.

Which of the following circumstances would most likely cause an auditor to suspect that material misstatements exist in a client's financial statements? a-The assumptions used in developing the prior year's accounting estimates have changed. b-Differences between reconciliations of control accounts and subsidiary records are not investigated. c-Negative confirmation requests yield fewer responses than in the prior year's audit. d-Management consults with another CPA firm about complex accounting matters.

b-Differences between reconciliations of control accounts and subsidiary records are not investigated.

Which of the following situations increases the reliability of data being used for substantive analytical procedures? a-The source of the data is the client's internal budget reports. b-During the prior-year audit, the data were subjected to audit testing. c-Controls over the data have not been tested. d-Broad industry averages will be used in comparison with the client's data.

b-During the prior-year audit, the data were subjected to audit testing.

An online sales order processing system would most likely have an advantage over a batch sales order processing system by a-Detecting errors in the data entry process more easily by the use of edit programs. b-Enabling shipment of customer orders to be initiated as soon as the orders are received. c-Recording more secure backup copies of the data base on magnetic tape files. d-Maintaining more accurate records of customer accounts and finished goods inventories.

b-Enabling shipment of customer orders to be initiated as soon as the orders are received.

In testing plant and equipment balances at the end of the period, an auditor examines new additions listed on an analysis of plant and equipment. This procedure most likely obtains evidence concerning management's assertion of a-Completeness. b-Existence. c-Rights and obligations. d-Valuation and allocation.

b-Existence.

An auditor discovers that an account balance believed not to be materially misstated based on an audit sample was materially misstated based on the total population of the account balance. This is an example of which of the following types of sampling risks? a-Incorrect rejection. b-Incorrect acceptance. c-Assessing control risk too low. d-Assessing control risk too high.

b-Incorrect acceptance.

Key Co. plans to present comparative financial statements for the years ended December 31, 2005, and 2006, respectively. Smith, CPA, audited Key's financial statements for both years and plans to report on the comparative financial statements on May 1, 2007. Key's current management team was not present until January 1, 2006. What period of time should be covered by Key's management representation letter? a-January 1, 2005, through December 31, 2006. b-January 1, 2005, through May 1, 2007. c-January 1, 2006, through December 31, 2006. d-January 1, 2006, through May 1, 2007.

b-January 1, 2005, through May 1, 2007.

Which of the following statements about audit sampling risks is correct for a nonissuer? a-Nonsampling risk arises from the possibility that, when a substantive test is restricted to a sample, conclusions might be different than if the auditor had tested each item in the population. b-Nonsampling risk can arise because an auditor failed to recognize misstatements. c-Sampling risk is derived from the uncertainty in applying audit procedures to specific risks. d-Sampling risk includes the possibility of selecting audit procedures that are not appropriate to achieve the specific objective.

b-Nonsampling risk can arise because an auditor failed to recognize misstatements.

An auditor wishes to perform tests of controls on a client's cash disbursements procedures. If the control procedures leave no audit trail of documentary evidence, the auditor will be most likely to test the procedures by a-Confirmation and observation. b-Observation and inquiry. c-Analytical procedures and confirmation. d-Inquiry and analytical procedures.

b-Observation and inquiry.

A client just read about a business paying extraordinary sums of money to a variety of employees. How would the client company use an IT application control to prevent this type of accuracy and valuation problem? a-Test a check digit embedded in the employee number. b-Perform a limit test related to the class of employees. c-Check the employee number against the master payroll file. d-Compare the total number of payroll disbursements with a predetermined batch total

b-Perform a limit test related to the class of employees.

Periodic or cycle counts of selected inventory items are made at various times during the year rather than a single inventory count at year-end. Which of the following is necessary if the auditor plans to observe inventories at interim dates? a-Complete recounts by independent teams are performed. b-Perpetual inventory records are maintained. c-Unit cost records are integrated with production accounting records. d-Inventory balances are rarely at low levels.

b-Perpetual inventory records are maintained.

Which of the following explanations most likely would satisfy an auditor who questions management about significant debits to the accumulated depreciation accounts? a-The estimated remaining useful lives of plant assets were revised upward. b-Plant assets were retired during the year. c-The prior year's depreciation expense was erroneously understated. d-Overhead allocations were revised at year end.

b-Plant assets were retired during the year

Immediately upon receipt of cash, a responsible employee should a-Record the amount in the cash receipts journal. b-Prepare a remittance listing. c-Update the subsidiary accounts receivable records. d-Prepare a deposit slip in triplicate.

b-Prepare a remittance listing.

Stratified mean per unit (MPU) sampling is a statistical technique that may be more efficient than unstratified MPU because it usually a-May be applied to populations where many monetary errors are expected to occur. b-Produces an estimate that has a desired level of precision with a smaller sample size. c-Increases the variability among items in a stratum by grouping sampling units with similar characteristics. d-Yields a weighted sum of the strata standard deviations that is greater than the standard deviation of the population.

b-Produces an estimate that has a desired level of precision with a smaller sample size.

Sound internal control procedures dictate that defective merchandise returned by customers should be presented initially to the a-Accounts receivable supervisor. b-Receiving clerk. c-Shipping department supervisor. d-Sales clerk.

b-Receiving clerk.

In a properly designed internal control structure, the same employee would most likely match vendors' invoices with receiving reports and also a-Post the detailed accounts payable records. b-Recompute the calculations on vendors' invoices. c-Reconcile the accounts payable ledger. d-Cancel vendors' invoices after payment.

b-Recompute the calculations on vendors' invoices.

When performing a substantive test of a random sample of cash disbursements, an auditor is supplied with a photocopy of vendor invoices supporting the disbursements for one particular vendor, rather than the original invoices. The auditor is told that the vendor's original invoices have been misplaced. What should the auditor do in response to this situation? a-Randomly increase the number of items in the substantive test to increase the reliance that may be placed on the overall test. b-Reevaluate the risk of fraud and design alternate tests for the related transactions. c-Increase testing by agreeing more of the payments to this particular vendor to the photocopies of its invoices. d-Count the missing original documents as misstatements and project the total amount of the error based on the size of the population and the dollar amount of the errors.

b-Reevaluate the risk of fraud and design alternate tests for the related transactions.

The auditor's decision about the risk of incorrect acceptance affects which of the following factors in a statistical PPS sample? a-Tolerable misstatement. b-Reliability factor. c-Book value of the population. d-Expected misstatement.

b-Reliability factor.

A client maintains perpetual inventory records in both quantities and dollars. If the assessed level of control risk is high, an auditor would probably a-Increase the extent of tests of controls of the inventory cycle. b-Request that the client schedule the physical inventory count at the end of the year. c-Insist that the client perform physical counts of inventory items several times during the year. d-Apply gross profit tests to ascertain the reasonableness of the physical counts.

b-Request that the client schedule the physical inventory count at the end of the year.

Which of the following industries would have the greatest concerns about purchases cutoff at month-end, unrecorded liabilities, and accounting for advertising allowances provided by vendors? a-Manufacturer of construction equipment. b-Retail grocer. c-Hotel. d-Local school district.

b-Retail grocer.

Assume that an auditor is auditing a public company client that manufactures computer hardware and markets significant maintenance and consulting services. The auditor should be concerned about which of the following? a-Appropriate accounting for commissions on sales. b-Significant revenue issues associated with bundling products and services. c-More than the usual concern about collection risk. d-Significant concerns about the completeness of revenues.

b-Significant revenue issues associated with bundling products and services.

During an audit, an auditor discovers a fraudulent expense reimbursement for a low-level manager. The auditor determines that this transaction is inconsequential and several similar transactions would not be material to the financial statements in the aggregate. Which of the following statements best describes the auditor's required response to the discovery? a-The auditor should fully investigate other transactions related to this manager to determine if fraud exists. b-The auditor should bring the transaction to the attention of an appropriate level of management. c-The auditor should report this finding to those charged with governance. d-The auditor's responsibility is satisfied by documenting that the single transaction is inconsequential.

b-The auditor should bring the transaction to the attention of an appropriate level of management.

While testing a sample of an audit client's bank reconciliations during the year under audit, an auditor notices that several immaterial deposits in transit did not clear the bank in a timely manner. The auditor suspects there may be fraud. Which of the following audit responses is most appropriate in this situation? a-Because the findings are not material, the auditor should project the errors to the population and consider the materiality of the projected misstatement in the auditor's concluding procedures. b-The auditor should consider the implications for the integrity of management or employees and the possible effect on other aspects of the audit. c-The auditor should focus on material misstatements and not consider these immaterial findings or potential errors further. d-The auditor should report the finding to the appropriate level of management immediately.

b-The auditor should consider the implications for the integrity of management or employees and the possible effect on other aspects of the audit.

An auditor has set the materiality level for the financial statements as a whole at $125,000. Which of the following misstatements would the auditor most likely consider material? a-The client did not record $47,000 in trade accounts payable at year end. b-The client did not disclose $45,000 of related party transactions in the footnotes. c-The client misclassified $42,000 of supplies expense as miscellaneous expense. d-The client's estimate of the allowance for doubtful accounts is $40,000 more than the auditor's estimate.

b-The client did not disclose $45,000 of related party transactions in the footnotes.

Which of the following matters would an auditor most likely include in a management representations letter? a-Communications with the audit committee concerning weaknesses in internal control structure. b-The completeness and availability of minutes of stockholders' and directors' meetings. c-Plans to acquire or merge with other entities in the subsequent year. d-Management's acknowledgment of its responsibility for the detection of all employee fraud.

b-The completeness and availability of minutes of stockholders' and directors' meetings.

Which of the following audit assertions is least likely to be accomplished by vouching payroll transactions to supporting documentation (e.g., time records and employee contracts)? a-The occurrence of payroll transactions. b-The completeness of payroll transactions. c-The accuracy of payroll transactions. d- Proper cutoff related to payroll transactions.

b-The completeness of payroll transactions.

When a client company does not maintain its own stock records, the auditor should obtain written confirmation from the transfer agent and registrar concerning a-Restrictions on the payment of dividends. b-The number of shares issued and outstanding. c-Guarantees of preferred stock liquidation value. d-The number of shares subject to agreements to repurchase.

b-The number of shares issued and outstanding.

Which of the following is a good example of an IT application control over the occurrence of revenue transactions? a-Physical access to computer systems is limited to specific personnel who work in the revenue process. b-The software compares information on a sales invoice with information from the bill of lading to ensure that sales invoices are only prepared for actual shipments. Any exceptions are not processed and are set aside for manual follow-up. c-Computer system changes to the revenue program must be tested and authorized before they are allowed to be used with live data. d-Effective segregation of duties exists between computer operations and computer program development.

b-The software compares information on a sales invoice with information from the bill of lading to ensure that sales invoices are only prepared for actual shipments. Any exceptions are not processed and are set aside for manual follow-up.

Which of the following control objectives is achieved by reviewing and testing control procedures over physical inventory count? a-Validation of purchase transactions. b-Verification of existence of inventory. c-Authorization of the manufacturing orders. d-Posting and summarization of inventory transactions.

b-Verification of existence of inventory.

Which of the following sample planning factors would influence the sample size for a substantive test of details for a specific account? Expected amount of misstatements Measure of tolerable misstatement a-No,No b-Yes,Yes C-No,Yes D- Yes,No

b-Yes,Yes

Describe the IT control procedure that provides assurance that all the merchandise for which the client was billed was received. Assume the software prepares an exception report, and follow-up procedures are effective. IT edit checks compare: a-quantities and prices on the voucher with quantities and prices on the purchase order. b-quantities on the vendor's invoice with quantities entered in receiving. c-quantities and prices on the voucher with quantities and prices on the vendor's invoice. d-quantities times price on the voucher with the amount of cash disbursements.

b-quantities on the vendor's invoice with quantities entered in receiving.

In an evaluated receipts settlement system, an advance shipping notice is: a-an electronic contract outlining the general terms for ordering, shipping, and paying for goods. b-similar to a sales order and indicates the goods to be shipped, prices, and other information (e.g., freight costs or taxes) and the sales transaction. c-equivalent to a bill of lading. d-equivalent to a packing slip.

b-similar to a sales order and indicates the goods to be shipped, prices, and other information (e.g., freight costs or taxes) and the sales transaction.

An auditor would consider a cashier's job description to contain compatible duties if the cashier receives remittances from the mailroom and also prepares the a-Prelist of individual checks. b-Monthly bank reconciliation. c-Daily deposit slip. d-Remittance advices.

c-Daily deposit slip.

An auditor is testing accounts receivable for a client that has 1,000 customers with customer balances that range from $150 to $185,000. The auditor subdivided the receivables into three groups: group 1 has all customers with receivable balances between $185,000 and $100,000, group 2 has all customers with receivable balances between $100,000 and $25,000, and group 3 has all customers with receivable balances less than $25,000. The auditor then randomly selects customers out of each group. This is known as: a-random selection. b-stratified sampling. c-haphazard selection. d-block selection.

b-stratified sampling.

When auditing the payroll process, the auditor will normally want to understand: a-the relationship between payroll and significant customers. b-the extent to which a company is capital-intensive or labor-intensive. c-the predictability of the relationship between payroll expense and capital expenditures for the year. d-the relationship between net payroll and the company's total tax liability.

b-the extent to which a company is capital-intensive or labor-intensive.

What is an auditor's primary method to corroborate information on litigation, claims, and assessments? a-Examining legal invoices sent by the client's attorney. b-Verifying attorney-client privilege through interviews. c-Reviewing the response from the client's lawyer to a letter of audit inquiry. d-Reviewing the written representation letter obtained from management.

c-Reviewing the response from the client's lawyer to a letter of audit inquiry.

How would increases in tolerable misstatement and assessed level of control risk affect the sample size in a substantive test of details? Increase in tolerable misstatement Increase in assessed level of control risk A- Increase sample size Increase sample size b- Increase sample size Decrease sample size c- Decrease sample size Increase sample size

c- Decrease sample size Increase sample size

Which of the following statements in an attorney's legal letter requires further investigation? a-"We believe that the plaintiff's case against the company is without merit." b-"We are of the opinion that this action will not result in any liability to the company." c-"It is our opinion that the company will be able to assert meritorious defenses to this action." d-"It is our opinion that the possible liability to the company in this proceeding is nominal in amount."

c-"It is our opinion that the company will be able to assert meritorious defenses to this action."

An auditor uses nonstatistical ratio estimation to evaluate the results of a sample. The population book value was $2,000,000 and contained 350 items. The auditor selected 100 items with a book value of $500,000. The audited value of the sample was $480,000. The estimated audited value of the population is: a-$1,980,000. b-$1,930,000. c-$1,920,000. d-$1,900,000.

c-$1,920,000.

In a probability-proportional-to-size sample with a sampling interval of $10,000, an auditor discovered that a selected account receivable with a recorded amount of $5,000 had an audit amount of $2,000. The projected error of this sample was a-$3,000 b-$4,000 c-$6,000 d-$8,000

c-$6,000

Which of the following situations could most likely lead to an embezzlement scheme? a-The accounts receivable bookkeeper receives a list of payments prepared by the cashier and personally makes entries in the customers' accounts receivable subsidiary ledger. b-Each vendor invoice is matched with the related purchase order and receiving report by the vouchers payable bookkeeper who personally approves the voucher for payment. c-Access to blank checks and signature plates is restricted to the cash disbursements bookkeeper who personally reconciles the monthly bank statement. d-Vouchers and supporting documentation are examined and then canceled by the treasurer who personally mails the checks to vendors.

c-Access to blank checks and signature plates is restricted to the cash disbursements bookkeeper who personally reconciles the monthly bank statement.

The auditor is studying a ratio of accounts payable turnover in days. Which of the following indicates a potential risk of unrecorded liabilities? a-Accounts payable turnover in days increased from 28 days to 45 days from year one to year two. b-Accounts payable turnover in days increased from 28 days to 30 days from year one to year two. c-Accounts payable turnover in days decreased from 28 days to 15 days from year one to year two. d-Accounts payable turnover in days decreased from 30 days to 25 days from year one to year two.

c-Accounts payable turnover in days decreased from 28 days to 15 days from year one to year two.

Upon receipt of customers' checks in the mailroom, a responsible employee should prepare a remittance listing that is forwarded to the cashier. A copy of the listing should be sent to the a-Internal auditor to investigate the listing for unusual transactions. b-Treasurer to compare the listing with the monthly bank statement. c-Accounts receivable bookkeeper to update the subsidiary accounts receivable records. d-Entity's bank to compare the listing with the cashier's deposit slip.

c-Accounts receivable bookkeeper to update the subsidiary accounts receivable records.

The date of the management representation letter should coincide with the date of the a-Balance sheet. b-Latest interim financial information. c-Auditor's report. d-Latest related party transaction.

c-Auditor's report.

Which of the following fraudulent activities could most likely be perpetrated due to the lack of effective internal controls in the revenue cycle? a- Fictitious transactions may be recorded that cause an understatement of revenues and an overstatement of receivables. b-Claims received from customers for goods returned may be intentionally recorded in other customers' accounts. c-Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash. d- The failure to prepare shipping documents may cause an overstatement of inventory balances.

c-Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash.

The primary source of information to be reported about litigation, claims, and assessments is the a-Client's lawyer. b-Court records. c-Client's management. d-Independent auditor.

c-Client's management.

During the course of an audit, an auditor finds evidence that an officer has entered fraudulent transactions in the financial statements. The fraudulent transactions can be adjusted so the statements are not materially misstated. What should the auditor do? a-Report the matters to regulatory authorities. b-Consider the fraud a scope limitation and disclaim an opinion. c-Communicate the matter to those charged with governance. d-Immediately withdraw from the engagement.

c-Communicate the matter to those charged with governance.

Each of the following might be considered as a type of factual misstatement, EXCEPT a-An inaccuracy in accounting processing data. b-The misapplication of accounting principles. c-Differences between management and the auditor's judgment regarding accounting estimates. d-A difference between the classification of a reported financial statement element and the classification according to generally accepted accounting principles.

c-Differences between management and the auditor's judgment regarding accounting estimates.

An auditor's principal objective in analyzing repairs and maintenance expense accounts is to a-Determine that all obsolete plant and equipment assets were written off before the year end. b-Verify that all recorded plant and equipment assets actually exist. c-Discover expenditures that were expensed, but should have been capitalized. d-Identify plant and equipment assets that cannot be repaired and should be written off.

c-Discover expenditures that were expensed, but should have been capitalized.

When sending positive confirmations, which of the following would not be an appropriate way to address nonresponse by a customer? a-Search for evidence of subsequent cash receipt from the customer. b-Match open invoices to underlying bills of lading and customer orders. c-If the customer's account balance is individually immaterial, conclude that no further work or analysis is necessary. d-Assume that the nonresponse is 100% in error and project the misstatement on the population.

c-If the customer's account balance is individually immaterial, conclude that no further work or analysis is necessary.

Which of the following most likely would be an advantage in using classical variables sampling rather than probability-proportional-to-size (PPS) sampling? a-An estimate of the standard deviation of the population's recorded amounts is not required. b-The auditor rarely needs the assistance of a computer program to design an efficient sample. c-Inclusion of zero and negative balances generally does not require special design considerations. d-Any amount that is individually significant is automatically identified and selected.

c-Inclusion of zero and negative balances generally does not require special design considerations.

While performing a test of details during an audit, an auditor determined that the sample results supported the conclusion that the recorded account balance was materially misstated. It was, in fact, not materially misstated. This situation illustrates the risk of a-Assessing control risk too high. b-Assessing control risk too low. c-Incorrect rejection. d-Incorrect acceptance.

c-Incorrect rejection.

An auditor has identified the controller's review of the bank reconciliation as a control to test. In connection with this test, the auditor interviews the controller to understand the specific data reviewed on the reconciliation. In addition, the auditor verifies that the bank reconciliation is properly prepared by the accountant and reviewed by the controller, as evidenced by their respective sign-offs. Which of the following types of audit procedures do these actions illustrate? a-and inspection of records. b-Confirmation and re-performance. c-Inquiry and inspection of records. d-Analytical procedures and re-performance.

c-Inquiry and inspection of records.

When auditing prepaid insurance, an auditor discovers that the original insurance policy on plant equipment is not available for inspection. The policy's absence most likely indicates the possibility of a(n) a-Insurance premium due but not recorded. b-Deficiency in the coinsurance provision. c-Lien on the plant equipment. d-Understatement of insurance expense.

c-Lien on the plant equipment.

Which of the following characteristics most likely would be indicative of check kiting? a-High turnover of employees who have access to cash. b-Many large checks that are recorded on Mondays. c-Low average balance compared to high level of deposits. d-Frequent ATM checking account withdrawals.

c-Low average balance compared to high level of deposits.

"We have disclosed to you all known instances of noncompliance or suspected noncompliance with laws and regulations whose effects should be considered when preparing financial statements." The foregoing passage most likely is from a(n) a-Client engagement letter. b-Report on compliance with laws and regulations. c-Management representations letter. d-Attestation report on an internal control structure.

c-Management representations letter.

When a company's stock record books are maintained by an outside registrar or transfer agent, the auditor should obtain confirmation from the registrar or transfer agent concerning the a-Amount of dividends paid to related parties. b-Expected proceeds from stock subscriptions receivable. c-Number of shares issued and outstanding. d-Proper authorization of stock rights and warrants.

c-Number of shares issued and outstanding.

At the conclusion of an audit, an auditor is reviewing the evidence gathered in support of the financial statements. With regard to the valuation of inventory, the auditor concludes that the evidence obtained is not sufficient to support management's representations. Which of the following actions is the auditor most likely to take? a-Consult with the audit committee and issue a disclaimer of opinion. b-Consult with the audit committee and issue a qualified opinion. c-Obtain additional evidence regarding the valuation of inventory. d-Obtain a statement from management supporting their inventory valuation.

c-Obtain additional evidence regarding the valuation of inventory.

Management's responses to inquiries can be corroborated by each of the following, except a-Visits to the entity's premises and plant facilities. b-Inspection of documents and internal control manuals. c-Preparation of the summary of unadjusted differences. d-Observation of entity activities and operations.

c-Preparation of the summary of unadjusted differences

Sound internal control procedures dictate that, immediately upon receiving checks from customers by mail, a responsible employee should a-Add the checks to the daily cash summary. b-Verify that each check is supported by a prenumbered sales invoice. c-Prepare a duplicate listing of checks received. d-Record the checks in the cash receipts journal.

c-Prepare a duplicate listing of checks received.

In auditing contingent liabilities, which of the following procedures would an auditor be most likely to perform? a-Confirm the details of outstanding purchase orders. b-Apply analytical procedures to accounts payable. c-Read the minutes of the board of directors' meetings. d-Perform tests of controls on the cash disbursement activities.

c-Read the minutes of the board of directors' meetings.

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

c-Segregation of duties between receiving cash and posting the accounts receivable ledger.

An auditor is not required to document a-Identified material misstatements that have been corrected by management. b-The basis for the auditor's determination of materiality levels used. c-Senior management's awareness of (and agreement with) the tolerable misstatement specified by the auditor for material elements of the financial statements. d-The auditor's conclusion as to whether any misstatements that management chose not to correct are, in fact, material.

c-Senior management's awareness of (and agreement with) the tolerable misstatement specified by the auditor for material elements of the financial statements.

A senior auditor conducted a dual-purpose test on a client's invoice to determine whether the invoice was approved and to ascertain the amount and other terms of the invoice. Which of the following lists two tests that the auditor performed? a-Substantive procedures and analytical procedures b-Substantive analytical procedures and tests of controls c-Tests of controls and tests of details d-Tests of details and substantive procedures

c-Tests of controls and tests of details

Which of the following statements is correct concerning probability-proportional-to-size (PPS) sampling, also known as dollar unit sampling? a-The sampling distribution should approximate the normal distribution. b-Overstated units have a lower probability of sample selection than units that are understated. c-The auditor controls the risk of incorrect acceptance by specifying this risk level for the sampling plan. d-The sampling interval is calculated by dividing the number of physical units in the population by the sample size.

c-The auditor controls the risk of incorrect acceptance by specifying this risk level for the sampling plan.

Which of the following controls should prevent an invoice for the purchase of merchandise from being paid twice? a-The check signer accounts for the numerical sequence of receiving reports used in support of each payment. b-An individual independent of cash operations prepares a bank reconciliation. c-The check signer reviews and cancels the voucher packets. d-Two check signers are required for all checks over a specified amount.

c-The check signer reviews and cancels the voucher packets.

Which of the following could indicate source document fraud? a-The same customer purchase order number appears on different customer invoices. b-The same item code appears on different invoices. c-The same invoice number appears on different invoices. d-The same invoice date appears on different invoices.

c-The same invoice number appears on different invoices.

Which of the following control activities would most likely assure that no fictitious billings have been posted to the sales journal? a-The accounts receivable master file is compared with the general ledger control account. b-Each shipment on credit is supported by a prenumbered sales order. c-The software compares each sales invoice with the supporting shipping documents and notes any discrepancies. d-The software compares prices on the sales invoices with prices on the master price list and notes any discrepancies.

c-The software compares each sales invoice with the supporting shipping documents and notes any discrepancies.

Which of the following would be the most likely reason to include more unpredictability in the selection and performance of audit procedures? a-Client has effective internal control environment. b-Client was not audited in the previous year. c-There is heightened risk of fraud. d- Unpredictability provides the audit team with more variety.

c-There is heightened risk of fraud.

Which of the following sampling methods would be used to estimate a numerical measurement of a population, such as a dollar value? a-Attributes sampling. b-Stop-or-go sampling. c-Variables sampling. d-Random number sampling.

c-Variables sampling.

An audit client that manufactures and sells goods to a network of authorized dealers may create the equivalent of a consignment sale if the client: a-only allows goods to be returned if they are damaged. b-allows a cash discount if the receivable is paid within 30 days. c-allows an unconditional right of return at any time until the goods are sold by the dealer. d-ships goods only on a collect on delivery (C.O.D.) basis

c-allows an unconditional right of return at any time until the goods are sold by the dealer.

When analyzing the results of substantive procedures, auditors should beware of: a-professional skepticism. b-audit engagement deadlines. c-confirmation bias. d-ineffective internal controls.

c-confirmation bias.

The purchasing process normally includes all of the following transactions: a-purchases, inventory transactions, and cash receipts. b-purchases on account, purchase returns, and cash receipts. c-purchases on account, purchase returns, and cash disbursements. d-purchases of inventory, plant and equipment, and depreciation.

c-purchases on account, purchase returns, and cash disbursements.

Audit sampling is defined as a situation where: a-the auditor tests a subset of the population to draw a conclusion about a subset of the population. b-the auditor screens 100% of the population to identify a subset with particular risk traits. c-the auditor tests a representative group that is less than 100% of the population for the purpose of drawing a conclusion about the entire population. d-the auditor screens less than 100% of the population to identify a subset with particular risk traits.

c-the auditor tests a representative group that is less than 100% of the population for the purpose of drawing a conclusion about the entire population.

An inherent risk of major concern to the auditor in the payroll process is: a-the completeness of payroll. b-the occurrence assertion for payroll. c-the occurrence and cutoff assertions for payroll. d-the completeness and occurrence assertions for payroll.

c-the occurrence and cutoff assertions for payroll.

The critical difference between statistical and nonstatistical sampling is: a-the required use of judgment in nonstatistical sampling. b-the elimination of nonsampling risk with statistical sampling. c-the use of the laws of probability in statistical sampling to determine sample size and develop a confidence interval around the results of the sample. d-that more representative samples are attained with statistical sampling.

c-the use of the laws of probability in statistical sampling to determine sample size and develop a confidence interval around the results of the sample.

All of the following are initial procedures performed on an account balance except: a-agreeing the opening balance to the audited ending balance from the prior year's working papers. b-footing a trial balance for mathematical accuracy. c-vouching items from the trial balance to supporting documentation. d-scanning account details for unusual items.

c-vouching items from the trial balance to supporting documentation.

Which of the following would not be a reason to increase the extent of a substantive procedure? a-The risk of material misstatement is high. b-Qualitative factors suggest there may be errors in the account. c-Internal controls are ineffective. d- Auditors have time to test more items.

d- Auditors have time to test more items.

The nature of an audit procedure refers to: a-when the procedure is performed. b-the assessed level of detection risk. c-the sample size required to perform the procedure. d- its purpose and its type.

d- its purpose and its type.

The auditor's best estimate of the misstatement in a population based on the misstatement found in a sample drawn from the population is called a: a-factual misstatement. b-judgmental misstatement. c-confirmation misstatement. d- projected misstatement.

d- projected misstatement.

While observing a client's annual physical inventory, an auditor recorded test counts for several items and noticed that certain test counts were higher than the recorded quantities in the client's perpetual records. This situation could be the result of the client's failure to record a-Purchase discounts. b-Purchase returns. c-Sales. d- sales return

d- sales return

Holding all other factors constant, which of the following factors results in an increase in sample size for substantive procedures? a-A decrease in the amount of expected misstatement in the population to be tested. b-Stratifying the population when appropriate. c-An increase in the amount of tolerable misstatement. d-An increase in the desired level of assurance that the tolerable misstatement is not exceeded by the actual amount of misstatement in the population.

d-An increase in the desired level of assurance that the tolerable misstatement is not exceeded by the actual amount of misstatement in the population.

Which of the following activities performed by a department supervisor would most likely help in the prevention or detection of a payroll fraud? a-Distributing paychecks directly to department employees. b-Setting the pay rate for departmental employees. c-Hiring employees and authorizing them to be added to payroll. d-Approving a summary of hours each employee worked during the pay period.

d-Approving a summary of hours each employee worked during the pay period.

The client asked the auditor to audit financial statements covering the current year. The auditor did not observe at the prior year's physical inventory. Which of the following actions would the auditor most likely take? a-Withdraw from the engagement and provide no assurance on the current year's financial statements. b-Rely on management's representation that the prior year's balances are correct. c-Audit the financial statements and express an opinion with a scope limitation. d-Audit the prior year inventory using alternative substantive procedures.

d-Audit the prior year inventory using alternative substantive procedures

The usefulness of the standard bank confirmation request may be limited because the bank employee who completes the form may a-Not believe that the bank is obligated to verify confidential information to a third party. b-Sign and return the form without inspecting the accuracy of the client's bank reconciliation. c-Not have access to the client's cut-off bank statement. d-Be unaware of all the financial relationships that the bank has with the client.

d-Be unaware of all the financial relationships that the bank has with the client.

Which assertion is typically related to income statement accounts rather than balance sheet accounts? a-Completeness. b-Accuracy. c-Rights and obligations. d-Cutoff.

d-Cutoff.

In evaluating the reasonableness of an accounting estimate, an auditor most likely would concentrate on key factors and assumptions that are a-Consistent with prior periods. b-Similar to industry guidelines. c-Objective and not susceptible to bias. d-Deviations from historical patterns.

d-Deviations from historical patterns

If a customer pays its receivable in full but a client fails to record cash received from the customer, which of the following account balance assertions related to accounts receivable is misstated? a-Completeness. b-Rights and obligations. c-Valuation at net realizable value. d-Existence.

d-Existence.

An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the audit assertion that all a-Noncapitalizable expenditures for repairs and maintenance have been recorded in the proper period. b-Expenditures for property and equipment have been recorded in the proper period. c-Noncapitalizable expenditures for repairs and maintenance have been properly charged to expense. d-Expenditures for property and equipment have not been charged to expense.

d-Expenditures for property and equipment have not been charged to expense.

To which of the following matters would an auditor not apply materiality limits when obtaining specific written representations from management? a-Disclosure of compensating balance arrangements involving restrictions on cash balances. b-Information concerning related party transactions and related amounts receivable or payable. c-The absence of errors and unrecorded transactions in the financial statements. d-Fraud involving employees with significant roles in the internal control structure.

d-Fraud involving employees with significant roles in the internal control structure.

In testing controls over cash disbursements, an auditor would be most likely to determine that the person who signs checks also a-Reviews the monthly bank reconciliation. b-Returns the checks to accounts payable. c-Is denied access to the supporting documents. d-Is responsible for mailing the checks.

d-Is responsible for mailing the checks.

To obtain assurance that all inventory items in a client's inventory listing are valid, an auditor most likely would agree a-Inventory tags noted during the auditor's observation to items listed in receiving reports and vendors' invoices. b-Items listed in receiving reports and vendor's invoices to the inventory listing. c-Inventory tags noted during the auditor's observation to items in the inventory listing. d-Items in the inventory listing to inventory tags and the auditor's recorded count sheets.

d-Items in the inventory listing to inventory tags and the auditor's recorded count sheets.

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

d-Measure the sufficiency of the evidential matter obtained.

In a well-designed internal control structure, employees in the same department most likely would approve purchase orders, and also a-Reconcile the open invoice file. b-Inspect goods upon receipt. c-Authorize requisitions of goods. d-Negotiate terms with vendors.

d-Negotiate terms with vendors.

Which of the following procedures would an auditor ordinarily perform first in evaluating management's accounting estimates for reasonableness? a-Develop independent expectations of management's estimates. b-Consider the appropriateness of the key factors or assumptions used in preparing the estimates. c-Test the calculations used by management in developing the estimates. d-Obtain an understanding of how management developed its estimates.

d-Obtain an understanding of how management developed its estimates.

Which of the following audit procedures would be most appropriate to test the valuation of the collateral of a delinquent loan receivable? a-Sending a positive confirmation letter to the debtor to confirm the loan balance. b-Performing a site visit to physically inspect the collateral. c-Reviewing the debtor's purchase records to test the historical value of the collateral. d-Obtaining a current value appraisal of the collateral.

d-Obtaining a current value appraisal of the collateral.

Which of the following procedures would be most appropriate for testing the completeness assertion as it applies to inventory? a-Scanning perpetual inventory, production, and purchasing records. b-Examining paid vendor's invoices. c-Tracing inventory items from the tag listing back to the physical inventory quantities. d-Performing cut-off procedures for shipping and receiving.

d-Performing cut-off procedures for shipping and receiving.

Which of the following explanations most likely would satisfy an auditor who questions management about significant debits to accumulated depreciation accounts in the current year? a-Prior years' depreciation expenses were erroneously understated. b-Current year's depreciation expense was erroneously understated. c-The estimated remaining useful lives of plant assets were revised upward. d-Plant assets were retired during the current year.

d-Plant assets were retired during the current year.

An advantage that using statistical sampling methods have over nonstatistical sampling methods in tests of controls is that the statistical methods a-Can more easily convert the sample into a dual-purpose test useful for substantive testing. b-Eliminate the need to use judgment in determining appropriate sample sizes. c-Afford greater assurance than a nonstatistical sample of equal size. d-Provide an objective basis for quantitatively evaluating sample risk.

d-Provide an objective basis for quantitatively evaluating sample risk

Which of the following procedures would be most likely to assist an auditor in identifying litigation, claims, and assessments? a-Inspect checks included with the client's cut-off bank statement. b-Obtain a letter of representations from the client's underwriter of securities. c-Apply ratio analysis on the current-year's liability accounts. d-Read the file of correspondence from taxing authorities.

d-Read the file of correspondence from taxing authorities.

Which of the following procedures would most likely not be an internal control procedure designed to reduce the risk of errors in the billing process? a-Comparing control totals for shipping documents with corresponding totals for sales invoices. b-Using computer programmed controls on the pricing and mathematical accuracy of sales invoices. c-Matching shipping documents with approved sales orders before invoice preparation. d-Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger.

d-Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger.

An analysis of which of the following accounts would best aid in verifying that all fixed assets have been capitalized? a-Cash. b-Depreciation expense. c-Property tax expense. d-Repairs and maintenance.

d-Repairs and maintenance

Which of the following payroll control activities would most effectively ensure that payment is made only for work performed? a-Require all employees to record arrival and departure by using the time clock. b-Have a payroll clerk recalculate all time cards. c-Require all employees to sign their time cards. d-Require employees to have their direct supervisors approve their time cards.

d-Require employees to have their direct supervisors approve their time cards.

Which of the following procedures most likely would assist an auditor in determining whether management has identified all accounting estimates that could be material to the financial statements? a-Inquire about the existence of related party transactions. b-Determine whether accounting estimates deviate from historical patterns. c-Confirm inventories at locations outside the entity. d-Review the lawyer's letter for information about litigation.

d-Review the lawyer's letter for information about litigation.

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

d-Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.

In auditing a client's retained earnings account, an auditor should determine whether there are any restrictions on retained earnings that result from loans, agreements, or state law. This procedure is designed to corroborate management's financial statement assertion of a-Valuation or allocation. b-Existence or occurrence. c-Completeness. d-Rights and obligations.

d-Rights and obligations

During an audit of an entity's stockholders' equity accounts, the auditor determines whether there are restrictions on retained earnings resulting from loans, agreements, or state law. This audit procedure most likely is intended to verify management's assertion of or about a-Existence or occurrence. b-Completeness. c-Valuation or allocation. d-Rights and obligations.

d-Rights and obligations.

An auditor is studying a ratio of accounts receivable growth rate to sales growth rate. Which of the following indicates a potential risk of a collection problem in accounts receivable? a-Sales grew by 10% and receivables grew by 11% from year one to year two. b-Sales declined by 2% and receivables declined by 7% from year one to year two. c-Sales grew by 10% and receivables declined by 2% from year one to year two. d-Sales grew by 5% and receivables grew by 17% from year one to year two

d-Sales grew by 5% and receivables grew by 17% from year one to year two

Which of the following sampling methods would be used to estimate a numerical measurement of a population, such as a dollar value? a-Discovery sampling. b-Numerical sampling. c-Sampling for attributes. d-Sampling for variables.

d-Sampling for variables.

Mailing disbursement checks and remittance advices should be controlled by the employee who a-Approves the vouchers for payment. b-Matches the receiving reports, purchase orders, and vendors' invoices. c-Maintains possession of the mechanical check-signing device. d-Signs the checks last.

d-Signs the checks last.

Which of the following situations increases the risk of fraud due to lapping? a-The sales manager can approve credit limits for customers. b-The accounts receivable clerk also has responsibilities for writing sales invoices. c-The shipping clerk in the warehouse has read-only access to sales orders. d-The accounts receivable clerk also has responsibilities for receiving cash.

d-The accounts receivable clerk also has responsibilities for receiving cash.

An auditor may decide to increase the risk of incorrect rejection when a-Increased reliability from the sample is desired. b-Many differences (audit value minus recorded value) are expected. c-Initial sample results do not support the planned level of control risk. d-The cost and effort of selecting additional sample items are low.

d-The cost and effort of selecting additional sample items are low.

If a nonissuer refuses to give permission to the auditor to communicate with its external legal counsel, then the auditor should modify which of the following? a-The audit plan b-The management representation letter c-The attorney's letter of inquiry d-The opinion in the auditor's report

d-The opinion in the auditor's report

An auditor is reporting on comparative financial statements for three years. Which of the following statements is correct regarding written representations from management? a-The representation letter needs to address the prior-year's financial statements not covered in the report. b-The representation letter needs to address only the most current year covered in the report. c-The representation letter needs to address only the two most recent years covered in the report. d-The representation letter needs to address all of the years being covered in the report.

d-The representation letter needs to address all of the years being covered in the report.

Which of the following controls would most likely prevent a vendor's invoice from being paid twice? a-An independent bank reconciliation is prepared. b-The software compares information on the check with information on the receiving report. c-The software compares the daily total in the cash disbursements journal with the total vouchers submitted for payment. d-The software has a field that identifies a vendor's invoice has been paid and the voucher number cannot be reused.

d-The software has a field that identifies a vendor's invoice has been paid and the voucher number cannot be reused.

Which of the following IT control procedures would be most effective in assuring that recorded purchases are accurately recorded for transactions that actually occurred? a-The software compares the quantity ordered from purchase order information with the quantity received from the receiving department. b-Vendor invoice information is compared with purchase order information. c-Receiving reports require the signature of the individual who authorized the purchase. d-The software matches voucher information with information supporting purchase orders, receiving reports, and vendor invoices.

d-The software matches voucher information with information supporting purchase orders, receiving reports, and vendor invoices.

In performing tests concerning the granting of stock options, an auditor should a-Confirm the transaction with the Secretary of State in the state of incorporation. b-Verify the existence of option holders in the entity's payroll records or stock ledgers. c-Determine that sufficient treasury stock is available to cover any new stock issued. d-Trace the authorization for the transaction to a vote of the board of directors.

d-Trace the authorization for the transaction to a vote of the board of directors.

Proper authorization of write-offs of uncollectible accounts should be approved in which of the following departments? a-Accounts receivable. b-Credit. c-Accounts payable. d-Treasurer.

d-Treasurer.

A small manufacturing company makes only credit sales. If cash receipts from sales are misappropriated, which of the following acts would most likely conceal this fraud? a-Understating the accounts receivable control account. b-Understating the accounts receivable subsidiary ledger. c-Overstating the sales journal. d-Understating the cash receipts journal.

d-Understating the cash receipts journal.

Under which of the following conditions may an auditor's observation procedure for inventory be performed during or after the end of the period under audit? a-When the client maintains periodic inventory records b-When the auditor finds minimal variations in client records and test counts in prior periods c-When total inventory has not varied more than 5% in the last five years d-When well-kept perpetual inventory records are checked by the client periodically by comparisons with physical counts

d-When well-kept perpetual inventory records are checked by the client periodically by comparisons with physical counts

Disclosure of irregularities to parties other than a client's senior management and its audit committee or board of directors ordinarily is not part of an auditor's responsibility. However, to which of the following outside parties may a duty to disclose irregularities exist? To the SEC when the client reports an auditor change To a successor auditor when the successor makes appropriate inquiries To a government funding agency from which the client receives financial assistance a-Yes,Yes,No b-Yes,No,Yes c-No,Yes,Yes d-Yes,Yes,Yes

d-Yes,Yes,Yes

When defining the population and sampling unit, sometimes an auditor must look for a reciprocal population. A reciprocal population is: a-a class of transactions or the account balance to be tested. b-a class of transactions related to the account balance being tested (e.g., sales to accounts receivable). c-a subset of the population that is the basis for sampling. d-a population that is overstated if the population of interest is understated (or vice versa).

d-a population that is overstated if the population of interest is understated (or vice versa).

Nonsampling risk: a-only occurs if you test every item of the population. b-only applies to samples taken for the purpose of substantive procedures. c-does not occur if an auditor relies on unreliable evidence. d-is the risk that an auditor arrives at an inappropriate conclusion for a reason unrelated to sampling issues.

d-is the risk that an auditor arrives at an inappropriate conclusion for a reason unrelated to sampling issues.

An auditor may plan to test controls in the payroll process because, among other factors: a-the chance of employee fraud is remote. b-outside governmental auditors spend considerable time investigating the payroll area in most companies. c-audit risk in the area relates primarily to the hiring of competent personnel. d-payroll transactions are generally routine and processed in a high volume, which makes controls effective for management to employ.

d-payroll transactions are generally routine and processed in a high volume, which makes controls effective for management to employ.

In evaluating an entity's accounting estimates, one of an auditor's objectives is to determine whether estimates are a- not subject to bias b- consistent with industry guidelines c-based on objective assumptions d-reasonable in the circumstances

d-reasonable in the circumstances

The internal document commonly used to record a credit purchase in the purchases journal is a: a-purchase requisition. b-purchase order. c-vendor's invoice. d-voucher.

d-voucher.