Audit Chapter 10, Audit Chapter 11, Auditing Chapter 9, Auditing Chapter 7 - Exam 2

When performing an internal control audit under PCAOB standards, one or more material weaknesses in internal control that exist at year-end will result in what type of report(s)? Qualified Disclaimer A. Yes Yes B. Yes No C. No Yes D. No No

option D

The effectiveness of controls is not generally tested by: - Observation of the application of accounting policies and procedures. - Inquiries of appropriate client personnel. - Inspection of documents and reports. - Performance of analytical procedures.

performance of analytical procedures

The 2,000 accounts receivable of ABC Company have a total book value of $40,000. Bob Rotter, CPA, has selected and audited a sample of 100 accounts with a total book value of $1,950. The audited value of the 100 accounts in the sample is $1,875.The 3,000 accounts receivable of DEF Company have a total book value of $60,000. Bob Smith, CPA, has selected and audited a sample of 100 accounts with a total book value of $2,100. Using the difference estimation technique, Smith has properly estimated a projected misstatement of an overstatement of $6,000 for the entire population. The audited value of Smith's sample is: - $1,700 - $1,800 - $1,900 - $2,300

$1,900

The 4,000 accounts receivable of Miller Company have a total book value of $150,000. A CPA has selected and audited a sample of 100 accounts with a total book value of $3,700 and an audited value of $3,800.Using the mean-per-unit estimation technique, the estimated total audited value of the population is: - $150,000 - $152,000 - $154,000 - $154,054

$152,000

The 4,000 accounts receivable of Miller Company have a total book value of $150,000. A CPA has selected and audited a sample of 100 accounts with a total book value of $3,700 and an audited value of $3,800.Using the difference estimation technique, estimated total audited value of the population is: - $150,000 - $152,000 - $154,000 - $154,054

$154,000

The 4,000 accounts receivable of Miller Company have a total book value of $150,000. A CPA has selected and audited a sample of 100 accounts with a total book value of $3,700 and an audited value of $3,800.Using difference estimation, an auditor has taken a sample of 150 from a population's 50,000 items; that population has a book value of $250,000. She found that in her sample the average audited value was $4.50, while the average book value was $5.20. What is the estimated total audited value of the population? - $215,000 - $216,346 - $225,000 - $250,000

$215,000

The 4,000 accounts receivable of Miller Company have a total book value of $150,000. A CPA has selected and audited a sample of 100 accounts with a total book value of $3,700 and an audited value of $3,800.Using ratio estimation, an auditor has taken a sample of 150 from a population's 50,000 items; that population has a book value of $250,000. She found that in her sample the average audited value was $4.50, while the average book value was $5.20. What is the estimated total audited value of the population? - $215,000. - $216,346. - $225,000. - $250,000.

$216,346

The 1,000 accounts receivable of Baker Company have a total book value of $30,000 (Average book value = $30). Wendy Duffo, CPA, has selected and audited a sample of 50 accounts with the following mean values:1- Book value of $29.00 2- Audited value of $29.50.What is the estimated total audited value using mean-per-unit sampling? - $29,000. - $29,500. - $30,500. - $30,517.

$29,500

x The 1,000 accounts receivable of Baker Company have a total book value of $30,000 (Average book value = $30). Wendy Duffo, CPA, has selected and audited a sample of 50 accounts with the following mean values:1- Book value of $29.00 2- Audited value of $29.50.What is the estimated total audited value using difference estimation sampling? -$29,000 -$29,500 -$30,517 -$30,500.

$30,500

The 2,000 accounts receivable of ABC Company have a total book value of $40,000. Bob Rotter, CPA, has selected and audited a sample of 100 accounts with a total book value of $1,950. The audited value of the 100 accounts in the sample is $1,875.Using the ratio estimation technique, Rotter's estimate (to the nearest dollar) of year-end accounts receivable balance would be: -$37,500 - $38,462 - $38,500 - $41,600

$38,462

The 2,000 accounts receivable of ABC Company have a total book value of $40,000. Bob Rotter, CPA, has selected and audited a sample of 100 accounts with a total book value of $1,950. The audited value of the 100 accounts in the sample is $1,875.Using the difference estimation technique, Rotter's estimate (to the nearest dollar) of year-end accounts receivable balance would be: - $37,500 - $38,462 - $38,500 - $41,600

$38,500

The 2,000 accounts receivable of ABC Company have a total book value of $40,000. Bob Rotter, CPA, has selected and audited a sample of 100 accounts with a total book value of $1,950. The audited value of the 100 accounts in the sample is $1,875.Assume a mean-per-unit estimation variables sampling application with a tolerable misstatement of $70,000 and a book value of $700,000. After performing the sampling plan, the auditors calculated an allowance for sampling risk of $45,000 and a point estimate of the population's total audited value to be $640,000. The projected misstatement based on this sample is: - $5,000 - $45,000 - $60,000 - $70,000

$60,000

Situation: no tests of controls performed Assessed level of control risk?

100% or max

Inspection

Inspect documents and determine whether evidence exists that the procedures have been performed

Control risk

The risk that the internal control will fail to prevent, or detect and correct, material misstatement that occur

The auditors should insist that a representative of the client be present during the physical examination of securities in order to: - Lend authority of the auditor's directives. - Coordinate the return of all securities to proper locations. - Detect forged securities. - Acknowledge the receipt of securities returned.

acknowledge the receipt of securities returned

Bank cut-off statement

a bank statement for the first 7-10 business days following the end of the client's fiscal year

The 2,000 accounts receivable of ABC Company have a total book value of $40,000. Bob Rotter, CPA, has selected and audited a sample of 100 accounts with a total book value of $1,950. The audited value of the 100 accounts in the sample is $1,875.During the final planning of the accounts receivable plan a CPA specified a tolerable misstatement of $30,000, instead of the $20,000 contained in the preliminary audit plan. What would be the impact of this change? - A decrease in population standard deviation - An increase in sample standard deviation - An increase in required sample size - A decrease in the required sample size.

a decrease in the required sample size

Material weakness

a deficiency(ies) in internal control such that there is a reasonable possibility that a material misstatement of the company's financial statements will not be prevented or detected on a timely basis

Significant deficiency

a deficiency(ies) in internal control that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company's financial reporting

The auditors obtain audit evidence for accounts receivable by using positive or negative confirmation requests. Under which of the following circumstances might the negative form of the accounts receivable confirmation be useful? - A substantial number of accounts are in disputes. - A low exception rate is expected. - The combination of inherent risk and control risk is high. - The auditors believe that recipients of the requests are unlikely to give them consideration.

a low exception rate is expected

Which of the following is correct with respect to control deficiencies discovered during an audit? - All such matters must be communicated to the audit committee and regulatory agencies. - All control deficiencies are also significant deficiencies. - All material weaknesses in internal control must be reported to the audit committee in writing. - Auditors must communicate and recommend corrections relating to all material weaknesses in internal control to management.

all material weaknesses in internal control must be reported to the audit committee in writing

After the CPAs have selected particular accounts receivable for confirmation: - It is important that every account selected that has a material balance ultimately be verified by confirmation or the application of alternative procedures; immaterial balances never require any follow-up through alternative procedures. - As a control measure, the CPAs should carefully list the audited values of all of those accounts before turning the letters over to the client to type and mail. - All requests for confirmation should be mailed personally by the auditors at a post office. - All differences between confirmation replies and book values should be reconciled by the CPAs, rather than the client.

all requests for confirmation should be mailed personally by the auditors at a post office

The 2,000 accounts receivable of ABC Company have a total book value of $40,000. Bob Rotter, CPA, has selected and audited a sample of 100 accounts with a total book value of $1,950. The audited value of the 100 accounts in the sample is $1,875.In variables estimation sampling, the sample standard deviation is used to calculate the: - Point estimate of central tendency - Tainting of the sample interval - Risk of incorrect acceptance - Allowance for sampling risk.

allowance for sampling risk

The 2,000 accounts receivable of ABC Company have a total book value of $40,000. Bob Rotter, CPA, has selected and audited a sample of 100 accounts with a total book value of $1,950. The audited value of the 100 accounts in the sample is $1,875.To determine sample size in an attribute sampling application, what must be specified? - Population mean, expected error rate, allowance for sampling risk - Allowance for sampling risk, risk of assessing control risk too low, standard deviation - Allowance for sampling risk, risk of assessing control risk too low, expected deviation rate - Population mean, standard deviation, allowance for sampling risk.

allowance for sampling risk, risk of assessing control risk too low, expected deviation rate

Accounting information and communication system

an information system should include methods and records that identify and record all valid transactions, recording of transactions at their proper monetary value in the financial statements, proper accounting period, disclosures

Which of the following would least likely be included in an auditor's tests of controls? - Analytical procedures. - Inquiry. - Inspection. - Observation.

analytical procedures

Audit sampling

application of an audit procedure to less than 100 percent of the items for the purpose of evaluating some characteristic of the balance or class

5 missteps to avoid when evaluating internal controls

assuming that the client has no controls, not understanding which controls are relevant to the audit, stopping after determining whether controls exist, improperly assessing control risk, failing to link further audit procedures to control-related risks

Audit sampling is made up of what?

attributes sampling in tests of controls and variables sampling in substantive testing

The auditors who become aware of an internal control significant deficiency are required to communicate this to the: - Compensation committee. - Audit committee. - Client's legal counsel. - Internal auditors.

audit committee

Implemented/placed in operation understanding

auditor may have obtained a flowchart of the revenue cycle, and s/he simply observes employees performing the duties outlined on that flowchart

What are the three branches of segregation of duties?

authorization, recording, and custody

An integrated audit performed under Section 404b of the Sarbanes-Oxley Act addresses financial statements and: - Internal control over asset safeguarding. - Internal control over financial reporting. - Compliance with laws. - Suitable criteria.

internal control over financial reporting

Risk of assessing control risk too low

based on sampling, think the controls are better than they actually are (the worst of the two)

The 2,000 accounts receivable of ABC Company have a total book value of $40,000. Bob Rotter, CPA, has selected and audited a sample of 100 accounts with a total book value of $1,950. The audited value of the 100 accounts in the sample is $1,875.Which of the following statistical selection techniques is least desirable for use by an auditor? - Systematic selection - Stratified selection - Block selection - Sequential selection.

block selection

What do you mean by tests of controls being cost justified?

by testing controls, the control risk can be lowered low; detection risk can raise, and the auditors can do fewer substantive procedures (not as much work needed)

Why do auditors consider internal control?

by understanding and testing controls, it helps with audit; tests risks, can determine amount of substantive procedures

The major components of internal control include all of the following, except: - Control activities. - Risk assessment. - Internal auditing. - The control environment.

internal auditing

Systematic sampling

calculate a sampling interval by dividing the number of items in population by the sample size

Which of the following procedures in the cash disbursements cycle should not be performed by the accounts payable department? - Comparing the vendor's invoice with the receiving report. - Canceling supporting documentation after payment. - Preparing the check for signature by an authorized person. - Verifying the mathematical accuracy of the vendor's invoice.

canceling supporting documentation after payment

What are the two variables sampling in substantive tests methods?

classical and MUS

How to detect lapping

compare details of bank deposit slips with details of credits to customer accounts

Anderson embezzled $20,000 from her company's account in Bank X. At year-end, she hid the shortage by making a deposit on December 31 in Bank X, drawn on Bank Y. She has not recorded the transaction on the books. Which of the following is most likely to be effective in detecting this fraud? - Comparison of bank cutoff statement to the cash receipts and disbursements records. - Bank confirmation. - Bank transfer schedule prepared using only the cash receipts and cash disbursements journals. - Receivable confirmation.

comparison of bank cutoff statement to the cash receipts and disbursements records

If the external auditors decide that the work performed by the internal auditors may be used, they should consider the internal auditors': -T raining and supervisory skills. - Independence and review skills. - Competence, objectivity, and approach. - Efficiency and experience.

competence, objectivity, and approach

To establish the existence and ownership of a large long-term investment in the common stock of a publicly traded company, the auditors ordinarily perform a security count or: - Determine the market price per share at the balance sheet date from published quotations. - Confirm the number of shares owned that are held by an independent custodian. - Confirm the number of shares owned with the issuing company. - Rely on the client's internal controls if the auditors have reasonable assurance that the control procedures are being applied as prescribed.

confirm the number of shares owned that are held by an independent custodian

Monitoring

internal controls be monitored over time to determine whether they continue to be relevant and able to address new risks of the organization

Which procedure would be of most assistance to an auditor discovering a large credit sale that has erroneously been recorded twice? - Observation of the physical inventory count at year-end. - Footing the sales journal. - Confirming accounts receivable. - Tracing the total sales in the sales journal to the general ledger.

confirming accounts receivable

Of the following statements about internal control, which one is not valid? - Because of the cost/benefit relationship, a client may apply control procedures on a test basis. - Control activities ensure all fraud will be eliminated. - No one person should be responsible for the custodial responsibility and the recording responsibility for an asset. - Transactions must be properly authorized before such transactions are processed.

control activities ensure all fraud will be eliminated.

Internal control over marketable securities is enhanced when: - Securities are held by the cashier. - Detailed records of securities are maintained by the custodian of the securities. - Securities are registered in the name of the custodian. - Custody of securities is maintained by a stockbroker or bank.

custody of securities is maintained by a stockbroker or bank

The scope of substantive procedures as compared to the scope of tests of controls generally vary: - Equally. - Directly. - In a parallel manner. - Inversely.

inversely

The 2,000 accounts receivable of ABC Company have a total book value of $40,000. Bob Rotter, CPA, has selected and audited a sample of 100 accounts with a total book value of $1,950. The audited value of the 100 accounts in the sample is $1,875.When using a statistical sampling plan, the auditors would probably require a smaller sample if the: - Population increases - Tolerable misstatement decreases - Desired risk of incorrect acceptance increases - Expected deviation rate increases.

desired risk of incorrect acceptance increases

inquiries

discuss with appropriate client personnel the manner in which the control functions

Non-sampling risk

due to "human" errors, not due to examining only a portion of the population; all aspects of audit risk not due to sampling

When tests of controls reveal that controls are operating as anticipated, it is most likely that the assessed level of control risk will: - Be less than the preliminary assessed level of control risk. - Equal the preliminary assessed level of control risk. - Be less than the actual control risk. - Equal the actual control risk.

equal the preliminary assessed level of control risk

Variables sampling

estimating dollar amounts or quantities; primarily to limit detection risk by conducting substantive testing (detailed tests of balances).

Random number selection

every item in the population has an equal chance of being selected; best way to obtain a representative sample

Which of the following is a likely procedure to test the adequacy of the allowance for doubtful accounts? - Foot the receivables lead schedule. - Examine dates of purchase orders. - Examine cash receipts received after year-end. - Confirm receivables.

examine cash receipts received after year-end

T/F if no tests of control have been performed, control risk must be assessed at the minimum level

false

T/F the risk of incorrect rejection of a recorded account balance is the worst sampling risk

false; incorrect acceptance is worse

Controls are not designed to provide assurance that: - Fraud will be eliminated. - Access to assets is permitted only in accordance with management's authorization. - The recorded accountability for assets is compared with the existing assets at reasonable intervals. - Transactions are executed in accordance with management's authorization.

fraud will be eliminated

Situation: tests of controls performed, system operating somewhat effectively, but not as well as anticipated Assessed level of control risk?

higher than planned assessed level of control risk

Which of the following factors would most likely be considered an inherent limitation to an entity's internal control? - The complexity of the information processing system. - The ineffectiveness of the board of directors. - The lack of management incentives to improve the control environment. - Human judgment in the decision making process.

human judgment in the decision making process

Planned and assessed control risk below maximum level requires:

identify internal control procedures relevant to account or assertion, and perform test of controls

The 1,000 accounts receivable of Baker Company have a total book value of $30,000 (Average book value = $30). Wendy Duffo, CPA, has selected and audited a sample of 50 accounts with the following mean values:1- Book value of $29.00 2- Audited value of $29.50.If all other factors specified in an attributes sampling plan remain constant, decreasing the tolerable rate and increasing the estimated population deviation rate would have what effect on sample size? - Increase - Remain the same - Decrease - Indeterminate, depends upon exact change being made.

increase

How can sampling risk be reduced?

increasing the sample, but it may cost more

Types of tests of controls

inquires, inspection, observation, and reperformance

Which of the following is correct concerning "window dressing" for cash? - It generally involves manipulation of inventory. - It is illegal, and an audit is designed to provide reasonable assurance of its detection. - It may increase but not falsify cash position. - A segregation of duties within the cash function effectively eliminates its occurrence.

it may increase but not falsify cash position

After obtaining an understanding of internal control and arriving at a preliminary assessed level of control risk, an auditor decided to perform tests of controls. The auditor most likely decided that: - There were many internal control deficiencies that would allow misstatements to enter the accounting system. - An increase in the assessed level of control risk is justified for certain financial statement assertions. - It would be efficient to perform tests of controls that would result in a reduction in planned substantive procedures. - Additional evidence to support a reduction in the assessed level of control risk is not available.

it would be efficient to perform tests of controls that would result in a reduction in planned substantive procedures

Assessed level of control risk

level at which control risk is assessed for purposes of determining the scope of substantive procedures; if no tests of controls are performed this is at the maximum level

Planned assessed level of control risk

level is lower than the maximum level when the assessed level of the risk of material misstatement presumes that controls operate effectively (maximum level = 1 or 100%)

When there are a large number of relatively small account receivable balances, negative confirmation requests may be appropriate if the combination of inherent risk and control risk is: - High, and the individuals receiving the confirmation requests are unlikely to give them adequate consideration. - Low, and the individuals receiving the confirmation requests are likely to give them adequate consideration. - High, and the individuals receiving the confirmation requests are likely to give them adequate consideration. - Low, and the individuals receiving the confirmation requests are unlikely to give them adequate consideration.

low, and the individuals receiving the confirmation requests are likely to give them adequate consideration

Control environment

management's and directors' attitudes, awareness & actions

Situation: tests of control performed, system found not to be operating effectively. Assessed level of control risk?

maximum (worst situation)

The use of fidelity bonds protects a company from embezzlement loses and also: - Reduces the company's need to obtain expensive business interruption insurance. - Allows the company to substitute the fidelity bonds for various parts of internal control. - Protects employees who made unintentional errors from possible monetary damages resulting from such errors. - Minimizes the possibility of employing persons with dubious records in positions of trust.

minimizes the possibility of employing persons with dubious records in positions of trust

Best internal controls may break down due to:

misunderstandings, mistakes of judgment, carelessness, and collusion and/or management override

How would an auditor modify the nature, timing, and extent of substantive procedures if the assessed level of control risk increases?

nature: perform a lot of procedures; timing: wait until year-end; extent: a lot of testing with large sample sizes

The auditors compare information on canceled checks with information contained in the cash disbursement journal. The objective of this test is to determine that: - Recorded cash disbursement transactions are properly authorized. - No discrepancies exist between the data on the checks and the data in the journal. - Proper cash purchase discounts have been recorded. - Cash disbursements are for goods and services actually received.

no discrepancies exist between the data on the checks and the data in the journal

Which of the following statements regarding auditor documentation of the client's internal control is correct? - No documentation is necessary, although it is desirable. - Documentation must include procedural write-ups. - Documentation must include flowcharts. - No one particular form of documentation is necessary, and the extent of documentation may vary.

no one particular form of documentation is necessary, and the extent of documentation may vary

An auditor should perform alternative procedures to substantiate the existence of accounts receivable when: - Collectibility of the receivables is in doubt. - No reply to a positive confirmation request is received. - Pledging of the receivables is probable. - No reply to a negative confirmation request is received.

no reply to a positive confirmation request is received

Major points for non-statistical sampling

no statistical calculations, need an experienced auditor, generally use higher sample sizes

The 1,000 accounts receivable of Baker Company have a total book value of $30,000 (Average book value = $30). Wendy Duffo, CPA, has selected and audited a sample of 50 accounts with the following mean values:1- Book value of $29.002- Audited value of $29.50.The auditors expect a population deviation rate of billing errors of eight percent, and have established a tolerable rate of five percent. The sampling approach most likely to be used is: - Attributes sampling - Stratified random sampling - Variables sampling - None, as sampling does not seem appropriate in this situation.

none, as sampling does not seem appropriate in this situation

The 1,000 accounts receivable of Baker Company have a total book value of $30,000 (Average book value = $30). Wendy Duffo, CPA, has selected and audited a sample of 50 accounts with the following mean values:1- Book value of $29.002- Audited value of $29.50.When using statistical sampling, which of the following need not be known to evaluate the results of an attributes sample? - Sample size - Risk of assessing control risk too low - Number of deviations in the population - Number of deviations found in the sample.

number of deviations in the population

What is the primary advantage of statistical sampling?

objectively quantify results

Observation

observe application of the procedures being applied to the invoices several times during the year

When performing an internal control audit under PCAOB requirements, one or more material weaknesses in internal control that exist at year-end will result in what type of report(s)? Qualified Adverse A. Yes Yes B. Yes No C. No Yes D. No No

option C

Which of the following is least likely to be used as an alternate procedure for handling nonreplies to accounts receivable confirmation requests? - Examine bills of lading. - Examine correspondence. - Physically examine items sold. - Examine subsequent cash receipts.

physically examine items sold

Control activities

policies and procedures to help ensure management directives are carried out (performance reviews, segregation of duties, etc.)

Attributes sampling

primarily used to assess control risk, by conducting tests of controls; deals with numbers in the form of percentages

Internal control definition

process, effected by the entity's board of directors, management and other personnel designed to provide reasonable assurance regarding reliability of financial reporting, effectiveness and efficiency of operations, compliance with applicable laws and regulations

After considering the client's internal control, the auditors have concluded that it is well-designed and is functioning as anticipated. Under these circumstances, the auditors would most likely: - Reduce substantive procedures in areas where the internal control was found to be effective. - Increase the extent of anticipated analytical procedures. - Perform all tests of controls to the extent outlined in the preplanned audit plan. - Cease to perform further substantive procedures.

reduce substantive procedures in areas where the internal control was found to be effective

Operating effectiveness understanding

relates to tests of controls; tests of controls address this

Reperformance

reperform the procedure by comparing amounts shown on each document to the items listed on the related documents and by comparing items to the client's lists

Which of the following is not a component of the control environment? - Integrity and ethical values. - Organizational structure. - Risk assessment. - Commitment to attracting, developing, and retaining competent employees.

risk assessment

audit risk euqation

risk of material misstatement * risk auditor doesn't detect misstatements (inherent risk * control risk) * detection risk

Which of the following is not ordinarily considered a factor indicative of increased financial reporting risk when an auditor is considering a client's risk assessment policies? - Implementation of a new information system. - Salaried sales personnel. - Rapid growth of the organization. - Corporate restructuring.

salaried sales personnel

Situation: tests of controls performed, system operating as anticipated Assessed level of control risk?

same as planned

What is the risk in using sampling? (Sampling risk)

sample that is taken does not represent the sample well, resulting in a bad conclusion

Haphazard selection

selection made without any special reason for including or excluding an item; cannot be used in statistical sampling; purposely use a higher sample sizes

In November, two months before year-end, the bookkeeper erroneously recorded the receipt of a one year bank loan with a debit to cash and a credit to interest revenue. The most effective method for detecting this type of error is: - Foot the cash receipts journal for November. - Prepare a bank reconciliation as of year-end. - Send a bank confirmation as of year-end. - Prepare a bank transfer schedule as of year-end.

send a bank confirmation as of year-end

Which of the following is not a universal rule for achieving internal control over cash? - Have monthly bank reconciliations prepared by employees not responsible for the issuance of checks. - Separate recordkeeping from accounting for cash to the extent possible. - Deposit each day's cash receipts intact. - Separate cash handling from recordkeeping.

separate recordkeeping from accounting for cash to the extent possible

Properly designed internal control will permit the same employee to: - Reconcile the bank statements, and also receive and deposit cash. - Receive and deposit checks, and also approve write-offs of customer accounts. - Sign checks, and also cancel supporting documents. - Approve vouchers for payment, and also receive and deposit cash.

sign checks, and also cancel supporting documents

The 2,000 accounts receivable of ABC Company have a total book value of $40,000. Bob Rotter, CPA, has selected and audited a sample of 100 accounts with a total book value of $1,950. The audited value of the 100 accounts in the sample is $1,875.An important statistic to consider when using a statistical sampling audit plan is the population variability. The population variability is measured by the - Sample mean - Standard deviation - Median - Estimated population total minus the actual population total.

standard deviation

Tests of controls are most likely to be performed when: - The client's control environment appears weak. - The auditor wishes to assess control risk at the maximum. - Controls seem weak and must be properly documented. - The auditor plans to rely on the controls.

the auditor plans to rely on the controls

The 2,000 accounts receivable of ABC Company have a total book value of $40,000. Bob Rotter, CPA, has selected and audited a sample of 100 accounts with a total book value of $1,950. The audited value of the 100 accounts in the sample is $1,875.Which of the following statements is correct about the sample size in statistical sampling when testing internal controls? - The auditor should consider the tolerable rate of deviation from the controls being tested in determining sample size - As the likely rate of deviation decreases, the auditor should increase the planned sample size - The allowable risk of assessing control risk too low has no effect on the planned sample size - Of all the factors to be considered, the population size has the greatest effect on the sample size.

the auditor should consider the tolerable rate of deviation from the controls being tested in determining sample size

Which of the following statements is correct concerning the understanding of internal control needed by auditors? - The auditors must understand the information system, not the accounting system. - The auditors must understand the control environment, risk assessment, and all control activities. - The auditors must have a sufficient understanding to assess the risks of material misstatement. - The auditors must understand monitoring and all preliminary accounting controls.

the auditors must have a sufficient understanding to assess the risks of material misstatement

Why would an auditor have a planned assessed level of control risk at the maximum level?

the auditors see that the internal controls are very weak; the system appears to be operating effectively but the auditors choose not to test the controls

Tests of controls do not ordinarily address: - By whom a control was applied. - The consistency with which a control was applied. - How a control was applied. - The cost effectiveness of the way a control was applied.

the cost effectiveness of the way a control was applied

Which of the following is the best argument against the use of negative accounts receivable confirmation requests? - Recipients are likely to feel that in reality the confirmation is a subtle request for payment. - The cost-per-response is excessively high. - The inference drawn from receiving no reply may not be correct. - There is no way of knowing if the intended recipients received them.

the inference drawn from receiving no reply may not be correct

Tolerable rate

the maximum rate of deviations from the control policy that could be accepted without altering the planned assessed level of control risk

risk assessment

the organization's process of identifying potential risks to its financial reporting objectives and developing actions to address those risks

Documentation requirements for tests of internal controls

the overall responses to address the assessed risks of misstatement at the financial statement level; the nature, timing, and extent of the further audit procedures; the linkage of procedures with the assessed risks; the results of the audit procedures; the conclusions reached

The 2,000 accounts receivable of ABC Company have a total book value of $40,000. Bob Rotter, CPA, has selected and audited a sample of 100 accounts with a total book value of $1,950. The audited value of the 100 accounts in the sample is $1,875.Which of the following statements is correct concerning statistical sampling in tests of controls? - The population size has little effect on determining sample size except for very small populations - The expected population deviation rate has little or no effect on determining sample size except for very small populations - As the population size doubles, the sample size also should double - For a given tolerable rate, a larger sample size should be selected as the expected population deviation rate decreases.

the population size has little effect on determining sample size except for very small populations

The 2,000 accounts receivable of ABC Company have a total book value of $40,000. Bob Rotter, CPA, has selected and audited a sample of 100 accounts with a total book value of $1,950. The audited value of the 100 accounts in the sample is $1,875.The tolerable deviation rate in sampling for tests of controls is: - Used to determine the probability of the auditor's conclusion based upon reliance factors - The probability that the financial statements are not materially in error - A measure of the reliability of substantive tests - The rate the auditor will tolerate without modifying the planned assessment of control risk.

the rate the auditor will tolerate without modifying the planned assessment of control risk

The 1,000 accounts receivable of Baker Company have a total book value of $30,000 (Average book value = $30). Wendy Duffo, CPA, has selected and audited a sample of 50 accounts with the following mean values:1- Book value of $29.00 2- Audited value of $29.50.Which of the following types of risk is of critical importance to auditors in performing tests of controls? - The risk of assessing control risk too low. - The risk of assessing control risk too high. - The risk of incorrect acceptance. - The risk of incorrect rejection.

the risk of assessing control risk too low

Risk of incorrect rejection

the substantive procedures indicate that the population is materially misstated when it is actually not misstated

Risk of incorrect acceptance

the substantive procedures indicate that the population is not materially misstated when it actually is (worse of the two)

If the auditors do not perform tests of controls for certain assertions: - They must assess control risk at the maximum level for those assertions. - They are not required to communicate significant deficiencies relating to those accounts to management and the board of directors. - They have performed a substandard audit. - They must issue a qualified opinion.

they must assess control risk at the maximum level for those assertions

Risk of assessing control risk too high

think controls are worse than they are and the sampling takes more work than it should

Most often the confirmation per bank will differ from the client books. Why?

timing difference; outstanding checks, deposits in transit, and bank fees from month-end may be missing from book balance

Why do sampling?

to control costs

Which of the following is not a control that generally is established over cash receipts? - To prevent abstraction of cash, a control listing of cash receipts should be prepared by mailroom personnel. - To prevent theft of cash, receipts should be deposited daily. - To ensure accurate posting, the accounts receivable clerk should post the customers' receipts from customers' checks. - To ensure accuracy of the accounts receivable records, the records should be reconciled monthly to the accounts receivable controlling account.

to ensure accurate posting, the accounts receivable clerk should post the customers' receipts from customers' checks

An audit basically consists of having the auditor form an opinion regarding management's financial statement assertions. The auditor therefore develops general and specific procedures to apply to the accounts and transactions. In a particular case, s/he might do this by: - Tracing sales invoices to shipping documents to tests the completeness of reported sales. - Tracing sales invoices to shipping documents to test the occurrence of reported sales. - Tracing sales invoices to shipping documents to test the completeness of recorded accounts receivable. - Tracing shipping documents to sales invoices to test the occurrence of reported sales.

tracing sales invoices to shipping documents to test the occurrence of reported sales

Contact with banks for the purpose of opening company bank accounts should normally be the responsibility of the corporate: - Board of Directors. - Executive Committee. - Controller. - Treasurer.

treasurer

T/F as the assessed level of control risk increases, the acceptable level of detection risk decreases

true

T/F auditors must, on all audits, determine that the IC has been implemented

true

T/F for nonpublic companies only, if the internal controls have not changed for several years, tests of controls can be performed every third audit

true

An auditor compares annual revenues and expenses with similar amounts from the prior year and investigates all changes exceeding 10%. This procedure most likely could indicate that: - Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities. - The annual provision for uncollectible accounts expense was inadequate because of worsening economic conditions. - Notice of an increase in property tax rates was received by management, but was not recorded until early in the subsequent year. - Fourth quarter payroll taxes were properly accrued and recorded, but were not paid until early in the subsequent year.

unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities

The 2,000 accounts receivable of ABC Company have a total book value of $40,000. Bob Rotter, CPA, has selected and audited a sample of 100 accounts with a total book value of $1,950. The audited value of the 100 accounts in the sample is $1,875.There are many kinds of statistical estimates that an auditor may find useful, but basically every statistical estimate in auditing is of either a quantity or of an error rate. The statistical terms that roughly correspond to "quantities" and "occurrence rate," respectively, are: - Attributes and variable - Variables and attributes - Constants and attributes - Constants and variables

variables and attributes

After documenting the client's prescribed internal control, the auditors will often perform a walk-through of each transaction cycle. An objective of a walk-through is to: - Replace tests of controls. - Evaluate the major strengths and weaknesses in the client's internal control. - Identify weaknesses to be communicated to management in the management letter. - Verify that the controls have been implemented (placed in operation).

verify that the controls have been implemented (placed in operation)

When would an auditor perform tests of controls?

when the controls appear to be operating effectively and, by testing them, it can be cost justified

Deficiency

when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect material misstatements on a timely basis