Audit Final Review Questions from Textbook

Which of the following internal controls will best detect the theft of valuable items from an inventory that consists of hundreds of different items selling for $1 to $10 and a few items selling for hundreds of dollars? 1. Maintain a perpetual inventory of only the more valuable items, with frequent periodic verification of the validity of the perpetual inventory records. 2. Have an independent auditing firm examine and report on management's assertion about the design and operating effectiveness of the control activities relevant to inventory. 3. Have separate warehouse space for the more valuable items, with sequentially numbered tags. 4. Require an authorized officer's signature on all requisitions for the more valuable items.

1. Maintain a perpetual inventory of only the more valuable items, with frequent periodic verification of the validity of the perpetual inventory records.

When fraud risk factors are identified during an audit, the auditor's documentation should include: 1. Risk Factors Identified Yes, Auditor's Response to the Risk Factors Identified Yes 2. Risk Factors Identified Yes, Auditor's Response to the Risk Factors Identified No 3. Risk Factors Identified No, Auditor's Response to the Risk Factors Identified Yes 4. Risk Factors Identified No, Auditor's Response to the Risk Factors Identified No

1. Risk Factors Identified Yes, Auditor's Response to the Risk Factors Identified Yes

In assessing sampling risk, the risk of underreliance (i.e., the risk of assessing control risk too high) relates to the 1. efficiency of the audit. 2. effectiveness of the audit. 3. selection of the items in the sample. 4. audit quality controls.

1. efficiency of the audit.

After a CPA has determined that accounts receivable have increased as a result of slow collections in a "tight money" environment, the CPA will be likely to 1. expand tests of collectibility. 2. review the going concern ramifications. 3. review the credit and collection policy. 4. increase the balance in the allowance for bad debt account.

1. expand tests of collectibility.

Jefferson, CPA, has identified five significant deficiencies in internal control during the audit of Portico Industries, a nonpublic company. Two of these conditions are considered to be material weaknesses. Which best describes Jefferson's communication requirements? 1. Communicate the two material weaknesses to Portico's management and those charged with governance, but not the three significant deficiencies that are not material weaknesses. 2. Communicate all five significant deficiencies to Portico's management and those charged with governance, distinguishing between material weaknesses and significant deficiencies. 3. Communicate all five significant deficiencies to Portico's management and those charged with governance, but only require a management response with respect to the two material weaknesses.

2. Communicate all five significant deficiencies to Portico's management and those charged with governance, distinguishing between material weaknesses and significant deficiencies.

Which action regarding fraud is an activity related to performance of risk assessment procedures? 1. Document the results of procedures used to address the risk of fraud. 2. Discussions among the engagement team members regarding the risks of material misstatement due to fraud. 3. Consider the characteristics of journal entries, particularly those made near year end. 4. Consider whether estimates prepared and recorded by management could indicate a bias in reporting.

2. Discussions among the engagement team members regarding the risks of material misstatement due to fraud.

Which of the following factors are included in an entity's control environment? I. Participation of Those Charged with Governance II. Integrity and Ethical Values III. Organizational Structure 1. I, II 2. I, II, III 3. II, III 4. I, III

2. I, II, III

Which of the following is the most likely cause of the decrease in accounts receivable turnover? 1. Increase in the cash discount offered 2. Liberalization of credit policy 3. Shortening of due date terms 4. Increased cash sales

2. Liberalization of credit policy

Which of the following statements is correct about an auditor's required communication with those charged with governance? 1. Any matters communicated with those charged with governance are also required to be communicated to the entity's management. 2. The auditor is required to inform those charged with governance about significant misstatements discovered by the auditor and subsequently corrected by management. 3. Disagreements with management about the application of accounting principles must be communicated in writing to those charged with governance. 4. The auditor should not communicate frequently recurring misstatements unless they are material.

2. The auditor is required to inform those charged with governance about significant misstatements discovered by the auditor and subsequently corrected by management.

Which of the following circumstances is most likely to cause an auditor to increase the assessment of the risk of material misstatement of the financial statements due to fraud? 1. Property and equipment are usually sold at a loss before being fully depreciated. 2. Unusual discrepancies exist between the entity's records and confirmation replies. 3. Monthly bank reconciliations usually include several in-transit items. 4. Clerical errors are listed on a computer-generated exception report.

2. Unusual discrepancies exist between the entity's records and confirmation replies.

In addition to making management inquiries, an auditor should perform the following procedures to identify client contingencies with the exception of 1. obtaining a client representation letter. 2. reviewing derivative transactions reflected on the quarter-end balance sheet. 3. reviewing the status of long-term leases. 4. discussing sales contracts with the sales manager.

2. reviewing derivative transactions reflected on the quarter-end balance sheet.

Which of the following situations is not an example of an inherent limitation of internal control? 1. A programming error in the design of an automated control allows an employee to give himself an unauthorized pay increase. 2. Management's failure to enforce control policies surrounding access to inventory allows employees to steal assets. 3. A lack of physical controls over the safeguarding of assets allows an employee to steal company assets. 4. A fraud scheme whereby an employee orders personal goods and his supervisor, who is in on the scheme, signs the checks to pay for those goods.

3. A lack of physical controls over the safeguarding of assets allows an employee to steal company assets.

Which of the following is least likely to suggest to an auditor that the client's management may have overridden internal control? 1. There are numerous delays in preparing timely internal financial reports. 2. Management does not correct internal control weaknesses that it knows about. 3. Differences are always disclosed on a computer exception report. 4. There have been two new controllers this year.

3. Differences are always disclosed on a computer exception report.

When assessing control risk, an auditor is required to document the auditor's: I. Understanding of the entity's Control Environment II. Basis for the Auditor's Risk Assessment 1. I 2. II 3. I, II 4. Neither

3. I, II

An auditor discovers that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This trend may indicate that 1. the client recently tightened its credit-granting policies. 2. employees have stolen inventory just before year end. 3. fictitious credit sales have been recorded during the year. 4. an employee has been lapping receivables in both years.

3. fictitious credit sales have been recorded during the year.

If an independent audit leading to an opinion on financial statements causes the auditor to believe that a material misstatement due to fraud exists, the auditor should first 1. request that management investigate to determine whether fraud has actually occurred. 2. consider the implications for other aspects of the audit and discuss the matter with the appropriate levels of management. 3. make the investigation necessary to determine whether fraud has actually occurred. 4. consider whether fraud was the result of a failure by employees to comply with existing controls.

3. make the investigation necessary to determine whether fraud has actually occurred.

While performing a preliminary assessment for a new client audit, the auditor determines that the client has had excessive growth over the past several years due to recent acquisitions and internal expansion. Through discussions with management, the auditor concludes that the company's operational staff is too lean and that internal controls in several operational functions may be currently insufficient to accommodate this rapid growth. About which of the following fraud risk factors related to the client would the auditor have the greatest concern? 1. Rationalization/attitude 2. Inadequate organizational structure 3. Opportunity 4. Incentives/pressures

3. opportunity

An advantage of using statistical over nonstatistical sampling methods in tests of controls is that the statistical methods 1. eliminate the need to apply professional judgment in determining appropriate sample sizes. 2. affords greater assurance than a nonstatistical sample of equal size. 3. provides an objective basis for quantitatively evaluating sample risk. 4. emphasizes qualitative evaluation of results as opposed to quantitative evaluations.

3. provides an objective basis for quantitatively evaluating sample risk.

Which of the following statements reflects an auditor's responsibility for detecting fraud? 1. An auditor is responsible for detecting employee errors and simple fraud, but not for discovering fraudulent acts involving employee collusion or management override. 2. An auditor should plan the audit to detect fraud caused by departures from GAAP. 3. An auditor is not responsible for detecting fraud unless the application of auditing standards would result in such detection. 4. An auditor should design the audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements.

4. An auditor should design the audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements.

Which of the following correctly describes an internal control component? 1. Control activities set the tone of the organization. 2. Information and communication systems have to do with management's analysis of risk. 3. Risk assessment relates to assessing the quality of the internal control structure over time. 4. Monitoring relates to ongoing assessment by management to determine whether controls are operating as intended.

4. Monitoring relates to ongoing assessment by management to determine whether controls are operating as intended.

Which of the following circumstances would most likely cause an auditor to suspect that there are material misstatements in an entity's financial statements? 1. The entity's management strictly enforces its integrity and ethical values. 2. Monthly bank reconciliations ordinarily include several outstanding checks. 3. Management outsources the internal audit function to another CPA firm. 4. The auditor identifies an inappropriate valuation method that is widely applied by the entity.

4. The auditor identifies an inappropriate valuation method that is widely applied by the entity.

During the planning stage of an audit, the auditor initially assessed both inherent risk and control risk at a high level. Further testing of the client's internal controls led the auditor to reduce the assessment of control risk. Which of the following will most likely occur as a result? 1. The auditor may reduce the assessment of inherent risk to match the control risk, since they were assessed at the same level during the initial planning. 2. The auditor may decrease the allowed level of detection risk. 3. The auditor may rely solely on analytical procedures, with no substantive procedures performed. 4. The auditor may reduce the amount of substantive procedures performed.

4. The auditor may reduce the amount of substantive procedures performed.

Which one of the following is a true statement about the required fraud risk assessment discussion? 1. The discussion about the susceptibility of the entity's financial statements to material misstatement must be held separately from the discussion about the susceptibility of the entity's financial statements to fraud. 2. The discussion should involve all members who participate on the audit team, including the engagement partner. 3. The fraud risk assessment discussion should occur during the overall review stage of the audit. 4. The discussion should include consideration of the risk of management override of controls.

4. The discussion should include consideration of the risk of management override of controls.

Cash receipts from sales on account have been misappropriated. Which of the following acts will conceal this embezzlement and be least likely to be detected by the auditor? 1. Understating the sales journal 2. Overstating the accounts receivable control account 3. Overstating the accounts receivable subsidiary records 4. Understating the cash receipts journal

4. Understating the cash receipts journal

The return of a positive confirmation of accounts receivable without an exception attests to the 1. collectibility of the receivable balance. 2. accuracy of the allowance for uncollectible accounts. 3. accuracy of the aging of accounts receivable. 4. accuracy of the receivable balance.

4. accuracy of the receivable balance.

A client acquired 25 percent of its outstanding capital stock after year end but prior to the date of the auditor's report. The auditor should 1. disclose the acquisition in the opinion paragraph of the auditor's report. 2. advise management to adjust the balance sheet to reflect the acquisition. 3. issue pro forma financial statements giving effect to the acquisition as if it had occurred at year end. 4. advise management to disclose the acquisition in the notes to the financial statements.

4. advise management to disclose the acquisition in the notes to the financial statements.

As a result of analytical procedures, the auditor determines that the gross profit percentage has declined from 30 percent in the preceding year to 20 percent in the current year. The auditor should 1. express a qualified opinion due to inability of the client company to continue as a going concern. 2. evaluate management's performance in causing this decline. 3. require footnote disclosure. 4. consider the possibility of a misstatement in the financial statements.

4. consider the possibility of a misstatement in the financial statements.

Actions, policies, and procedures that reflect the overall attitude of management, directors, and owners of the entity about internal control relate to which of the following internal control components? a. Control environment b. Information and communication c. Risk assessment d. Monitoring

a. Control Environment

Which of the following is generally not considered a category of IT general controls? a. Controls that determine whether a vendor number matches the pre-approved vendors in the vendor master file b. Controls that restrict systemwide access to programs and data c. Controls that oversee the acquisition of application software d. Controls that oversee the day-to-day operation of IT applications

a. Controls that determine whether a vendor number matches the pre-approved vendors in the vendor master file

Of the four factors that determine the initial sample size in attributes sampling (population size, tolerable exception rate, acceptable risk of overreliance, and expected population exception rate), which factor has the least effect on sample size? a. Population size b. Expected population exception rate c. Tolerable exception rate d. Acceptable risk of overreliance

a. Population size

An auditor who is auditing accounts receivable would least likely perform which of the following tests? a. Select cash disbursements made shortly after year end and examine the supporting documentation such as receiving reports and vendor invoices. b. Confirm a sample of accounts receivables with the customers that owe the balances. c. Vouch cash receipts to the accounts receivables transactions. d. Obtain an aged trial balance of accounts receivable and trace the total to the general ledger control account.

a. Select cash disbursements made shortly after year end and examine the supporting documentation such as receiving reports and vendor invoices.

Which of the following will likely provide the most assurance concerning the accuracy balance-related objective for accounts receivable? a. Vouch amounts in the subsidiary ledger to details on shipping documents. b. Compare receivable turnover ratios with industry statistics for reasonableness. c. Inquire about receivables pledged under loan agreements.

a. Vouch amounts in the subsidiary ledger to details on shipping documents.

The confirmation of customers' accounts receivable rarely provides reliable evidence about the completeness assertion because a. customers may not be inclined to report understatement errors in their accounts. b. recipients usually respond only if they disagree with the information on the request. c. many customers merely sign and return the confirmation without verifying details. d. there is likely to be reliable third-party evidence available.

a. customers may not be inclined to report understatement errors in their accounts.

An example of an event occurring in the period between the end of the year being audited and the date of the auditor's report that normally will not require disclosure in the financial statements or auditor's report is a. decreased sales volume resulting from a general business recession. b. serious damage to the company's plant from a widespread flood. c. issuance of a widely advertised capital stock issue with restrictive covenants. d. settlement of a large liability for considerably less than the amount recorded.

a. decreased sales volume resulting from a general business recession.

What is an auditor's evaluation of a statistical sample for attributes when a test of 50 documents results in two exceptions if the tolerable exception rate is 7 percent, the expected population exception rate is 5 percent, and the allowance for sampling risk is 2 percent? a. Modify the assessed level of control risk because the tolerable exception rate plus the allowance for sampling risk exceeds the population exception rate. b. Accept the sample results as support for the assessed level of control risk because the sample exception rate plus the allowance for sampling risk is less than the tolerable exception rate. c. Accept the sample results as support for the assessed level of control risk because the tolerable exception rate minus the allowance for sampling risk equals the expected population exception rate. d. Modify the assessed level of control risk because the sample exception rate plus the allowance for sampling risk exceeds the tolerable exception rate.

b. Accept the sample results as support for the assessed level of control risk because the sample exception rate plus the allowance for sampling risk is less than the tolerable exception rate.

For which of the following tests would an auditor most likely use attributes sampling? a. Selecting accounts receivable for confirmation of account balances. b. Inspecting employee time cards for proper approval by supervisors. c. Making an independent estimate of the amount of a LIFO inventory. d. Examining invoices in support of the valuation of fixed asset additions.

b. Inspecting employee time cards for proper approval by supervisors.

Management of Thurman Corporation included additional supplementary information in documents that include the audited financial statements for the year ended December 31, 2019. Management has asked its audit firm, Wally, CPAs, whether they can report on the supplementary information. Which of the following conditions would preclude Wally, CPAs, from conducting this engagement? a. The supplementary information is derived from the accounting records used to generate the basic financial statements. b. The supplementary information covers the period January 1, 2019, through February 15, 2020. c. Wally's opinion on the basic financial statements was unmodified. d. When evaluating supplementary information, Wally plans to use the same materiality threshold as that used in the audit of the basic financial statements.

b. The supplementary information covers the period January 1, 2019, through February 15, 2020.

A material weakness in internal control represents a control deficiency that a. more than remotely adversely affects a company's ability to initiate, authorize, record, process, or report external financial statements reliably. b. results in a reasonable possibility that internal control will not prevent or detect material financial statement misstatements. c. exists because a necessary control is missing or not properly designed. d. reduces the efficiency and effectiveness of the entity's operations.

b. results in a reasonable possibility that internal control will not prevent or detect material

When a contingency is resolved subsequent to the issuance of audited financial statements, which correctly contained disclosure of the contingency in the footnotes based on information available at the date of issuance, the auditor should a. inform the appropriate authorities that the report cannot be relied on. b. take no action regarding the event. c. insist that the client issue revised financial statements. d. inform the audit committee that the report cannot be relied on.

b. take no action regarding the event.

In determining the sample size for a test of controls, an auditor should consider the likely rate of exception, the acceptable risk of overreliance, and the a. risk of incorrect acceptance. b. tolerable exception rate. c. nature and cause of exceptions. d. population size.

b. tolerable exception rate

Which of the following best illustrates the concept of sampling risk? a. The documents related to the chosen sample may not be available to the auditor for inspection. b. An auditor may fail to recognize errors in the documents from the sample. c. A randomly chosen sample may not be representative of the population as a whole for the characteristic of interest. d. An auditor may select audit procedures that are not appropriate to achieve the specific objective.

c. A randomly chosen sample may not be representative of the population as a whole for the characteristic of interest.

Which of the following is an example of an operation deficiency in internal control? a. The company does not have a code of conduct for employees to consider. b. The cashier has online ability to post write-offs to accounts receivable accounts. c. Clerks who conduct monthly reconciliation of intercompany accounts do not understand the nature of misstatements that could occur in those accounts. d. Management does not have a process to identify and assess risks on a recurring basis.

c. Clerks who conduct monthly reconciliation of intercompany accounts do not understand the nature of misstatements that could occur in those accounts.

Which of the following would not be considered an inherent limitation of the potential effectiveness of an entity's internal control structure? a. Mistakes in judgment b. Management override c. Incompatible duties d. Collusion among employees

c. Incompatible duties

Which of the following procedures will an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests? a. Review the cash receipts journal for the month prior to year end. b. Intensify the study of internal control concerning the revenue cycle. c. Inspect the shipping records documenting the merchandise sold to the debtors. d. Increase the assessed level of detection risk for the existence assertion.

c. Inspect the shipping records documenting the merchandise sold to the debtors.

The auditor sends out positive accounts receivable confirmations for a client. Assuming a second confirmation is sent out to a major customer who still fails to respond, which action should the auditor take? a. Consider the nonresponse as a minor audit finding and use responding confirmations as a basis for test results. b. Issue a qualified opinion due to the lack of sufficient audit evidence. c. Send out a third confirmation request and, if no response, perform alternative procedures. d. Provide the client a copy of the accounts receivable confirmation and request that they obtain the information from the customer.

c. Send out a third confirmation request and, if no response, perform alternative procedures.

Which of the following audit procedures will best uncover an understatement of sales and accounts receivable? a. Confirm accounts receivable. b. Test a sample of sales transactions, selecting the sample from sales invoices recorded in the sales journal. c. Test a sample of sales transactions, selecting the sample from prenumbered shipping documents. d. Review the aged accounts receivable trial balance.

c. Test a sample of sales transactions, selecting the sample from prenumbered shipping documents.

The Form 10-K filed by management of a public company includes a section on management's discussion and analysis (MD&A) in addition to the annual financial statements. Which of the following best describes the auditor's responsibility for the MD&A information? a. The auditor must perform sufficient appropriate audit procedures to opine on the MD&A information. b. The auditor has no responsibilities related to the MD&A disclosures. c. The auditor must read the MD&A information to determine whether there is any material inconsistency with the audited financial statements. d. The auditor must provide a disclaimer of opinion related to the MD&A information.

c. The auditor must read the MD&A information to determine whether there is any material inconsistency with the audited financial statements.

Which of the following is an example of an application control? a. The client uses access security software to limit access to each of the accounting applications. b. Employees are assigned a user ID and password that must be changed every quarter. c. The sales system automatically computes the total sale amount and posts the total to the sales journal master file. d. Systems programmers are restricted from doing applications programming functions.

c. The sales system automatically computes the total sale amount and posts the total to the sales journal master file.

The upper precision limit (CUER) in statistical sampling is a. the percentage of items in a sample that possess a particular attribute. b. the percentage of items in a population that possess a particular attribute. c. a statistical measure, at a specified confidence level, of the maximum rate of occurrence of an attribute. d. the maximum rate of exception that the auditor would be willing to accept in the population without altering the planned reliance on the attribute.

c. a statistical measure, at a specified confidence level, of the maximum rate of occurrence of an attribute.

Before processing, the system validates the sequence of items to identify any breaks in sequence of input documents. This automated control is primarily designed to ensure the a. accuracy of input. b. authorization of data entry. c. completeness of input. d. restriction of duplicate entries.

c. completeness of input.

If all other factors specified in a sampling plan remain constant, changing the ARO from 5 percent to 10 percent will cause the required sample size to a. increase. b. remain the same. c. decrease. d. become indeterminate.

c. decrease

An internal control deficiency may be defined as a condition in which material misstatements would ordinarily not be timely detected by a. auditors in assisting control risk. b. the controller reconciling the general ledger. c. employees in normal course of assigned functions. d. the chief financial officer reviewing interim financial statements.

c. employees in normal course of assigned functions.

As general IT controls weaken, the auditor is most likely to a. reduce testing of automated application controls done by the computer. b. increase testing of general IT controls to conclude whether they are operating effectively. c. expand testing of automated application controls used to reduce control risk to cover greater portions of the fiscal year under audit. d. ignore obtaining knowledge about the design of general IT controls and whether they have been implemented.

c. expand testing of automated application controls used to reduce control risk to cover greater portions of the fiscal year under audit.

An auditor will use the test data approach to obtain certain assurances with respect to the a. input data. b. machine capacity. c. procedures contained within the program. d. degree of data entry accuracy.

c. procedures contained within the program.

The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the a. factors that raise doubts about the auditability of the financial statements. b. operating effectiveness of internal control policies and procedures. c. risk that material misstatements exist in the financial statements. d. possibility that the nature and extent of substantive tests may be reduced.

c. risk that material misstatements exist in the financial statements.

Investment and property schedules are presented for purposes of additional analysis in a document outside the basic financial statements. The schedules are not required supplementary information. When the auditor is engaged to report on whether the supplementary information is fairly stated in relation to the audited financial statements as a whole, the measurement of materiality is the a. greater of the individual schedule of investments or schedule of property by itself. b. lesser of the individual schedule of investments or schedule of property by itself. c. same as that used in forming an opinion on the basic financial statements as a whole. d. combined total of both the individual schedules of investments and property as a whole.

c. same as that used in forming an opinion on the basic financial statements as a whole.

1. Written management representations obtained by the auditor in connection with a financial statement audit should include a a. summary of all corrected misstatements. b. statement of management's belief that any uncorrected misstatements are in fact not misstatements. c. statement of management's belief that the effects of uncorrected misstatements are not material. d. summary of all uncorrected misstatements.

c. statement of management's belief that the effects of uncorrected misstatements are not material.

Which of the following would be least likely to be included in a standard inquiry to the client's attorney? a. A list provided by the client of pending litigation or asserted or unasserted claims with which the attorney has had some involvement b. A request that the attorney provide information about the status of pending litigation c. A request for the attorney to identify any pending litigation or threatened legal action not identified on a list provided by the client d. A request for the attorney to opine on the correct accounting treatment associated with an outstanding claim or pending lawsuit outcome

d. A request for the attorney to opine on the correct accounting treatment associated with an outstanding claim or pending lawsuit outcome

Which of the following is least likely to be a reasonable explanation for an increase in accounts receivable turnover? a. Early payment incentives for customers b. Tightening of credit policy c. Implementation of more aggressive collection policies d. Allowance of a new grace period for customer payments

d. Allowance of a new grace period for customer payments

Vendor account reconciliations are performed by three clerks in the accounts payable department on Friday of each week. The accounts payable supervisor reviews the completed reconciliations the following Monday to ensure they have been completed. The work performed by the supervisor is an example of which COSO component? a. Control activities b. Information and communication c. Risk assessment d. Monitoring

d. Monitoring

Which of the following is not a required item to be communicated by the auditor to the audit committee or others charged with governance? a. Information about the auditor's responsibility in an audit of financial statements b. Information about the overall scope and timing of the audit c. Significant findings arising from the audit d. Recommendations for improving the client's business

d. Recommendations for improving the client's business

A management letter a. is the auditor's report on significant deficiencies and material weaknesses in internal control. b. is mandatory in all audits and must be dated the same date as the audit report. c. contains management's representations to the auditor documenting statements made by management to the auditor during the audit about matters affecting the financial statements. d. contains recommendations from the auditor designed to help the client improve the efficiency and effectiveness of its business.

d. contains recommendations from the auditor designed to help the client improve the efficiency and effectiveness of its business.

On the basis of audit evidence gathered and evaluated, an auditor decides to increase assessed control risk from that originally planned. To achieve an audit risk level (AcAR) that is substantially the same as the planned audit risk level (AAR), the auditor will a. increase inherent risk. b. increase materiality levels. c. decrease substantive testing. d. decrease planned detection risk.

d. decrease planned detection risk.

An auditor uses assessed control risk to a. evaluate the effectiveness of the entity's internal controls. b. identify transactions and account balances where inherent risk is at the maximum. c. indicate whether materiality thresholds for planning and evaluation purposes are sufficiently high. d. determine the acceptable level of detection risk for financial statement assertions.

d. determine the acceptable level of detection risk for financial statement assertions.

The negative form of accounts receivable confirmation request is useful except when a. internal control surrounding accounts receivable is considered to be effective. b. a large number of small balances is involved. c. the auditor has reason to believe the persons receiving the requests are likely to give them consideration. d. individual account balances are relatively large.

d. individual account balances are relatively large.

In addition to evaluating the frequency of deviations in tests of controls, an auditor should also consider certain qualitative aspects of the deviations. The auditor most likely would give additional consideration to the implications of a deviation if it was a. the only deviation discovered in the sample. b. identical to a deviation discovered during the prior year's audit. c. caused by an employee's misunderstanding of instructions. d. initially concealed by a forged document.

d. initially concealed by a forged document.

An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor a. minimize the failure to detect errors and fraud. b. eliminate the risk of nonsampling errors. c. design more effective audit procedures. d. measure the sufficiency of the audit evidence by quantifying sampling risk.

d. measure the sufficiency of the audit evidence by quantifying sampling risk.

Which of the following is an advantage of a computer-based system for transaction processing over a manual system? A computer-based system a. does not require as stringent a set of internal controls. b. will produce a more accurate set of financial statements. c. eliminates the need to reconcile control accounts and subsidiary ledgers. d. will be more efficient in generating financial statements.

d. will be more efficient in generating financial statements.