Becker Quizzes

An auditor has obtained the listing detail of fixed asset additions (see exhibit) for the year under audit for a manufacturing client. The auditor plans to test the fixed asset additions using PPS sampling. The auditor is determining whether stratification would improve the efficiency of the audit for testing fixed asset additions. Determine the sample size without stratification and with stratification. The auditor rounds the selected number of items up. The sampling interval is $300,000. Enter the amount of items selected under each method in the appropriate cell. Then determine whether stratification would improve the efficiency of testing by clicking in the associated cell and selecting "Yes" or "No" as appropriate. Find the following 1. sample size without stratification 2. Sample size with stratification 3. Will stratification improve the efficiency of testing?

1. 27 7,864,000 Population (This is fixed asset addition total)/300,00 Sampling interval (given in intro paragraph) 2. 6 7,200,000 Sum of highest dollar items. No. 1, 17 and 30 (1,500,000+2,500,000+3,200,000)=3 664,000 Remainder of population after the highest items are separated (7,864,000-7,200,000)/300,000 sampling interval=2.21 3+2.21=5.21 Rounds up to 6 3. Yes

The sample size of a test of controls varies inversely with (expected population exception rate, TER) 1. no yes 2. yes no 3. no no 4. yes yes

1. Expected population=NO, Tolerable Rate=YES The sample size for a test of controls varies directly with the expected deviation rate and inversely with the tolerable rate. If the auditor expects more errors, he or she would increase sample size; conversely, if the tolerable rate of deviation increases, not as many items need to be selected.

When using classical variables sampling for estimation, an auditor normally evaluates the sampling results by calculating the possible error in either direction. This statistical concept is known as A) Precision. B) Reliability. C) Projected error. D) Standard deviation.

A) Precision. The statistical concept of precision is used to describe the auditor's evaluation of sampling results by calculating the possible error in either direction

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

A) Preliminary judgments about materiality levels. When planning a sample for a test of subsequent cash receipts, the auditor should consider preliminary judgements about materiality levels.

Which of the following internal controls most likely would reduce the risk of diversion of customer receipts by an entity's employees? A. A Bank lockbox system. B. Prenumbered remittance advices. C. Monthly bank reconciliations. D. Daily deposit of cash receipts.

A. A Bank lockbox system. A lockbox is the best means of preventing defalcation of cash by empolyees becasue the employees never have direct access to cash receipts.

What effect would the sale of a company's trading securities at their carrying amounts have on each of the following ratios? A. Current Ratio-no effect; Quick Ratio-no effect B. Current Ratio-increase; Quick Ratio-increase C. Current Ratio-no effect; Quick Ratio-increase D. Current Ratio-increase; Quick Ratio-no effect

A. Current Ratio-no effect; Quick Ratio-no effect Trading securities are both current assets and quick assets. if they are sold for their carrying value, then both total current assets and total quick assets remain constant since one type of current asset and quick asset is traded for another. Thus, both the current ratio and quick ratio would be unaffected by the sale of trading securities.

An auditor most likely would add an emphasis-of-matter paragraph when: A. Describing a justified change in accounting principle that has a material effect on the entity's financial statements. B. The financial statements of the prior period were audited by a predecessor auditor and the predecessor's audit report is not reissued. C. The auditor chooses to report on supplementary information presented with the financial statements in the auditor's report, rather than in a separate report. D. Restricting the use of the auditor's report.

A. Describing a justified change in accounting principle that has a material effect on the entity's financial statements. An auditor would add an emphasis-of-matter paragraph when describing a justified change in accounting principle that has a material effect on the entity's financial statements.

An audit partner is developing an office training program to familiarize his professional staff with statistical decision models applicable to the audit of dollar value balances. He wishes to demonstrate the relationship of sample sizes to population size and variability and the auditor's specifications as to tolerable misstatement and risk of incorrect acceptance. The partner prepared the following table to show comparative population characteristics and audit specifications of two populations. NEED CHART You are to indicate for the specified case from the above table the required sample size to be selected from population 1 relative to the sample from population 2. In case 1 the required sample size from population 1 is: a. Larger than the required sample size from population 2. b. Indeterminate relative to the required sample size from population 2. c. Equal to the required sample size from population 2. d. Smaller than the required sample size from population 2.

A. Larger than the required sample size form population 2. A lower risk of incorrect acceptance requires a greater sample size.

The most reliable for an auditor to use to test the existence of a client's inventory at an outside location would be to: A. Observe physical counts of the inventory items. B. Trace the total on the inventory listing to the general ledger inventory account. C. Obtain a confirmation from the client indicating inventory ownership. D. Analytically compare the current-year inventory balance to the prior-year balance.

A. Observe physical counts of the inventory items. The auditor's personal observation is generally one of the most reliable forms of evidence. Observing physical inventory counts provides reliable evidence that the inventory actually exists.

Which of the following procedures would an auditor most likely perform to test controls relating to management's assertion about the completeness of cash receipts for cash sales at a retail outlet? A. Observe the consistency of the employees' use of cash registers and tapes. B. Inquire about employees' access to recorded but undeposited cash. C. Trace the deposits in the cash receipts journal to the cash balance in the general ledger. D. Compare the cash balance int he general ledger with the bank confirmation request.

A. Observe the consistency of the employees' use of cash registers and tapes. Observing the consistent use of cash registers and tapes by employees would provide evidence to the auditor regarding the controls over the completeness of cash receipts.

The degree of an audit risk always present in an audit engagement is referred to as a combination on non sampling and sampling risk? Which of the following is an example of non sampling risk? A. The auditor selecting inappropriate auditing procedures B. The internal control being more effective than the auditor believes C. The auditor concluding the account balance is not materially misstated, but is, in fact, materially misstated D. The internal control not being as effective as the auditor believes

A. The auditor selecting inappropriate auditing procedures Nonsampling risk includes all aspects of audit risk that are not due to sampling. Examples of nonsampling risk include the auditor selecting inappropriate auditing procedures, using inappropriate audit evidence, and failure by the auditor to recognize misstatements in documents examined.

Which of the following is the primary objective of probability proportional to sample size? A. To identify overstatement errors. B. To increase the proportion of smaller-value items int he sample. C. To identify items where controls were not properly applied. D. To identify zero and negative balances.

A. To identify overstatement errors. PPS sampling is a method designed to estimate overstatement errors. Zero balances, negative balances, and understated balances require special design considerations.

When financial statements contain a departure from GAAP because, due to unusual circumstances, the statements would otherwise be misleading, the auditors should explain the unusual circumstances in a separate paragraph and express an opinion that is: A. Unmodified. B. Qualified. C. Adverse. D. Qualified or adverse, depending on pervasiveness

A. Unmodified. When circumstances indicate that a financial presentation in accordance with U.S. GAAP would be misleading, a departure from U.S. GAAP is permissible. in such cases, the auditor should issue an unmodified opinion because the financial statements are not materially misstated.

Which of the following statements is correct concerning the use of negative confirmation requests? A. Unreturned negative confirmation requests rarely provide significant explicit evidence. B. Negative confirmation requests are effective when detection risk is low. C. Unreturned negative confirmation requests indicate that alternative procedures are necessary. D. Negative confirmation requests are effective when understatements of account balances are suspected.

A. Unreturned negative confirmation requests rarely provide significant explicit evidence. Although returned negative confirmations may provide evidence about the financial statement assertions, unreturned negative confirmation requests do not provide explicit evidence that the intended third parties received the confirmation requests and verified that the information contained in them is correct.

An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support management's financial statement assertion of: A. Valuations and allocation. B. Rights and obligations. C. Existence. D. Understandability and classification.

A. Valuation and allocation. An audit objective for inventory valuation and allocation is to determine that slow-moving, excess, defective and obsolete items included in inventory are properly identified. Inquiries of production and sales personnel concerning possible excess or obsolete inventory items would support management's assertion of valuation and allocation.

During the audit of a nonissuer, the engagement team discovers that the accounts payable clerk was writing checks to fictitious vendors. Which paragraph in the professional standards establishes the requirement(s) the auditor should follow when considering whether to continue the engagement? Enter your response in the answer fields below. Guidance on correctly structuring your response appears above and below the answer fields.

Answer: QC 10.17 QC Section 10 -- A Firm's System of Quality Control Elements of a System of Quality Control .17 The firm must establish and maintain a system of quality control. The system of quality control should include policies and procedures addressing each of the following elements: a.Leadership responsibilities for quality within the firm (the tone at the top) b.Relevant ethical requirements c.Acceptance and continuance of client relationships and specific engagements d.Human resources e.Engagement performance f.Monitoring Policies and procedures established by the firm related to each element are designed to achieve reasonable assurance with respect to the purpose of that element. Deficiencies in policies and procedures for an element may result in not achieving reasonable assurance with respect to the purpose of that element; however, the system of quality control as a whole may still be effective in achieving the objective described in paragraph .12.

Which of the following sample planning factors will influence the sample size for a test of details of balances from a specific account? A. Expected-no Tolerable-No B. Expected-Yes Tolerable-Yes C. Expected-No Tolerable-Yes D. Expected-Yes Tolerable-No

B. Expected Amount of Misstatements - Yes Measure of Tolerable Misstatement - Yes When planning a particular sample for a substantive test of details, the auditor should consider how much monetary misstatement in the account for a substantive test of details, the auditor should consider how much monetary misstatement in the account might exist without causing the financial statements to be materially misstated (tolerable misstatement) as well as the expected size and frequency of misstatements.

How would increases in tolerable misstatement and assessed level of control risk affect the sample size in a substantive test of details? a. Increase in Tolerable Misstatement = Decrease sample size. Increase in Assessed Level of Control Risk = Decrease sample size b. Increase in Tolerable Misstatement = Decrease sample size. Increase in Assessed Level of Control Risk = Increase sample size c. Increase in Tolerable Misstatement = Increase sample size. Increase in Assessed Level of Control Risk = Decrease sample size d. Increase in Tolerable Misstatement = Increase sample size. Increase in Assessed Level of Control Risk = Increase sample size

B. Increase in Tolerable Misstatement = Decrease sample size. Increase in Assessed Level of Control Risk = Increase sample size An increase in tolerable misstatement results in a smaller sample size. An increase in the assessed level of control risk leads to an increase in sample size.

For Which of the following audit tests would an auditor most likely use attribute sampling? A. Selecting accounts receivable for confirmation of account balances B. Inspecting employee time cards for proper approval by supervisors C. Making an independent estimate of the amount of a LIFO inventory D. Examining invoices in support of the calculation of fixed asset additions

B. Inspecting employee time cards for proper approval by supervisors Attribute sampling is used to test controls. Inspecting employee time cards for proper approval by supervisors is a test of controls. Controls often relate to authorization, validity, completeness, accuracy, appropriate classification, accounting in conformity with GAAP, and proper period. Look for these terms in identifying which option is a test of controls. Words such as account balance, amount, valuation, presentation, and disclosure are more likely to relate to substantive tests.

Under which of the following circumstances would a disclaimer of opinion not be appropriate? A. The auditor is unable to determine the amounts associated with an employee fraud scheme. B. Management does not provide reasonable justification for a change in accounting principle. C. The client refuses to permit auditor to confirm certain accounts receivable or apply alternative procedures to verify their balances. D. The chief executive officer is unwilling to sign the management representation letter.

B. Management does not provide reasonable justification for a change in accounting principle. A disclaimer of opinion means that the auditor was unable to obtain sufficient appropriate audit evidence to provide a reasonable basis for an opinion, thus, no opinion is expressed. An unjustified change in accounting principle could result in a material misstatement of the financial statements that would result in a qualified or adverse opinion, not a disclaimer of opinion.

Which of the following would NOT be considered an analytical procedure? A. Estimating payroll expense by multiplying the number of employees by the average hourly wage rate and the total hours worked. B. Projecting an error rate by comparing the results of a statistical sample with the actual population characteristics. C. Computing accounts receivable turnover by dividing credit sales by the average net receivables. D. Developing the expected current-year sales based on the sales trend of the prior five years.

B. Projecting an error rate by comparing the results of a statistical sample with the actual population characteristics. Analytical procedures involve comparison of recorded amounts, or ratios developed from recorded amounts, to expectations developed by the auditor. Projecting an error rate form a statistical sample does not involve such comparison.

Tracing shipping documents to prenumbered sales invoices provides evidence that: A. No duplicate shipments or billings occurred. B. Shipments to customers were properly invoiced. C. All goods ordered by customers were shipped. D. All prenumbered sales invoices were accounted for.

B. Shipments to customers were properly invoiced. By tracing from the shipping documents to the invoices, the auditor confirms that goods that were shipped were properly billed.

Which of the following comparisons would an auditor most likely make in evaluating an entity's costs and expenses? A. The current year's accounts receivable with the prior year's accounts receivable. B. The current year's payroll expense with the prior year's payroll expense. C. The budgeted current year's sales with the prior year's sales. D. The budgeted current year's warranty expense with the current year's contingent liabilities.

B. The current year's payroll expense with the prior year's payroll expense. The most likely analytical procedure involving costs and expenses would be to compare the current year's payroll expense (average amount per employee) to the prior year, taking into consideration an average increase in wage rates. This is a very effective technique in auditing payroll expense.

An auditor uses an attribute sampling plan to determine whether large expenditures are being properly approved. The auditor is willing to accept a 2% risk of assessing control risk too low, and has a tolerable rate of 5%. A sample of 100 invoices is selected, and only one is found to be lacking appropriate approval. One invoice selected by the auditor cannot be located. Which statement is true? A. Since the sample deviation rate is less than the tolerable rate, the auditor should rely on this control B. There is not enough information given to determine whether the auditor should rely on this control. C. Since the auditor has a tolerable rate of 5%, he or she can be 95% certain that he or she will make a correct decision D. The invoice selected by the auditor that cannot be located is ignored in the calculation of the sample deviation rate

B. There is not enough information given to determine whether the auditor should rely on this control. The missing invoice should be counted as a deviation, resulting in a 2% sample deviation rate. However, this information alone is not sufficient to determine whether the control can be relied upon. The auditor would also need to know the upper deviation rate (or the allowance for sampling risk, which would allow the auditor to calculate the upper deviation rate). It is the upper deviation rate that needs to be compared to the tolerable rate in making decisions.

An auditor discovered that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that A. Obsolete inventory has not yet been reduced to fair market value. B. There was an improper cutoff of sales at the end of the year. C. An unusually large receivable was written off near the end of the year. D. The aging of accounts receivable was improperly performed in both years.

B. There was an improper cutoff of sales at the end of the year. A/R Turnover is calculated as sales (net)/average A/R (net). A decline in this ratio may indicate that there was an improper cutoff of sales at the end of the year. For example, if sales made at the beginning of the subsequent year were inadvertently recorded in the current year, both sales and receivables would be overstated by the same amount. This would generally result in a larger proportionate effect on receivables (since the receivables balance is smaller than sales for the year), and an overall decrease in the ratio.

In testing the existence assertion for an asset, an auditor ordinarily works from the: A. Financial statements to the potentially unrecorded items. B. Potentially unrecorded items to the financial statements. C. Accounting records to the supporting evidence. D. Supporting evidence to the accounting records.

C. Accounting records to the supporting evidence.

which of the following statement is a basic element of the auditor's report under u.s. auditing standards? A. The disclosures provide reasonable assurance that the financial statements are free of material misstatement B. The auditor evaluated the overall internal control C. An audit includes evaluating significant estimates made by management. D. The financial statements are consistent with those of the prior period

C. An audit includes evaluating significant estimates made by management. Under U.S. auditing standards, the auditor's report includes a statement that "An audit includes evaluating...significant estimates made by management..."

Analytical procedures used in the overall review stage of an audit generally include: A. Gathering evidence concerning account balances that have NOT changed from the prior year. B. Retesting control activities that appeared to be ineffective during the assessment of control risk. C. Considering unusual or unexpected account balances that were NOT previously identified. D. Performing tests of transaction to corroborate management's financial statement assertions.

C. Considering unusual or unexpected account balances that were NOT previously identified. The objective of analytical procedures used in the overall review state of the audit is to assist the auditor in assessing conclusions reached and in the evaluation of the overall financial statement presentation. Analytical procedures applied in the overall review stage are used to consider the adequacy of evidence gathered in response to unusual balances or relationships that were not previously identified.

Tests designed to detect purchases made before the end of the year that have been recorded int he subsequent year most likely would provide assurance about management's assertion regarding: A. Accuracy B. Obligations C. Cutoff D. Classification

C. Cutoff If purchases made before the end of the year have been recorded in the subsequent year, inventory will not be complete. The auditor uses cutoff tests to detect such situations and to determine that inventory quantities include all products, materials and supplies owned by the company. (Note that the cutoff assertion is closely related to the completeness and occurrence assertions

Which of the following phrases would an auditor of a nonissuer most likely include in the auditor's report when expressing a qualified opinion due to inadequate disclosure? A. Subject to the departure from GAAP, as described above. B. With the foregoing explanation of these omitted disclosures. C. Except for the omission of the information described in the basis for qualified opinion paragraph. D. Do no present fairly.

C. Except for the omission of the information described in the basis for qualified opinion paragraph. When inadequate disclosure has a material but no pervasive effect on the financial statements, the auditor's opinion should state "In our opinion, except for the omission of the information described in the basis of qualified opinion paragraph.."

The diagram below depicts an auditor's estimated maximum deviation rate compared with the tolerable rate, and also depicts the true population deviation rate compared with the tolerable rate. As a result of tests of controls, the auditor assesses control risk too low and thereby decreases substantive testing. This is illustrated by situation: a. III. b. I. c. II. d. IV.

C. II If, as a result of test of controls, the auditor assesses control risk higher than necessary, then the maximum deviation rate (auditor's estimate) exceeds the tolerable rate (putting us in row 2) and the deviation rate (true state of the population) is less than the tolerable rate (putting us in column 1). The intersection of column 1 and row 2 puts us in box II.

An advantage of statistical sampling over nonstatistical sampling is that statistical aampling helps an auditor to A. Eliminate the risk of nonsampling errors B. Reduce the level of audit risk and materiality to a relatively low amount C. Measure the sufficiency of the audit evidence obtained D. Minimize the failure to detect errors and fraud.

C. Measure the sufficiency of the audit evidence obtained Statistical sampling helps the auditor to measure the sufficiency of the audit evidence because the auditor can quantify the audit risk, thus assisting in limiting it to an acceptable level.

In statistical sampling methods used in substantive testing, an auditor most likely would stratify a population into meaningful groups if A. The standard deviation of the recorded amounts is relatively small. B. The auditor's estimated tolerable misstatement is extremely small. C. The population has highly variable recorded amounts. D. Probability-proportional-to-size (PPS) sampling is used.

C. The population has highly variable recorded amounts. Stratification enables the auditor to emphasize certain population items and deemphasize others. Stratified sampling is used to minimize the effect on sample size of the variation within the population.

If an auditor of a non issuer discovers an unexpectedly high number of deviations during procedures performed on a sample to test management's review and approval of time sheets, then the auditor would most likely appropriately: A. Increase the tolerable rate of deviation B. Extrapolate the impact of the exceptions on other key controls requiring management review C. Propose an audit adjustment D. Increase the assessed risks of material misstatement

D. Increase the assessed risks of material misstatement If an auditor of a nonissuer discovers an unexpectedly high number of deviations during procedures performed on a sample to test management's review and approval of time sheets (control), then the auditor would most appropriately increase the assessed risks of material misstatement. Specifically, the auditor would increase control risk to reflect that the controls are not operating effectively.

which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of the subsequent events? A. Confirming a sample of material accounts receivable established after year-end. B. Comparing the financial statements being reported on with those of the prior period. C. Investigating personnel changes in the accounting department occurring after year-end. D. Inquiring as to whether any unusual adjustments were made after year-end

D. Inquiring as to whether any unusual adjustments were made after year-end An auditor would most likely inquire as to whether any unusual adjustments were made after year-end that would require adjustments to and/or disclosure in the year-end financial statements

Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events? A. Determine that changes in employee pay rates after year-end were properly authorized. B. Recompute depreciation charges for plant assets sold after year-end. C. Inquire about payroll checks that were recorded before year-end but cashed after year-end. D. Investigate changes in long-term debt occurring after year-end.

D. Investigate changes in long-term debt occurring after year-end. Long-term debt that matures within one year is reported as a current liability on the balance sheet. An auditor reviews changes in long-term debt occurring after year-end to evaluate whether such debt is appropriately classified on the balance sheet.

An auditor includes a separate paragraph in an otherwise unmodified report to emphasize that the entity being reported on had significant transactions with related parties. The inclusion of this separate paragraph: A. Is considered an "except for" qualification of the opinion. B. Violates generally accepted auditing standards if this information is already disclosed in footnotes to the financial statements. C. Necessitates a revision of the opinion paragraph to include the prase "with the foregoing explanation" D. Is appropriate and would not negate the unmodified opinion.

D. Is appropriate and would not negate the unmodified opinion. This is an emphasis-of-matter paragraph and should be added to an otherwise unmodified opinion in this case.

An auditor ordinarily sends a standard confirmation request to all banks with which the client has done business during the year under audit, regardless of the year-end balance. A purpose of this procedure is to: A. Provide the data necessary to prepare a proof of cash. B. Request a cutoff bank statement and related checks be sent to the auditor. C. Detect kiting activities that may otherwise not be discovered. D. Seek information about contingent liabilities and security agreements.

D. Seek information about contingent liabilities and security agreements. The standard confirmation request seeks information on contingent liabilities and security agreements in addition to information related to deposit account balances.

An audit partner is developing an office training program to familiarize his professional staff with statistical decision models applicable to the audit of dollar value balances. He wishes to demonstrate the relationship of sample sizes to population size and variability and the auditor's specifications as to tolerable misstatement and risk of incorrect acceptance. The partner prepared the following table to show comparative population characteristics and audit specifications of two populations. NEED CHART You are to indicate for the specified case from the above table the required sample size to be selected from population 1 relative to the sample from population 2. In case 2 the required sample size from population 1 is: a. Larger than the required sample size from population 2. b. Indeterminate relative to the required sample size from population 2. c. Equal to the required sample size from population 2. d. Smaller than the required sample size from population 2.

D. Smaller than the required sample size from population 2. The effect on sample size cannot be determined, because there is more than one change occurring. in this case, the increase in population variability results in an increase in sample size, whereas the larger tolerable misstatement results in a decrease in sample size. The overall effect on sample size will depend on which of the two effects is greater, but this cannot be determined from the information provided.

Which of the following factors is (are) considered in determining the sample size for a test of controls? a) expected deviation rate and tolerable deviation rate b) neither expected deviation rate or tolerable deviation rate c) tolerable deviation rate d) expected deviation rate

a) expected deviation rate and tolerable deviation rate To determine the number of items to be selected for a particular sample for a test of controls, the auditor should consider the tolerable rate of deviation from the controls being tested, the likely rate of deviations (expected deviation rate), and the allowable risk of assessing control risk too low.

In analyzing a company's financial statements, which financial statement would a potential investor primarily use to assess the company's liquidity and financial flexibility? a. Balance sheet. b. Income statement. c. Statement of retained earnings. d. Statement of cash flows.

a. Balance sheet. Liquidity ratios focus on balance sheet account balances

To provide assurance that each voucher is submitted and paid only once, an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is: a. Supported by a vendor's invoice. b. Stamped "paid" by the check signer. c. Prenumbered and accounted for. d. Approved for authorized purchases.

b. Stamped "paid" by the check signer. By stamping the voucher "paid", the check signer cancels the voucher so it cannot be resubmitted for payment.