Audit Midterm 2
Substantive and Control risk
Control risk set high
Reliance and Control risk
Control risk set low
Which of the following is not one of the five major components of internal control? A) Risk assessment. B) Control activities. C) Information and communication system. D) Human resource background checks.
D) Human resource background checks.
The purchase journal is referred to as a check register. True/False
False
Evaluation: Draw final conclusions
Supports + Not misstated = correct conclusion Supports + Misstated = Type II Does not support + Not misstated = Type I Does not support + Misstated = correct conclusion
Product costs should be matched directly with specific transactions and are recognized upon recognition of revenue True/False
true
Differences between nonstatistical sampling and statistical sampling
--Identifying individually significant items --Determining the sample size --Selecting sample items --Calculating the sample results
Performance: Perform the audit procedures
--Perform on the logical units selected --Understand and analyze any misstatements observed --If unable to conduct the planned procedures on a particular logical unit, the item should be considered a misstatement
Components of internal control
1. Control Environment 2. Entity's Risk Assessment process 3. Information System and related business processes relevant to financial reporting and communication 4. Control Activities 5. Monitoring of Controls
Limitations of internal control
1. Human error 2. Collusion 3. Management override 4. Cost/Benefit Analysis
Control activities in internal control
1. Performance Reviews 2. Segregation of Duties 3. Physical controls over the security of assets 4. Information Processing (data verification, new system development, System access restriction)
Disadvantages of MUS
1. The selection of zero or negative balances generally requires special design consideration 2. The general approach to MUS assumes that the audited amount of the sample item is not in error by more than 100% 3. When more than one or two misstatements are detected, the sample results calculations may overstate the allowance for sampling risk (Type I)
Advantages of MUS
1. When the auditor expects no misstatement, MUS usually results in a smaller sample size than classical variables sampling 2. When applied using the probability-proportional-to-size procedure, MUS automatically results in a stratified sample 3. MUS does not require the user to make assumptions about the distribution of misstatements
Which of the following is true regarding technological advances and auditing? A) A well-controlled, automated accounting system that processes routine transactions with few errors can reduce the number of times auditors need to utilize sampling techniques in an audit. B) A well-controlled, automated accounting system that processes routine transactions with few errors can eliminate the number of times auditors need to utilize sampling techniques in an audit. C) Powerful audit software (e.g., ACL) has eliminated the need for sampling in an audit. D) Technology, though not there yet, will eventually eliminate the need for auditors to rely on sampling in an audit.
A) A well-controlled, automated accounting system that processes routine transactions with few errors can reduce the number of times auditors need to utilize sampling techniques in an audit.
Which of the following statements is true regarding audit sampling? A) Audit firms are increasingly utilizing nonstatistical sampling plans using their own proprietary software. B) Audit firms have reduced their reliance on nonstatistical sampling plans using EXCEL and other commercially developed software. C) Audit firms are increasingly utilizing statistical sampling plans using their own proprietary software. D) Audit firms are increasingly utilizing statistical sampling plans using EXCEL and other commercially developed software.
A) Audit firms are increasingly utilizing nonstatistical sampling plans using their own proprietary software.
Which of the following procedures involved in processing accounts payable and cash disbursements should not be performed by the accounts payable department? A) Counting and inspection of purchased materials. B) Updating of accounts payable records. C) Determining appropriate account distribution. D) Comparing the vendor's invoice against information on the receiving report.
A) Counting and inspection of purchased materials.
Which of the following comparisons would be most useful to an auditor in evaluating the overall results of an entity's sales efforts? A) Current year sales to current year budgeted sales. B) Current year ending accounts receivable to prior year ending accounts receivable. C) Current year bad debts expense as a percentage of accounts receivable to the same value for the prior year. D) Current year gross profit to prior year gross profit.
A) Current year sales to current year budgeted sales.
The likelihood of assessing control risk too high is the risk that the sample selected to test controls A) Does not support the auditor's planned assessed level of control risk when the true operating effectiveness of the control justifies such an assessment. B) Does support the auditor's planned assessed level of control risk when the true operating effectiveness of the control does not justify such an assessment. C) Contains misstatements that could be material to the financial statements when aggregated with misstatements in other account balances or transaction classes. D) Contains proportionately fewer monetary errors or deviations from prescribed internal controls than exist in the balance or class as a whole.
A) Does not support the auditor's planned assessed level of control risk when the true operating effectiveness of the control justifies such an assessment.
In order to be able to set control risk at a lower level, the auditor must do all of the following except: A) Identify all general IT controls. B) Identify specific controls that will be relied upon. C) Perform tests of controls. D) Conclude on the achieved level of control risk.
A) Identify all general IT controls.
An auditor may need to obtain a service auditor's report when an entity receives accounting services such as payroll from a service organization. Which of the following statements is true regarding this service audit report? A) It should include an opinion. B) It provides the client auditor with a guarantee regarding whether the entity's control procedures have been placed in operation. C) The client auditor need not inquire about the service auditor's professional reputation. D) The client auditor should perform the procedures at the service organization to verify the information in the report.
A) It should include an opinion.
Accounts payable (A/P) confirmations are generally used less frequently than accounts receivable confirmations since A) Other procedures such as the search for unrecorded liabilities are generally very effective. B) A/P confirmations generally have lower response rates than accounts receivable confirmations. C) A/P confirmations do not address the existence assertion. D) A/P confirmations do not address specific audit assertions.
A) Other procedures such as the search for unrecorded liabilities are generally very effective.
A reliance strategy is chosen when the auditor: A) Plans on conducting tests of controls. B) Has set the control risk at a high level. C) Has set the control risk at a lower level. D) Both a and c.
A) Plans on conducting tests of controls.
Which of the following does not represent a major accounting transaction type processed in the purchasing cycle? A) Requisition of goods. B) Purchase of goods and services. C) Payment of liabilities. D) Return of goods to suppliers.
A) Requisition of goods.
Which of the following audit procedures is best for identifying unrecorded trade accounts payable? A) Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payable applies to the period before the balance sheet date and whether it was recorded. B) Investigating payables recorded just before and after the balance sheet date to determine whether they are supported by receiving reports. C) Examining unusual relationships between monthly accounts payable balances and recorded cash payments. D) Reconciling monthly vendor statements to the receiving report file to identify items received just before the balance sheet date.
A) Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payable applies to the period before the balance sheet date and whether it was recorded.
Which of the following best illustrates the components that make up the upper deviation rate [UDR]? A) Sample deviation rate + allowance for sampling risk. B) Sample deviation rate + risk of assessing control risk too high. C) Tolerable deviation rate + allowance for sampling risk. D) Expected population deviation rate + allowance for sampling risk.
A) Sample deviation rate + allowance for sampling risk
Which of the following is not considered an important element of segregation of duties in the purchasing process? A) Separating the check signing and check mailing functions. B) Separating the accounts payable and check signing functions. C) Separating the accounts payable and receiving functions. D) Separating the purchasing function from the receiving function.
A) Separating the check signing and check mailing functions.
Which of the following is the population the auditor is most likely to draw from in order to test the cutoff assertion for revenue? A) Shipping documents. B) Customer sales orders. C) Customer account receivable balances. D) The record of sales returns.
A) Shipping documents.
Monetary-unit-sampling [MUS] is less efficient and generally not used if A) The auditor's objective is oriented towards understatements. B) Computerized system account balances are being audited. C) The account contains a large book value and a large number of transactions. D) Statistical conclusions are to be made relating to the sample.
A) The auditor's objective is oriented towards understatements.
Which of the following is not a factor that an auditor would consider when assessing the inherent risk associated with sales transactions? A) The nature of the credit authorization process. B) Billings are made using the percentage-of-completion method of revenue recognition. C) Each sales transaction is individually negotiated with the customer. D) The conditions of the sale allow for a right of return or the right to modify the purchase agreement.
A) The nature of the credit authorization process.
6) Because they operate the business on a daily basis, a company's management knows more about the company's transactions and related assets, liabilities, and equity than the auditors. A) True B) False
A) True
An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable is most likely to obtain evidence concerning management's assertions relating to A) Valuation or allocation. B) Presentation and disclosure. C) Existence or occurrence. D) Rights and obligations.
A) Valuation or allocation.
1) The objective of an audit of the financial statements is an expression of an opinion on: A) the fairness of the financial statements in all material respects. B) the accuracy of the financial statements. C) the accuracy of the annual report. D) the accuracy of the balance sheet and income statement.
A) the fairness of the financial statements in all material respects
8-5 Define attribute sampling. Why is this sampling technique appropriate for test of controls?
Attribute sampling is a statistical sampling method used to estimate the proportion of a characteristic in a population. In applying this this technique to test of controls, the auditor normally attempts to determine the operating effectiveness to a control in terms of deviations from a prescribed internal control.
Monetary-Unit Sampling
Attribute-sampling techniques used to estimate the dollar amount of misstatement for a class of transactions or an account balance.
8-1 Define audit sampling. Why do auditors sample instead of examining every transaction?
Audit Sampling is the application of an audit procedure to less than 100 percent of the items within an account or class of transactions for the purpose of evaluating some characteristic of the balance or class. It is not economical for auditors to test 100% of the population; instead they use sampling to gather sufficient audit evidence.
8-3 List audit evidence types that do not involve sampling and provide an example of a situation where an auditor would not use audit sampling.
Audit evidence types that do not involve sampling and an example of a situation where an auditor would not use audit sampling follows: o Analytical procedures o Scanning o Inquiry o Observation o Procedures applied to every item in the population o Classes of transactions or account balances not tested o Tests of automated information technology controls • When an account or class of transactions is made up of a few large items, the auditor may test all the items in the account or class of transactions. • The auditor is aware of certain transactions that look unusual or present greater risk. • If a relatively small number of large transactions make up a relatively large percentage of an account or class of transactions
Non statistical Sampling
Audit sampling that relies on the auditor's judgment to determine sample size (typically of comparable size to a statistically based sampling approach), select the sample, and/or evaluate the results for the purpose of reaching a conclusion about the population.
In a probability-proportional-to-size sample with a sampling interval of $15,000, an auditor discovered that a selected inventory item with a recorded amount of $5,000 had an audited amount of $3,500. If this were the only misstatement discovered by the auditor, the projected misstatement of this sample would be A) $1,500. B) $4,500. C) $5,000. D) $6,428.
B) $4,500.
Using the following information and ratio projection, what is the best estimate of the misstatement in the account? A) $5,000. B) $75,000. C) $83,333. D) There is not enough information to determine.
B) $75,000.
An auditor plans to use a monetary-unit sampling plan with a systematic sample selection on an account balance of $1,000,000. There are over 50 items that make up the account balance, ten of which are individually over $50,000. To ensure that all accounts with balances of at least $50,000 are selected, the minimum sample size should be A) 10. B) 20. C) 30. D) 50.
B) 20
Which of the following best illustrates the concept of sampling risk? A) An auditor may select audit procedures that are not appropriate to achieve the specific objective. B) A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest. C) An auditor may fail to recognize errors in the documents examined for the chosen sample. D) The documents related to the chosen sample may not be available for inspection.
B) A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest.
The sample size for a substantive test of details of an account balance is affected by a number of factors. Assuming all other information remains constant, which of the following would lead to a smaller sample size? A) Less reliance on internal controls. B) An increase in the amount of tolerable misstatement. C) Less reliance on substantive analytical procedures. D) Larger expected frequency of misstatements.
B) An increase in the amount of tolerable misstatement.
According to SAB 101, which of the following is not a criterion for revenue recognition? A) Delivery has occurred or services have been rendered. B) Cash is received. C) The seller's price to the buyer is determinable. D) Persuasive evidence of an arrangement exists.
B) Cash is received.
For nonpublic companies with preliminary control risk assessments set at high, auditors are likely to: A) Use a reliance strategy. B) Complete little or no tests of controls. C) Complete interim testing of account balances. D) Test controls extensively.
B) Complete little or no tests of controls.
Customers are more likely to complain to the entity if which of the following assertions for cash receipts is violated? A) Existence. B) Completeness. C) Authorization. D) Rights and obligations.
B) Completeness.
Which of the following types of evidence is most likely to utilize sampling? A) Scanning. B) Confirmation. C) Observation. D) Analytical procedures.
B) Confirmation.
Auditors obtain an understanding of a nonpublic entity's internal control for the primary purpose of: A) Gathering sufficient evidence to provide a reasonable basis for an opinion on the financial statements. B) Determining the nature, extent, and timing of subsequent audit procedures to be performed. C) Determining whether interim audit testing is appropriate. D) Providing documentary evidence to present to the audit committee.
B) Determining the nature, extent, and timing of subsequent audit procedures to be performed.
15. The occurrence assertion for accounts payable includes A. Determining whether all accounts payable are recorded B. Determining whether all accounts payable actually are liabilities C. Determining whether all accounts payable are recorded in the proper period D. Determining whether all accounts payable are properly classified in the financial statements
B. Determining whether all accounts payable actually are liabilities
For which of the following audit tests would an auditor most likely use attribute sampling? A) Observation of employees who control mailroom receipts. B) Examining supporting documentation for purchases for evidence of proper authorization. C) Examining invoices in support of the valuation of equipment additions. D) Selected accounts receivable for confirmation of account balances.
B) Examining supporting documentation for purchases for evidence of proper authorization.
The auditor may document the achieved level of control risk using all of the following except: A) Structured working papers. B) Flowcharts. C) Internal control questionnaire. D) A memorandum.
B) Flowcharts.
Which of the following does not represent a major classification of expenses identified by FASB Concept Statement No. 5? A) Product costs. B) Functional costs. C) Period costs. D) Allocable costs.
B) Functional costs.
Which of the following procedures would an auditor most likely perform related to year-end accounts receivable confirmations when the auditor does not receive replies even after second requests? A) Review the cash receipts journal for the month prior to year-end. B) Inspect related shipping records and sales invoices documenting the merchandise sold to customers. C) Intensify the study of internal control concerning the revenue and collection cycle. D) Increase assessed detection risk related to existence assertion in this area.
B) Inspect related shipping records and sales invoices documenting the merchandise sold to customers.
Which of the following is not one of the major steps in setting control risk for the purchasing process? A) Understand and document the purchasing process. B) Plan and perform analytical procedures on accounts used in the purchasing process. C) Plan and perform tests of controls on purchase transactions. D) Set and document the control risk for the purchasing process.
B) Plan and perform analytical procedures on accounts used in the purchasing process.
As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses control risk (CR) lower than appropriate. The most likely explanation for this situation is that A) The deviation/failure rates of both the auditor's sample and the population exceed the tolerable deviation rate [TDR]. B) The deviation/failure rate in the auditor's sample is less than the TDR, but the deviation/failure rate in the population exceeds the TDR. C) The deviation/failure rate in the auditor's sample exceeds the TDR, but the deviation/failure rate in the population is less than the TDR. D) The deviation/failure rates of both the auditor's sample and the population are less than the TDR.
B) The deviation/failure rate in the auditor's sample is less than the TDR, but the deviation/failure rate in the population exceeds the TDR.
Which of the following is a proper reason for not conducting tests of controls for nonpublic companies? A) The internal control structure appears very strong. B) The procedures require more audit effort than the projected benefits to be obtained from lowering the control risk. C) The company does not have any flowcharts of its system available for review. D) The auditor prefers the control risk to be the minimum.
B) The procedures require more audit effort than the projected benefits to be obtained from lowering the control risk.
Which of the following relationships is correct? A) Desired confidence level and sample size are inversely related. B) Tolerable misstatement and sample size are inversely related. C) Expected misstatement and sample size are inversely related. D) Tolerable misstatement and desired confidence level are directly related.
B) Tolerable misstatement and sample size are inversely related.
An auditor would conclude that an account balance is not fairly stated if the __________________ is less than the __________________. A) Projected misstatement; Expected misstatement. B) Tolerable misstatement; Upper misstatement limit. C) Projected misstatement; Upper misstatement limit. D) Upper misstatement limit; Tolerable misstatement.
B) Tolerable misstatement; Upper misstatement limit.
Which of the following actions would best conceal the theft of cash collections from sales on account? A) Understating the cash receipts journal amounts. B) Understating the sales journal amounts. C) Overstating the accounts receivable control [G/L] account. D) Overstating the accounts receivable subsidiary ledger.
B) Understating the sales journal amounts.
1) The responsibility for adopting sound accounting policies and maintaining adequate internal control rests with the: A) board of directors. B) company management. C) financial statement auditor. D) company's internal audit department.
B) company management.
14. In assessing control risk for purchases, an auditor vouches a sample of entries in the voucher register to the supporting documents. Which assertion would this test of controls most likely support? A. Completeness B. Occurrence C. Accuracy D. Classification
B. Occurrence
Using classical variables sampling, the projected population misstatement is $40,000 and the confidence bound is $2,400. What amount will be compared to tolerable misstatement to determine whether the account is fairly stated? A) $40,000. B) $41,200. C) $42,400. D) There is not enough information given to determine.
C) $42,400.
When assessing the tolerable deviation rate (TDR), the auditor should consider that while deviations from control procedures increase the risk of material misstatements, such deviations may not necessarily result in errors. This explains why A) Deviations from examined control procedures at a given rate would normally be expected to result in a higher rate of dollar errors. B) A recorded disbursement that is properly authorized may nonetheless contain a material dollar error. C) A recorded disbursement that is not properly authorized may nonetheless be recorded properly in the cash disbursements journal. D) Deviations would result in dollar errors in the accounting records only when they occurred in different transactions.
C) A recorded disbursement that is not properly authorized may nonetheless be recorded properly in the cash disbursements journal.
which of the following sampling methods would be used to estimate a numeric measurement of a population such as a dollar value? A) random sampling B) numeric smapling C) Attribute sampling D) Variable sampling
C) Attribute sampling
Which of the following types of statistical testing is likely to be used for a test of controls? A) Monetary-unit sampling. B) Probability-proportional-to-size sampling. C) Attribute sampling. D) Classical variables sampling.
C) Attribute sampling.
To determine whether the entity's internal control operated effectively to minimize the likelihood of failing to bill a customer for a shipment of goods, the auditor should begin by selecting a sample of transactions from the population represented by the A) Accounts receivable subsidiary ledger. B) Customer order file. C) Bill of lading (shipping report) file. D) Sales invoice file.
C) Bill of lading (shipping report) file.
Which of the following represents the reason(s) that statistical sampling has fallen out of favor? A) Auditors were over-relying on statistical sampling techniques. B) There is poor linkage between the applied audit setting and traditional statistical sampling applications. C) Both (1) the Auditors were over-relying on statistical sampling techniques and (2) there is poor linkage between the applied audit setting and traditional statistical sampling applications. D) Statistical sampling is no longer required because information technology allows the auditor to test 100% of necessary data.
C) Both (1) the Auditors were over-relying on statistical sampling techniques and (2) there is poor linkage between the applied audit setting and traditional statistical sampling applications.
Tracing bills of lading (shipping reports) to sales invoices as a test of controls related to the sales and collection process provides evidence that A) Shipments to customers were recorded in the sales journal. B) Recorded sales were actually shipped. C) Customers were billed for goods shipped to them. D) Customers were billed for the correct amounts.
C) Customers were billed for goods shipped to them.
The auditor must report the following to the audit committee or others charged with governance: A) Only material weaknesses. B) Only significant deficiencies. C) Significant deficiencies and material weaknesses. D) All control deficiencies identified during the audit.
C) Significant deficiencies and material weaknesses.
Most of the steps for planning and carrying out a nonstatistical test of controls are the same as those for a statistical test of controls. Which of the following represent the steps that could differ between nonstatistical and statistical sampling as discussed in the text? A) Defining the control deviation conditions, determining the sample size, calculating the upper deviation rate. B) Defining the control deviation conditions, defining the sampling unit, calculating the computed upper deviation rate. C) Determining the sample size, selecting the sample items, calculating the computed upper deviation rate. D) Defining the sampling unit, selecting the sample items, performing the audit procedures.
C) Determining the sample size, selecting the sample items, calculating the computed upper deviation rate.
The effectiveness of internal control is reduced by: A) Computerized accounting records. B) Flowcharts. C) Human errors or mistakes. D) Both a and c.
C) Human errors or mistakes.
Which of the following is considered one of the main advantages of classical variables sampling over monetary-unit sampling? A) Any amount that is individually significant is automatically identified and selected. B) Auditors rarely need the assistance of computer software to design and carry out an effective sampling plan. C) Inclusion of zero and negative balances generally do not require special ampling considerations. D) An understanding of standard deviation and normal distribution theory is not necessary.
C) Inclusion of zero and negative balances generally do not require special ampling considerations.
Which of the following is not considered a general control? A) Back up and disaster recovery controls. B) Password protection on the central server. C) Reconciliation of payroll record count with the number of active employees. D) Requiring change authorization forms on all program software.
C) Reconciliation of payroll record count with the number of active employees.
An entity erroneously recorded a large purchase twice. Which of the following internal control measures would be most likely to detect this in a timely, efficient manner? A) Periodically tracing the purchases journal daily totals to the applicable postings in the general ledger. B) Sending quarterly confirmations to all vendors. C) Reconciling monthly statement received from the vendor with the accounts payable subsidiary ledger. D) Tracing the totals from the purchases journal to the various general ledger accounts.
C) Reconciling monthly statement received from the vendor with the accounts payable subsidiary ledger.
Internal controls are designed to achieve company objectives in all of the following areas except: A) Safeguarding of assets. B) Reliability of financial reporting. C) Reduction of debt financing costs. D) Compliance with laws and regulations.
C) Reduction of debt financing costs.
Which of the following statements is true regarding nonstatistical sampling? A) It quantifies the auditor's exposure to sampling risk. B) Its use is required by the Public Company Accounting Oversight Board for small public company audits. C) Sample sizes for non-statistical sampling should be comparable to statistical sampling. D) It gives greater assurance than statistical sampling that samples are randomly selected.
C) Sample sizes for non-statistical sampling should be comparable to statistical sampling.
The risk of incorrect rejection is associated with A) Inherent risk. B) Engagement risk. C) Sampling risk. D) Audit risk.
C) Sampling risk.
Which of the following is not a key segregation of duties in the revenue process? A) The credit function should be segregated from the billing function. B) The shipping function should be segregated from the billing function. C) The accounts receivable function should be segregated from the invoice preparation function. D) The cash receipts function should be segregated from the accounts receivable function.
C) The accounts receivable function should be segregated from the invoice preparation function.
Sample size varies indirectly with which of the following: A) Desired level of confidence. B) Expected population deviation rate. C) Tolerable deviation rate. D) All of the above.
C) Tolerable deviation rate.
Which of the following would not be considered a test in the area of accounts receivable that relates to the existence assertion? A) Evaluate proper segregation of duties. B) Confirm accounts receivable directly with customers. C) Trace the record of shipping to inclusion in the accounts receivable subsidiary ledger. D) Review receipt of cash from customers in the period subsequent to the balance sheet date.
C) Trace the record of shipping to inclusion in the accounts receivable subsidiary ledger.
An auditor plans to examine a sample of 40 accounts payable invoices for proper approval as prescribed by the entity's internal accounting control procedures. One of the invoices in the chosen sample cannot be found, and the auditor is unable to use alternative procedures to determine whether the invoice was properly approved. The auditor should A) Choose another invoice to replace the missing one in the sample. B) Consider this compliance test invalid and proceed with substantive tests because internal control cannot be relied upon. C) Treat the missing invoice as a deviation for the purpose of evaluating the sample. D) Select a completely new random set of 40 invoices.
C) Treat the missing invoice as a deviation for the purpose of evaluating the sample.
Identify the assertion that is represented by the following statement: "Accounts payable and accrued expenses are included in the financial statements at appropriate amounts." A) Existence. B) Completeness. C) Valuation and allocation. D) Rights and Obligations.
C) Valuation and allocation.
When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population would most likely be A) Payees of checks written in the month after year-end. B) Those vendors with balances in the year-end accounts payable subsidiary ledger. C) Vendors with whom the entity has done business with during the year. D) Invoices filed in the entity's open (unpaid) invoice file at year-end.
C) Vendors with whom the entity has done business with during the year.
2) If the auditor believes that the financial statements are not fairly stated or is unable to reach a conclusion because of insufficient evidence, the auditor: A) should withdraw from the engagement. B) should request an increase in audit fees so that more resources can be used to conduct the audit. C) has the responsibility of notifying financial statement users through the auditor's report. D) should notify regulators of the circumstances.
C) has the responsibility of notifying financial statement users through the auditor's report.
3) In certifying their annual financial statements, the CEO and CFO of a public company certify that the financial statements comply with the requirements of: A) GAAP. B) the Sarbanes-Oxley Act. C) the Securities Exchange Act of 1934. D) GAAS.
C) the Securities Exchange Act of 1934.
16. The cutoff assertion for accounts payable includes A. Determining whether all accounts payable are recorded B. Determining whether all accounts payable actually are liabilities C. Determining whether all accounts payable are recorded in the proper period D. Determining whether all accounts payable are properly classified in the financial statements
C. Determining whether all accounts payable are recorded in the proper period
What is a common flow of data in the purchasing process? A. Sales order processing, shipping, invoicing, and receiving cash B. Receiving inventory, storing inventory, and shipping inventory C. Ordering goods, receiving, invoicing, and disbursing cash D. Ordering goods, shipping, and disbursing cash
C. Ordering goods, receiving, invoicing, and disbursing cash
11. A product cost is A. An expense allocated by a systematic procedure B. Recognized during the period in which a liability is incurred C. Recognized in the period during which related revenue is recognized D. Recognized in the period in which cash is spent
C. Recognized in the period during which related revenue is recognized
Why are audit trails for the purchasing process somewhat more complicated than those for the revenue process? A. The revenue process involves the revenue recognition principle. B. The purchasing process usually includes only a single journal entry and, therefore, provides inadequate support. C. The purchasing process may involve two journal entries often made at difference times. D. The revenue process is vulnerable to errors when posting from the cash receipts journal
C. The purchasing process may involve two journal entries often made at difference times.
All of the following are inherent risk factors for the purchasing process except: A) Whether the supply of raw materials is adequate. B) How volatile raw material prices are. C) Misstatements detected in prior audits. D) A new IT system placed in operation during the year.
D) A new IT system placed in operation during the year.
Which of the following represents the correct sequence of audit steps that come after first obtaining an understanding and documenting the entity's internal control? A) Test of Controls, Assess Control Risk, Determine Extent of Substantive Tests, Reassess Control Risk. B) Assess Control Risk, Test of Controls, Determine Extent of Substantive Testing, Reassess Control Risk. C) Assess Control Risk, Determine Extent of Substantive Testing, Test of Controls, Reassess Control Risk. D) Assess Control Risk, Test of Controls, Reassess Control Risk, Determine Extent of Substantive Testing.
D) Assess Control Risk, Test of Controls, Reassess Control Risk, Determine Extent of Substantive Testing.
Understanding each of the components of internal control provides knowledge about: A) The design of tests of controls. B) The assessment of inherent risks. C) Factors that affect the risk of material misstatement. D) Both a and c.
D) Both a and c.
An auditor gathers receiving reports from the few days before and after year-end to determine that purchases made before the end of the current year have not been recorded in the following year to provide assurance about management's assertion of A) Valuation or allocation. B) Existence or occurrence. C) Authorization. D) Cutoff.
D) Cutoff.
Which of the following statements regarding auditor documentation of the entity's internal control is correct? A) Documentation must include narrative memorandums. B) No documentation is necessary to satisfy GAAS, however, oral inquiry is required at minimum. C) Internal control questionnaires are specifically tailored to meet the needs of each individual entity. D) No one particular form of documentation is necessary, and the extent of documentation may vary.
D) No one particular form of documentation is necessary, and the extent of documentation may vary.
In applying classical variables sampling, an auditor will generally evaluate sample results by calculating the possible error in either direction of a projected misstatement (or point estimate). This statistical concept is known as A) Reliability. B) Projected misstatement. C) Standard deviation. D) Precision [or confidence interval].
D) Precision [or confidence interval].
Which of the following controls would most effectively ensure that recorded purchases are free of material misstatements? A) The receiving department compares the quantity ordered on purchase orders with the quantity received on receiving reports. B) Vendor invoices are compared with purchase orders by an employee who is independent of the receiving department. C) Receiving reports require the signature of the individual who authorized the purchase. D) Purchase orders, receiving reports, and vendor invoices are independently matched when preparing vouchers.
D) Purchase orders, receiving reports, and vendor invoices are independently matched when preparing vouchers.
Auditors perform a test to verify that all merchandise received has been recorded, in part, to satisfy the completeness assertion with regard to accounts payable. Which of the following would represent the population of documents for this test? A) Purchase requisitions. B) Payment vouchers. C) Vendor invoices. D) Receiving reports.
D) Receiving reports.
If tolerable misstatement for the accounts receivable balance is $75,000 and the aggregate factual misstatement found by the auditor is $82,000, the auditor is most likely to A) Resign from the engagement. B) Issue a qualified opinion. C) Request that the entity adjust its accounts receivable balance by $7,000. D) Request that the entity adjust its accounts receivable balance by $82,000.
D) Request that the entity adjust its accounts receivable balance by $82,000.
Which of the following statements is true in an attribute sampling plan where the tolerable deviation rate is 7%, the computed upper deviation rate is 6.5%, the sample deviation rate is 2%, and the risk of assessing control risk too low is 5%? A) The auditor is likely to increase control risk because the computed upper deviation rate is less than the risk of assessing control risk too low. B) The auditor is likely to decrease control risk because the computed upper deviation rate is less than the risk of assessing control risk too low. C) The auditor is likely to determine that the results do not support reliance on the control because the computed upper deviation rate plus the sample deviation rate is greater than the tolerable deviation rate. D) The auditor is likely to determine that the results do support reliance on the control because the computed upper deviation rate is less than the tolerable deviation rate.
D) The auditor is likely to determine that the results do support reliance on the control because the computed upper deviation rate is less than the tolerable deviation rate.
Which of the following best represents a situation in which an auditor would use a tax specialist for the audit of the tax provision? A) The company has several temporary differences. B) The company has several permanent differences. C) The company has deferred tax liabilities. D) The company does business overseas.
D) The company does business overseas.
When determining the sample size for MUS application, the auditor must determine all of the following except: A) The desired confidence level. B) The tolerable misstatement. C) The expected population misstatement. D) The estimated standard deviation.
D) The estimated standard deviation.
An auditor may decide to decrease the desired level of confidence when A) Increased reliability based on the sample is desired. B) The cost and effort of selecting additional sample items are low. C) Many differences (audit value minus recorded value) are expected. D) The planned evidence required from a particular test of detail is reduced because of the strength of evidence provided by an improved substantive analytical procedure.
D) The planned evidence required from a particular test of detail is reduced because of the strength of evidence provided by an improved substantive analytical procedure.
Which of the following is not a typical procedure performed related to other non-trade receivables? A) Confirmation of the amount with the other party. B) Evaluation of the collectability of other receivables. C) Examination of the note for repayment terms and interest arrangements. D) Write-off of receivables from officers against their bonus pay as those arrangements are inappropriate.
D) Write-off of receivables from officers against their bonus pay as those arrangements are inappropriate.
3) Auditors accumulate evidence to: A) defend themselves in the event of a lawsuit. B) determine if the financial statements are correct. C) satisfy the requirements of the Securities Acts of 1933 and 1934. D) reach a conclusion about the fairness of the financial statements.
D) reach a conclusion about the fairness of the financial statements.
12. Which of the following accounts is not affected by cash disbursement transactions? A. Cash B. Accounts payable C. Purchase discounts D. Purchase returns
D. Purchase returns
8-8 In performin certain audit procedures, the auditor may encounter voided documents, inapplicable documents, or missing documents, or the auditor may stop testing before examining all the items selected for the sample. How should each of these situations be handled within the attribute-sampling application?
Each of these situations should be handled within the attribute-sampling application: o Voided documents: If the transaction has been properly voided, it does not represent a deviation. The item should be replaced with a new sample item. o Unused or inapplicable documents: Sometimes a selected item is not appropriate for the definition of the control. In such a case, the item is not a deviation and the auditor would simply replace the item with another purchase transaction.o Missing documents: If the auditor is unable to examine a document or use an alternative procedure to test whether the control was adequately performed, the sample item is a deviation for purposes of evaluating the sample results. o Stopping the test before completion: If a large number of deviations are detected early in the tests of controls, the auditor should consider stopping the test as soon as it is clear that the results of the test will not support the planned assessed level of control risk.
Classical Variables Sampling
the use of normal distribution theory to estimate the dollar amount of misstatement for a class of transactions or an account balance.
8-10 How should the results of a nonstatistical test of controls sample be evaluated in terms of considering sampling risk?
In nonstatistical samples, the difference between the auditor's total projected misstatement and tolerable misstatement may be viewed as an allowance for sampling risk.
8-4 Distinguish between nonstatistical and statistical sampling. What are the advantages and disadvantages of using statistical sampling?
In nonstatistical sampling, the auditor does not use statistical techniques to determine the sample size, select the sample, and /or measure sampling risk when evaluating results. Statistical sampling, on the other hand, uses the laws of probability to compute sample size and evaluate the sample results, thereby permitting the auditor to sue the most efficient sample size and to quantify the sampling risk for the purpose of reaching a statistical conclusion about the population. The major advantages of statistical sampling are that it helps the auditor: o Design and efficient sample o Measure the sufficiency of evidence obtained o Quantify sampling risk The major disadvantages of statistical sampling include additional costs of: o Training auditors in the proper use of sampling techniques o Designing and conducting the sampling application o Lack of consistent application across audit teams due to the complexity of the underlying concepts
Steps in a Monetary-Unit Sampling Application
Planning 1. Determine the test objectives 2. Define the population characteristics 3. Determine the sample size Performance 4. Select sample items 5. Perform the auditing procedures Evaluation 6. Calculate the projected misstatement and the upper limit on misstatement 7. Draw final conclusions
Performance: Select the sample items
Probability-proportional-to-size selection: uses sampling intervals; larger logical units have a higher chance of being selected; can decrease sample size
Statistical Sampling
Sampling that uses the laws of probability to select and evaluate the results of an audit sample, thereby permitting the auditor to quantify the sampling risk for the purpose of reaching a conclusion about the population.
Attribute Sampling
Sampling used to estimate the proportion of a population that possesses a specified characteristic.
8-9 The auditor should evaluate the qualitative aspects of deviations found in a sampling application. What are the purposes of evaluating the qualitative aspects of deviations?
The auditor must consider the qualitative aspects of the deviations as well as the number of deviations. Deviations that directly affect the financial statements or appear to be irregularities have greater audit significance. When the sample results do not support the planned control risk, the nature, extent, or timing of substantive tests are ordinarily modified, or, if applicable, tests may be made of other compensating controls.
Representative Sample
The evaluation of the sample will result in conclusions that are similar to those that would be drawn if the same procedures were applied to the entire population.
8-7 List the four factors that enter into the sample size decision. What is the relationship between sample size and each of these factors?
The four factors that enter into the sample size decision: Table 8-7 on page 288
Sampling Unit
The individual items constituting a population being sampled.
Tolerable Deviation Rate
The maximum deviation rate from a prescribed control that the auditor is willing to accept without altering the planned assessed level of control risk.
Desired Confidence Level
The probability that the true but unknown measure of the characteristic of interest is within specified limits.
Non sampling Risk
The risk that the auditor reaches an erroneous conclusion for any reason not related to sampling risk (e.g., judgment error, inappropriate procedures, failing to detect a misstatement when applying an audit procedure).
Risk of Incorrect Rejection
The risk that the sample supports the conclusion that the control is not operating effectively when it actually is or that the recorded account balance is materially misstated when it IS NOT materially misstated.
Risk of Incorrect Acceptance
The risk that the sample supports the conclusion that the control is operating effectively when it is not or that the recorded account balance is not materially misstated when it IS materially misstated.
Audit Sampling
The selection and evaluation of less than 100% of the population of audit relevance such that the auditor expects the items selected to be representative of the population and, thus, likely to provide a reasonable basis for conclusions about the population.
Allowance for Sampling Risk
The uncertainty that results from sampling; the difference between the expected mean of the population and the tolerable deviation or misstatement.
8-2 Distinguish between Type I and Type II errors. What terms are used to describe these errors when the auditor is conducting tests of controls and substantive tests? What costs are potentially incurred by auditors when such decision errors occur?
Type I error is deciding that the population tested is not acceptable when in reality it is. Type II error is deciding that the population tested is acceptable when in reality it is not. When and auditor is evaluating the level of reliance that can be placed on a control in the context of a financial statement audit, this risk is also commonly referred to as the risk of underreliance or the risk of assessing control risk too high. When an auditor is evaluating the level of reliance that can be placed on a control in the context of a financial statement audit, this risk is also commonly referred to as the risk of overreliance or the risk of assessing control risk too low. The risk of incorrect rejection (Type I) can result in the auditor conducting more audit work than necessary in order to reach the correct conclusion. The risk of incorrect acceptance (Type II) can result in the auditor failing to detect a material misstatement in the financial statements. This can lead to litigation against the auditor by parties that rely on the financial statements.
2. A purchase transaction usually begins with the preparation of a purchase order True/False
false
A receiving report is used to document the ordering of goods. True/False
false
which of the following statements concerning the auditor's use of statistical sampling is correct? a) an auditor needs to estimate the dollar amount of the standard deviation of the population in order to use classical variables sampling b) an assumption of MUS is that the underlying accounting population is normally distributed c) a classical variables sample needs to be designed with special considerations to include negative balances in the sample d) the selection of zero balances usually does not require special sample design considerations when using MUS
a) an auditor needs to estimate the dollar amount of the standard deviation of the population in order to use classical variables sampling
an auditor should perform alternative procedures to substantiate the existence of a/r when a) no reply to a positive confirmation request is received b) no reply to a negative confirmation request is received c) the collectibility of receivables is in doubt d) pledging of receivables is probable
a) no reply to a positive confirmation request is received
cash receipts from sales on account have been misappropriated. which of the following acts would conceal this defalcation and be least likely to be detected by an auditor a) understanding sales journal b) overstating A/R control account c) overstating A/R subsidiary ledger d) understating cash receipts journal
a) understanding sales journal
If A/R turnover was 7.1 in 2011 compared to only 5.6 in 2012 it is possible that there were a) unrecorded credit sales in 2012 b) unrecorded cash receipts in 2011 c) more thorough credit investigations made by the company late in 2011 d) fictitious sales in 2012
a) unrecorded credit sales in 2012
which of the following is most likely to be detected by an auditor's review of a client's sales cutoff a) unrecorded sales for the year b) lapping of year-end a/r c) excessive sales discounts d) unauthorized goods returned for credit
a) unrecorded sales for the year
Planning: Define the population characteristics
a. Define the population (monetary value of account balance) b. Define the sampling unit (extend to logical units) c. Define a misstatement (difference between recorded amount and amount supported by audit evidence)
Planning: Determine the sample size
a. Desired confidence level (direct) or acceptable risk of incorrect acceptance (inverse; same as DR) b. Tolerable misstatement (inverse) c. Expected misstatement (direct) d. Population size (direct when using ACL)
Planning: Determine the test objectives
a. test the reasonableness of assertions about a financial statement amount (e.g., accuracy, existence) b. develop an estimate of some amount Objective for substantive tests of detail is to test the assertion that no material misstatements exist in an account balance, class of transactions, or a disclosure component of the financial statements
An auditor performing substantive procedures of pricing and extensions of perpetual inventory balances consisting of a large number of items. past experience indicates that there may be numerous pricing and extension errors. which of the following statistical sampling approaches is most appropriate? a) classical variables sampling b) MUS c) stop-n-go sampling d) attribute sampling
b) MUS
if the number of days sales in a/r decreases significantly which of the following assertions for a/r most likely is violated a) existence or occurence b) completeness c) rights and obligations d) classification
b) completeness
Smith corporation has numerous customers. customer file is kept on disk. each customer file contains a name, address, credit limit, and account balance. the auditor wishes to test this file to determine whether credit limits are being exceeded. the best procedure for the auditor to follow would be to a) develop test data that would cause some account balances to exceed the credit limit and determine if the system properly detects such situations b) develop a program to compare credit limits with account balances and print out the details of any account with a balance exceeding its credit limit c) request a printout of all account balances so that they can be manually checked against the credit limits d) request a printout of a sample of account balances so that they can be individually checked against the respective credit limits
b) develop a program to compare credit limits with account balances and print out the details of any account with a balance exceeding its credit limit
in evaluating the adequacy of the allowance for doubtful accounts an auditor is most likely reviews the entity's agin of receivables to support management's financial statement assertion of a) existence b) valuation and allocation c) completeness d) rights and obligations
b) valuation and allocation
In classical variables sampling which of the following must be known in order to estimate the appropriate sample size required to meet the auditor's needs in a given situation a) qualitative aspects of misstatements b) total dollar amount of population c) acceptable level of risk d) estimated percentage of deviations in the population
c) acceptable level of risk
negative confirmation of accounts receivable is less effective than positive confirmation of a/r because a) a majority of recipients usually lack willingness to respond objectively b) some recipients may report incorrect balances that require extensive follow up c) auditor cannot infer that all nonrespondents have verified account information d) negative confirmations do not produce evidence that is statistically quantifiable
c) auditor cannot infer that all nonrespondents have verified account information
which of the following would most likely be an advantage in using classical variables sampling rather than MUS a) an estimate of the standard deviation of the populations recorded amounts is not required b) the auditor rarely needs the assistance of a computer program c) inclusion of zero and negative balances 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 does not require special design considerations
which of the following internal controls would be most likely to deter lapping of collections from customers a) independent internal verification of dates of entry in cash receipts journal with dates of daily cash summaries b) authorization of write-offs of uncollectible accounts by a supervisor independent of the credit approval function c) segregation of duties between receiving cash and posting 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 accounts receivable ledger
which of the following statements concerning monetary unit sampling is correct? 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 the desired confidence level for the sampling plan d) the sampling interval is calculated by dividing the number of physical units in the population by sample size
c) the auditor controls the risk of incorrect acceptance by specifying the desired confidence level for the sampling plan
which of the following controls is most likely to help ensure that all credit revenue transactions of an entity are recorded? a) employee overtime wages b) credit granted to customer c) write-offs of customer accounts d) cash disbursements
c) write-offs of customer accounts
A number of factors influence the sample size for a substantive test of details of an account balance. All other factors being equal, which of the following would lead to a larger sample size? a) greater reliance on internal controls b) greater reliance on analytical procedures c) smaller expected frequency of misstatements d) smaller amount of tolerable misstatement
d) smaller amount of tolerable misstatement
which of the following controls is most likely to help ensure that all credit revenue transactions of an entity are recorded? a) the billing department supervisor sends a copy of each approved sales order to the credit department for comparison to the customers' authorized credit limit and current account balance b) accounting department supervisor independently reconciles the accounts receivable subsidiary ledger to the accounts receivable subsidiary ledger to the accounts receivable control account each month c) the accounting department supervisor controls the mailing of monthly statements to customers and investigates any differences reported by customers d) the billing department supervisor matches pre-numbered shipping documents with entries in the sales journal
d) the billing department supervisor matches pre-numbered shipping documents with entries in the sales journal
Expected Population Deviation Rate
deviation rate that the auditor expects to exist in the population.
How should these relate? assessed level of control risk relating to receivables (low or high) number of small balances (high or low) consideration by recipient (likely or unlikely)
low, high, likely
Sampling Risk
possibility that the sample drawn is not representative of the population and that, as a result, the auditor reached an incorrect conclusion about the reliability of the control, the account balance, or class of transactions based on the sample.
Evaluation: Calculate the projected misstatement and the upper limit misstatement
projected misstatement: projection of errors to the population upper limit misstatement = projected + allowance for sampling risk -- basic precision = 0 + allowance for sampling risk