Audit Test 4
"All purchase orders are supported by requisitions from proper persons" is a specific example of which management assertion? Multiple Choice Occurrence Completeness Cutoff Classification
A
Auditors consider statistical sampling to be characterized by the following: Multiple Choice Representative sample selection and mathematical evaluation of the results. Representative sample selection and nonmathematical evaluation of the results. Carefully biased sample selection and nonmathematical evaluation of the results. Carefully biased sample selection and mathematical evaluation of the results.
A
For which of the following audit tests would an auditor most likely use attributes sampling? Multiple Choice Inspecting purchase orders for proper approval by supervisors. Making an independent estimate of recorded payroll expense. Determining that all payables are recorded at year end. Selecting accounts receivable for confirmation of account balances.
A
If systematic selection is used with a starting point of 10, a population size of 100, and a necessary sample size of 20, the first three items selected for examination would be Multiple Choice 10, 15, 20. 110, 210, 310. 10, 110, 210. 15, 20, 25.
A
In an audit sampling application, an auditor Multiple Choice Performs procedures on less than 100 percent of the items in a balance and formulates a conclusion about the entire balance. Performs procedures on less than 100 percent of the items in a class of transactions to become familiar with the client's accounting system. Performs analytical procedures on the client's unaudited financial statements when planning the audit. Performs procedures on all items in a balance and makes a conclusion about the entire balance.
A
The risk of underreliance is the risk that the sample selected to test controls: Multiple Choice does not support the auditor's planned level of control risk when the true operating effectiveness of the control justifies such an assessment. Correct contains misstatements that could be material to the financial statements when aggregated with misstatements in other account balances or transaction classes. contains proportionally fewer monetary errors or deviations from prescribed control procedures than exist in the balance or class as a whole. does not support the tolerable misstatement for some or all of management's assertions.
A
When confirming accounts payable, emphasis should be put on what kind of accounts? Multiple Choice Accounts with small or zero balances All accounts should be equally emphasized. Accounts with large balances Accounts listed in the accounts payable subsidiary
A
When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely would be Multiple Choice vendors with whom the entity has previously done business. amounts recorded in the accounts payable subsidiary ledger. payees of checks drawn in the month after the year-end. invoices filed in the entity's open invoice file.
A
Which of the following audit procedures is best for identifying unrecorded accounts payable? Multiple Choice Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports Examining unusual relationships between monthly accounts payable balances and recorded cash payments Reconciling vendors' statements to the file of receiving reports to identify items received just prior to the balance sheet date
A
Which of the following is not true with regard to the relationship among control risk, the risk of overreliance, and the tolerable rate of deviation? Multiple Choice Lower levels of control risk result in a higher level of the risk of overreliance. Lower levels of the risk of overreliance result in a lower tolerable rate of deviation. Lower levels of control risk result in a lower tolerable rate of deviation. All of these are true.
A
When using sampling in the study of internal control, the audit team would compare the upper limit rate of deviation to the Multiple Choice Expected rate of deviation. Tolerable rate of deviation. Statistical rate of deviation. Sample rate of deviation.
B
"Recorded vouchers (accounts payable entries) in the voucher register (e.g., purchases journal) supported by completed voucher documentation" is a specific example of which management assertion? Multiple Choice Classification Occurrence Completeness Cutoff
B
An audit team designed a sample that would provide a 10 percent risk of overreliance that not more than 7 percent of sales invoices lacked credit approval. From previous audits, the audit team expected that 3 percent of the sample invoices lacked proper approval. From the sample of 90 invoices, 7 were found to lack credit approval. Using AICPA sample evaluation tables. Based on the above information, the audit team determined that the allowance for sampling risk was Multiple Choice 2.2 percent. 5.0 percent. 7.8 percent. 10.0 percent.
B
An auditor discovers that an account balance believed not to be materially misstated based on an audit sample was materially misstated based on the total population of the account balance. This is an example of which of the following types of sampling risks? Multiple Choice Incorrect rejection. Incorrect acceptance. Overreliance. Underreliance.
B
An auditor wanted to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide a 1% risk of overreliance (99% confidence) that not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience that about 2.5% of the sales invoices lacked approval. A sample of 200 invoices was examined and 7 of them were lacking approval. The auditor then determined the upper limit rate of deviation to be 8%. The allowance for sampling risk was: Multiple Choice 5.5%. 4.5%. 3.5%. 1%.
B
An auditor wishes to perform tests of controls on a client's purchasing procedures. If the control activities leave no audit trail of documentary evidence, the auditor most likely will test the procedures by Multiple Choice confirmation and observation. observation and inquiry. analytical procedures and confirmation. inquiry and analytical procedures.
B
For the copy of the purchase order that goes to the receiving department, it is best to Multiple Choice leave off the description of the goods ordered. leave off the quantity of the goods ordered. leave off the name of the vendor. have the receiving department forward all copies of the purchase order to accounts payable.
B
In order for the auditor to decide to perform tests of controls, which of the following relationships should exist? Multiple Choice The sampling risk should be less than 5%. The tolerable rate of deviation should exceed the expected population deviation rate. The expected population deviation rate should exceed the risk of overreliance. The expected population deviation rate should exceed the tolerable rate of deviation.
B
Item11 0.6 points Return to question Item 11 Item 11 0.6 points What is an auditor's evaluation of a statistical sample for attributes when a test of 100 documents results in 4 deviations if the tolerable rate of deviation is 5%, the expected population deviation rate is 3%, and the allowance for sampling risk is 2%? Multiple Choice Accept the sample results as support for planned reliance on the control because the tolerable rate of deviation less than allowance for sampling risk equals the expected population deviation rate. Modify planned reliance on the control because the sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate of deviation. Modify planned reliance on the control because the tolerable rate of deviation plus the allowance for sampling risk exceeds the expected population deviation rate. Accept the sample results as support for planned reliance on the control because the sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate of deviation.
B
What evidence is appropriate to determine whether recorded purchase transactions are valid and the vendors charged the correct prices? Multiple Choice Purchase requisitions and accounts payable entries Receiving reports and purchase orders Purchase requisitions and purchases orders Purchase orders and bid quotes
B
When examining the client's internal control, what is the relationship of each of the following with sample size? Expected rate of deviation Risk of overreliance A. Direct Direct B. Direct Inverse C. Inverse Inverse D. Inverse Direct Multiple Choice Option A Option B Option C Option D
B
Which of the following allow the auditor to limit the exposure to sampling risk? Multiple Choice Determining an appropriate sample size: Yes; Performing an appropriate audit procedure: Yes Determining an appropriate sample size: Yes; Performing an appropriate audit procedure: No Determining an appropriate sample size: No; Performing an appropriate audit procedure: Yes Determining an appropriate sample size: No; Performing an appropriate audit procedure: No
B
Which of the following does not affect the sample size in an attributes sampling application? Multiple Choice Expected population deviation rate. Upper limit rate of deviation. Sampling risk. Tolerable rate of deviation.
B
Which of the following is an advantage of nonstatistical sampling? Multiple Choice It measures the audit team's exposure to sampling risk. It is typically less complex than statistical sampling. It ensures that samples are randomly selected. It is required by generally accepted auditing standards.
B
Which of the following is not true with respect to the use of statistical and nonstatistical sampling? Multiple Choice Statistical sampling allows the auditor to quantitatively measure the sufficiency of evidence gathered. Statistical sampling does not require auditors to utilize extensive judgment during the sampling process. Statistical sampling allows the auditor to make quantitative statements with respect to the results of the sampling procedures. Both statistical and nonstatistical sampling are permissible under generally accepted auditing standards.
B
Which of the following is the best audit procedure for determining the existence of unrecorded liabilities? Multiple Choice Examine confirmation requests returned by creditors whose accounts are on a subsidiary trial balance of accounts payable. Examine a sample of cash disbursements in the period subsequent to year-end. Examine a sample of invoices a few days prior to and subsequent to year-end to ascertain whether they have been properly recorded. Examine unusual relationships between monthly accounts payable and recorded purchases.
B
Which of the following most closely represents an unrestricted random selection procedure? Multiple Choice Identifying a starting point within the population and bypassing a fixed number of items. Matching items in the population to a series of randomly selected numbers. Randomly selecting invoices to customers whose last names start with "W". Randomly picking items from an accounts receivable file.
B
Which of the following situations represents an internal control weakness in the payroll department? Multiple Choice Payroll department personnel are rotated in their duties. Paychecks are distributed by the employees' immediate supervisor. Payroll records are reconciled with quarterly tax reports. The timekeeping function is independent of the payroll department.
B
Which of the following statements is correct concerning statistical sampling in tests of controls? Multiple Choice As the population increases, the sample size should increase proportionally. The expected population deviation rate can either be based on prior audits or a small sample of controls examined in the current year. Correct There is an inverse relationship between the expected population deviation rate and sample size. In determining the tolerable rate of deviation, an auditor considers the desired level of detection risk.
B
Which of the following would not result in the audit team's selecting a larger sample of controls for examination? Multiple Choice A reduction in the risk of overreliance from 10 percent to 5 percent. An increase in the tolerable rate of deviation from 3 percent to 6 percent An increase in the expected population deviation rate from 2 percent to 4 percent. All of the choices would result in a larger sample of controls.
B
Which of the following would typically result in nonsampling risk? Multiple Choice Selecting a nonrepresentative sample. Making a mistake in recording sample results. Intentionally omitting several items in the population from examination. None of these result in nonsampling risk.
B
A sampling plan in which an initial sample is selected and the audit team either draws a final conclusion or selects additional items before drawing a final conclusion is called Multiple Choice attributes sampling. discovery sampling. sequential sampling. statistical sampling.
C
An auditor most likely would extend substantive tests of payroll when Multiple Choice payroll is extensively audited by the state government. payroll expense is substantially higher than in the prior year. overpayments are discovered in performing tests of controls. employees complain to management about too much overtime.
C
An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal. The purpose of this substantive audit procedure most likely was to Multiple Choice identify usually large purchases that should be investigated further. verify that cash disbursements were for goods actually received. determine that purchases were properly recorded. test whether payments were for goods actually ordered.
C
If the upper limit rate of deviation exceeds the tolerable rate of deviation, the auditor would most likely: Multiple Choice accept the account balance as fairly stated. reject the account balance as fairly stated. increase the planned effectiveness of substantive procedures. not increase the planned effectiveness of substantive procedures.
C
In a sampling application to determine the average age of employees in management positions, the sample estimate was 50 years, reliability was 80 percent, and precision was 10 years. Which of the following would most likely result from an increase in the desired level of reliability to 90 percent? Multiple Choice The sample estimate would increase to 55 years. The precision interval would be 40 to 60 years. The precision interval would be 35 to 65 years. The precision interval would have a lower probability of including the true (unknown) population average.
C
Specific balance assertions typical of accounts payable would not include Multiple Choice recorded liabilities are obligations of the entity. estimated liabilities are properly valued. accounts payable are not pledged as collateral. payables are recorded in the proper period.
C
The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the Multiple Choice human resources function from the controllership function. administrative controls from the internal accounting controls. authorization of transactions from the custody of related assets. operational responsibility from the recordkeeping responsibility.
C
To determine whether accounts payable are complete, auditors perform a test to verify that all merchandise received has been recorded. The population for this test consists of all Multiple Choice vendors' invoices. purchase orders. receiving reports. canceled checks.
C
To statistically evaluate an attributes sampling application, the auditor would not need to know: Multiple Choice the acceptable risk of overreliance. the actual deviations in the sample. the actual population size. the upper limit rate of deviation.
C
Which of the following best describes the auditors' responsibility with respect to management's estimates? Multiple Choice Verifying the mathematical accuracy of management estimates Assessing the likelihood that actual results will be consistent with management's estimates Evaluating the reasonableness of management's estimates Identifying how the failure of the entity to achieve management's estimates will influence users' decisions
C
Which of the following client control activities is not usually performed in the vouchers payable (accounts payable) department? Multiple Choice Determining the mathematical accuracy of the vendors' invoices Writing checks for the treasurer's signature to take advantage of purchase discounts Controlling the mailing of the check and remittance advice Checking the prices on the vendor's invoice
C
Which of the following does not have a direct relationship with sample size? Multiple Choice Expected population deviation rate. Population size. Risk of overreliance. All of these have a direct relationship with sample size.
C
Which of the following is not a judgment or estimate auditors must make when performing attributes sampling? Multiple Choice Tolerable rate of deviation. Expected population deviation rate. Sample rate of deviation. Risk of overreliance.
C
Which of the following is true with respect to the use of sequential sampling when used with attributes sampling? Multiple Choice Sequential sampling is normally used when expected deviations occur at a relatively low rate in the population. Sequential sampling is normally used when the audit team wishes to place greater reliance on internal control. Sequential sampling may provide a more efficient sample size than the use of traditional attributes sampling. Sequential sampling will always provide auditors with the smallest final sample size for a given set of sampling parameters.
C
Which of the following sampling risks does the audit team control in an attributes sampling application (ROO = risk of overreliance, ROU = risk of underreliance)? ROO ROU a. Yes Yes b. No Yes c. Yes No d. No No Multiple Choice Option A Option B Option C Option D
C
Why is the auditor more concerned with the risk of overreliance rather than the risk of underreliance? Multiple Choice The risk of underreliance is not a type of sampling risk. The risk of overreliance exposes the auditor to an efficiency loss. The risk of overreliance may result in the auditor failing to perform sufficient substantive procedures. The risk of overreliance cannot be measured by the auditor during the sampling process. Ne
C
Why is the auditor more concerned with the risk of overreliance than the risk of underreliance? Multiple Choice The risk of underreliance is not a type of sampling risk. The risk of overreliance exposes the auditor to an efficiency loss. The risk of overreliance may result in the auditor failing to perform sufficient substantive procedures. Correct The risk of overreliance cannot be controlled by the auditor during the sampling process.
C
A furniture company ordered 84 tables from a supplier. The supplier accidentally sent only 48 tables, but the receiving department at the furniture company accepted the tables. The invoice was eventually received but was for the 84 tables ordered. The furniture company paid the entire amount. Which of the following controls would have been least likely to have prevented this erroneous payment? Multiple Choice The copy of the purchase order sent to the furniture company's receiving department should not have shown an expected quantity. Personnel in the furniture company's accounts payable department should compare the receiving report to the purchase invoice before creation of the voucher. Personnel in the furniture company's cash disbursements department should compare the check that is prepared to all of the backup documentation. Personnel in the furniture company's purchasing department should compare the purchase requisition to the purchase order.
D
A limitation of systematic random selection is that this method Multiple Choice Results in a larger sample size than other selection methods. Has a relatively low likelihood of yielding a representative sample. Cannot be used with statistical sampling plans. Can result in bypassing a number of items having similar characteristics.
D
An auditor who uses statistical sampling for attributes in testing internal controls should reduce the planned reliance on a prescribed control when the: Multiple Choice sample rate of deviation plus the allowance for sampling risk equals the tolerable rate of deviation. sample rate of deviation is less than the expected rate of deviation used in planning the sample. tolerable rate less the allowance for sampling risk exceeds the sample rate of deviation. sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate of deviation.
D
Auditors may conclude that depreciation charges are too small by noting Multiple Choice insured values much larger than book values. large numbers of fully depreciated assets. frequent trade-ins of relatively new assets. large and frequent losses on assets retired.
D
For which of the following audit tests would an auditor most likely use attributes sampling? Multiple Choice Making an independent estimate of the amount of a LIFO inventory. Examining invoices in support of the valuation of fixed asset additions. Selecting accounts receivable for confirmation of account balances. Inspecting employee time cards for proper approval by supervisors.
D
If the auditor were interested in ensuring that all sales have been recorded, the population would be defined as: Multiple Choice entries in the cash receipts journal. entries in the general journal. remittance advices. shipping documents.
D
The sampling plan for nonstatistical sampling is the same as statistical sampling except for which of the following steps? Multiple Choice Define the characteristic of interest. Define the population. Measure the sample items. Evaluate the sample results.
D
The type of sampling most frequently used by the auditors during their substantive procedures is referred to as: Multiple Choice account balance sampling. attributes sampling. item sampling. variables sampeling
D
Which of the following is not an advantage of statistical sampling? Multiple Choice Statistical sampling provides auditors with a sufficient sample size that controls exposure to sampling risk. Statistical sampling uses selection methods that expose all items in the population to selection. Statistical sampling evaluates the sample evidence in such a manner that controls exposure to sampling risk. Statistical sampling deploys audit procedures that allow auditors to more effectively evaluate evidence.
D
Which of the following pairs of selection methods could appropriately be used in statistical sampling applications? Multiple Choice Systematic random selection, haphazard selection. Block selection, haphazard selection. Unrestricted random selection, block selection. Unrestricted random selection, systematic random selection.
D
Which of the following situations is true with respect to sampling? Multiple Choice Sampling results in a tradeoff of efficiency for greater effectiveness. Sampling is most useful when the need for exact information is very important. A well-designed sample can appropriately limit the exposure to nonsampling risk. Sampling is more appropriate when the number of items comprising the population is relatively large.
D
Which of the following would not be included in the supporting documents for a voucher? Multiple Choice Purchase order Vendor invoice Receiving report Blank check
D
A partner of the accounting firm who has not been involved in the audit performs an engagement quality review of documentation. This review usually focuses on Multiple Choice the fair presentation of the financial statements in conformity with GAAP. irregularities involving the client's management and its employees. the materiality of the adjusting entries proposed by the audit staff. the communication of internal control deficiencies to the client's audit committee (or those charged with governance).
a
Following the audit report release date, auditors became aware of facts existing at the report date that would have affected the reports had auditors then been aware of such facts. What is the most appropriate initial course of action that auditors should take? Multiple Choice Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information. Request that management disclose the newly-discovered information by issuing revised financial statements. Issue revised pro forma financial statements taking into consideration the newly discovered information. Give public notice that auditors are no longer associated with financial statements.
a
Long and Short, CPAs, were auditing Island Corporation for the year ended December 31, 2017. On January 11, 2018, a major customer of Island Corporation declared bankruptcy as the result of an uninsured loss due to a major fire in their warehouse on January 8, 2018. As a result, a material accounts receivable from the customer was determined to be uncollectible. Long and Short, CPAs, would expect the client to Multiple Choice record the loss on uncollectible accounts as a routine transaction in the year 2018. treat the loss as a subsequent event and provide a footnote about the loss in the 2017 financial statements. treat the loss as a subsequent event and adjust the 2017 financial statements to record the loss on uncollectible accounts. file a lawsuit against the customer in hopes of collecting some of the money owed to the client.
b
What is the primary purpose of obtaining written representations? Multiple Choice To provide auditors with substantive evidence of important assertions To impress upon management its primary responsibility for the financial statements To allow auditors to communicate important internal control deficiencies to management To allow auditors to communicate important suggestions for improvement to management
b
Which of the following best describes the role of analytical procedures near the end of the audit engagement? Multiple Choice To identify accounts that appear to be misstated with the intention of planning the nature, timing, and extent of other substantive procedures. To provide an overall review of the financial information and assessment of the adequacy of evidence gathered during the audit engagement. To gather evidence to support one or more assertion(s) related to the account balance or class of transactions. To identify possible deficiencies in the client's internal control over financial reporting.
b
Which of the following conditions or set of circumstances would not ordinarily raise questions about the entity's ability to continue as a going concern: Multiple Choice Violation of debt covenants Failure to meet forecasted earnings per share Legal proceedings that may have a significant negative impact on the entity Negative cash flow from operations for each of the last three years
b
Which of the following substantive procedures would not ordinarily be used by auditors in evaluating the potential existence of subsequent events? Multiple Choice Reviewing the latest interim financial statements Performing cut-off testing near year end Inquiring of officers and other client executives Obtaining written representations
b
Why is it the client's decision to record adjustments to the financial statements? Multiple Choice Having auditors adjust the financial statements would impair independence with respect to the client. The financial statements are the responsibility of the client's management. Auditors often do not have sufficient client-specific expertise to record adjustments to the financial statements. The client will ultimately suffer any losses related to misstated financial statements.
b
An auditor most likely would perform substantive procedures on payroll transactions and balances when Multiple Choice cutoff tests indicate a substantial amount of accrued payroll expense. the assessed level of control risk relative to payroll transactions is low. analytical procedures indicate unusual fluctuations in recurring payroll entries. accrued payroll expense consists primarily of unpaid commissions.
c
An important method used by auditors to learn of material contingencies is Multiple Choice examining documents in the client's possession concerning contingencies. inquiring and discussing them with management. obtaining responses to an attorney letter. confirming accounts receivable with the client's customers.
c
Auditors have a responsibility to evaluate whether financial statements properly reflect all known events through the: Multiple Choice date of the financial statements. date of the auditors' report. audit report release date. subsequent year's date of the financial statements.
c
If auditors are appointed on January 3, 2017, the date of the financial statements is December 31, 2017, the date of the auditors' report is February 7, 2018, and the audit report release date is March 3, 2018, what is the appropriate date of the written representations? Multiple Choice January 3, 2017 December 31, 2017 February 7, 2018 March 3, 2018
c
The primary source of information auditors use to obtain information about litigation, claims, and assessments is the Multiple Choice client's attorney. court records. client's management. Correct independent auditors.
c
Which of the following is ordinarily performed last in the audit examination? Multiple Choice Securing a signed engagement letter from the client. Performing a review for subsequent events. Obtaining signed written representations. Performing tests of controls.
c
Why should auditors be particularly concerned with "miscellaneous," "other," and "clearing" accounts classified as revenues or expenses? Multiple Choice These accounts are likely to relate to going-concern matters. These accounts are often more difficult to audit using normal substantive procedures. These accounts may represent attempts of earnings management. These accounts are likely to require the assistance of a specialist.
c
Ambrose is auditing the financial statements of Mays (dated December 31, 2017). The date of the auditor's report is February 17, 2018, and the audit report release date is February 20, 2018. For which of the following matters would Ambrose have the least responsibility? Multiple Choice A customer's deteriorating financial condition that was identified on February 19, 2018. A merger that was announced by Mays and known by Ambrose on February 12, 2018. The obsolescence of inventory held on December 31, 2017, that was identified on January 20, 2018. A major loss due to a catastrophe that occurred and was known by Ambrose on March 1, 2018.
d
Auditors conclude that the omission of a substantive procedure considered necessary at the time of the examination may impair their present ability to support the previously-expressed opinion. Auditors need not try to perform the omitted procedure if Multiple Choice the risk of adverse publicity or litigation is low. some financial statement users are currently relying on the auditors' reports. the auditors' opinion was qualified because of a departure from generally accepted accounting principles. the results of other procedures that were applied at the time compensated adequately for the omitted procedure by providing sufficient appropriate evidence.
d
Small and Tall, CPAs, completed the December 31, 2017 audit of Big Company on February 10, 2018. After the audit report release date, an outstanding lawsuit against Big Company was settled for materially more than recorded in the December 31, 2017 financial statements. The amount recorded in the financial statements represented the best estimate of management and the company's attorneys at the time the audit was completed. Based on this new information, Small and Tall, CPAs should Multiple Choice determine whether persons are currently relying on the auditors' reports. advise the client to make appropriate changes in the financial statements and reissue them. notify each member of the board of directors of Big Company. take no action since the event took place after the audit report release date.
d
The primary reason auditors request responses to attorney letters is to provide auditors Multiple Choice The attorney's opinions of the client's historical experiences in recent similar litigation. The probable outcome of asserted claims and pending or threatened litigation. A description and evaluation of litigation, claims, and assessments that existed at the date of the financial statements. Corroboration of the information furnished by management about litigation, claims, and assessments.
d
Which of the following is not a purpose of the review of audit documentation by a supervisor during fieldwork? Multiple Choice To ensure that all appropriate steps in the audit plan were performed To ensure that referencing among audit documentation is clear To ensure that the explanations included in the audit documentation are understandable To ensure that the overall scope of the audit was appropriate
d
