QUIZ QUESTIONS EXAM #2

The term "substantive" comes from _______. -"insubstantial," which means auditors gather evidence to support only insubstantial transactions, account balances, and disclosures provided by management in the financial statements -"substantiate," which means auditors gather evidence to verify the transactions, account balances, and disclosures provided by management in the financial statements -the fact that the audit report is designed to assist stockholders with substantial stock holdings in the client -"insubstantial," which means auditors gather evidence to support the transactions, account balances, and disclosures provided by management in the financial statements

"substantiate," which means auditors gather evidence to verify the transactions, account balances, and disclosures provided by management in the financial statements

The types of substantive procedures discussed in this chapter include _______. Analytical procedures Substantive tests to follow-up on notable items identified when performing audit data analytics Tests of details of transactions and balances including audit data analytics (ADA) used as a substantive test All of these answer choices are correct.

-Analytical procedures -Substantive tests to follow-up on notable items identified when performing audit data analytics -Tests of details of transactions and balances including audit data analytics (ADA) used as a substantive test

Which of the following are causes of misstatements? (Select all that apply.) Inaccurate substantive procedure used Inappropriate selection of accounting policies Incorrect accounting estimate caused by a misinterpretation of facts Omission of an amount or disclosure

-Inappropriate selection of accounting policies -Incorrect accounting estimate caused by a misinterpretation of facts -Omission of an amount or disclosure

Which of the following initial procedures do auditors perform before applying substantive procedures when auditing an account balance? (Select all that apply.) Obtain a trial balance or other detailed report for the account. Trace the beginning balance of the prepaid insurance account to the auditor's working papers from the prior year's audit. Check if appropriate and understandable terminology is used, as prescribed by the applicable financial reporting framework. Scan the transactions in the account for unusual items.

-Obtain a trial balance or other detailed report for the account. -Trace the beginning balance of the prepaid insurance account to the auditor's working papers from the prior year's audit. -Scan the transactions in the account for unusual items.

Which of the following are indicators of possible management bias? (Select all that apply.) Selecting an estimate that indicates a pattern of optimism or pessimism. Changes in the method of making the accounting estimate that are based on subjective assumptions. Selecting or developing significant assumptions that yield an estimate more favorable for management's objectives. Inspecting the outcome of prior period accounting estimates.

-Selecting an estimate that indicates a pattern of optimism or pessimism. -Changes in the method of making the accounting estimate that are based on subjective assumptions. -Selecting or developing significant assumptions that yield an estimate more favorable for management's objectives.

An example of possible management bias would be _______. -changes in the method of making the accounting estimate that are based on subjective assumptions -using management's own assumptions for fair value estimates when they are inconsistent with readily observable market assumptions -selecting or developing significant assumptions that yield an estimate more favorable for management's objectives -All of these answer choices are correct.

-changes in the method of making the accounting estimate that are based on subjective assumptions -using management's own assumptions for fair value estimates when they are inconsistent with readily observable market assumptions -selecting or developing significant assumptions that yield an estimate more favorable for management's objectives

For clients with multiple locations, the auditors_______. -could not vary which locations are tested each year, but instead vary the type of audit procedures that are performed at the different locations -could vary which locations are tested each year and not change the type of audit procedures that are performed at the different locations -should always hire another auditor to check other locations, and not attempt to do this themselves -could vary which locations are tested each year and the type of audit procedures that are performed at the different locations

-could vary which locations are tested each year and the type of audit procedures that are performed at the different locations

If the control environment is assessed to be weak, _______. -the auditors should plan to increase their reliance on the internal audit function -the auditors should immediately consider withdrawal from the engagement -the auditors should address this by changing the audit plan to include more audit procedures and expanding the scope of the audit to include more of the client's locations -the auditors should plan to increase their reliance on the evidence generated by the system

-the auditors should address this by changing the audit plan to include more audit procedures and expanding the scope of the audit to include more of the client's locations

The amount of estimation uncertainty is affected by _______. ~the nature of the accounting estimate ~the subjectivity of the assumptions used to make the estimate ~the extent to which a generally accepted method or model is available to aid in developing the estimate ~All of these answer choices are correct.

-the nature of the accounting estimate -the subjectivity of the assumptions used to make the estimate -the extent to which a generally accepted method or model is available to aid in developing the estimate

Which of the following would require the auditor to increase the level of control testing for a particular control? A high degree of reliance is to be placed on the control to limit the amount of substantive testing required. There are several controls relating to a particular audit objective. The control is performed monthly instead of daily. The WCGW addressed by the control is not very important.

A high degree of reliance is to be placed on the control to limit the amount of substantive testing required.

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

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

What is a sampling unit? The class of transactions to be tested A subset of population A class that is overstated The reciprocal population

A subset of population

In an audit of a nonissuer's financial statements, projected misstatement is: ~The likely amount of misstatement in the subsequent period's financial statements if a control is not properly implemented. ~An auditor's best estimate of misstatements in a population extrapolated from misstatements identified in an audit sample. ~The only amount that the auditor considers in evaluating materiality and fairness of the financial statements. ~An auditor's best estimate, before performing audit procedures, of misstatements that the auditor expects to find during the audit.

An auditor's best estimate of misstatements in a population extrapolated from misstatements identified in an audit sample.

Holding all other factors constant, which of the following factors results in an increase in sample size for substantive tests? -An increase in the amount of tolerable misstatement. -A decrease in the amount of expected misstatement in the population to be tested. -An increase in the desired level of assurance that the tolerable misstatement is not exceeded by the actual amount of misstatement in the population. -Stratifying the population when appropriate.

An increase in the desired level of assurance that the tolerable misstatement is not exceeded by the actual amount of misstatement in the population.

If an auditor of an issuer examines purchase orders obtained from the issuer to verify proper authorization of transactions, then the auditor is conducting: An observation. A reperformance. A confirmation. An inspection.

An inspection.

Which of the following refers to a sampling technique used to reach a conclusion about a population in terms of a rate (frequency) of occurrence? Tests of control Control exception Benchmarking Attribute sampling

Attribute sampling

Which of the following procedures would provide the most reliable audit evidence? -Audit evidence provided by original documents is more reliable than audit evidence generated through a system of effective controls. -Audit evidence obtained from indirect sources rather than directly is more reliable than evidence obtained directly by the auditor. -Audit evidence obtained from knowledgeable independent sources outside the client company is more reliable than audit evidence obtained from nonindependent sources. -Audit evidence provided by copies is more reliable than that provided by facsimiles.

Audit evidence obtained from knowledgeable independent sources outside the client company is more reliable than audit evidence obtained from nonindependent sources.

Which of the following would not be a reason to increase the extent of a substantive test? Auditors have time to test more items. Internal controls are weak. Qualitative factors suggest there may be errors in the account. The risk of material misstatement is high.

Auditors have time to test more items.

Which of the following represent a common categorization of control activities? -Authorization controls, performance reviews, information-processing controls, physical controls, and segregation of duties. -Authorization controls, control over human error, information-processing controls, physical controls, and segregation of duties. -Authorization controls, control over human error, information-processing controls, and segregation of duties. -Authorization controls, information-processing controls, physical controls, and segregation of duties.

Authorization controls, performance reviews, information-processing controls, physical controls, and segregation of duties.

In a good system of segregation of duties, which of the following duties should be segregated? -Authorization of transactions, physical access to assets, and recording transactions. -Physical access to assets, recording of transactions, and consideration. -Authorization of transactions, physical access to assets, and management. -Authorization of transactions, recording transactions, and management.

Authorization of transactions, physical access to assets, and recording transactions.

After obtaining an understanding of an entity's internal control structure, an auditor may assess control risk at the maximum level for some assertions because the auditor: Believes the internal control policies and procedures are unlikely to be effective. Identifies internal control policies and procedures that are likely to prevent material misstatements. Performs tests of controls to restrict detection risk to an acceptable level. Determines that the pertinent internal control structure elements are not well documented.

Believes the internal control policies and procedures are unlikely to be effective.

Assume that a company has a control deficiency regarding the processing of cash receipts. Reconciliation of cash accounts by a competent individual otherwise independent of the cash function might make the likelihood of a significant misstatement due to the control deficiency remote. In this situation, reconciliation may be referred to as what type of control? Adjustive. Preventive. Compensating. Nonroutine.

Compensating.

During the audit the independent auditor identified the existence of a weakness in the client's internal control and communicated this finding in writing to the client's senior management and those charged with governance. The auditor should: Withdraw from the engagement. Suspend all audit activities pending directions from the client's audit committee. Consider the weakness a scope limitation and therefore disclaim an opinion. Consider the effects of the condition on the audit.

Consider the effects of the condition on the audit.

Before applying principal substantive tests to the details of accounts at an interim date prior to the balance sheet date, an auditor should: -Obtain written representations from management that all financial records and related data will be made available. -Assess control risk at below the maximum for the assertions embodied in the accounts selected for interim testing. -Determine that the accounts selected for interim testing are not material to the financial statements taken as a whole. -Consider whether the amounts of the year-end balances selected for interim testing are reasonably predictable.

Consider whether the amounts of the year-end balances selected for interim testing are reasonably predictable.

Which of the following are the conditions when limited tests of details of transactions occurring between the interim period and the year-end are necessary? (Select all that apply.) Controls have been tested. Major changes are required in internal controls. No significant changes in the control environment have occurred. The entity's control environment has been assessed as effective.

Controls have been tested. No significant changes in the control environment have occurred. The entity's control environment has been assessed as effective.

Which assertion is typically related to income statement accounts rather than balance sheet accounts or presentation and disclosure? Cutoff. Accuracy. Rights and obligations. Completeness.

Cutoff

How would increases in tolerable misstatement and assessed level of control risk affect the sample size in a substantive test of details? Increase in tolerable misstatement: Increase in assessed level of control risk:

Decrease sample size increase sample size

In obtaining an understanding of an entity's internal control relevant to audit planning, an auditor is required to obtain knowledge about the: Design of the controls pertaining to internal control components. Effectiveness of controls that have been implemented. Consistency with which controls are currently being applied. Controls related to each principal transaction class and account balance.

Design of the controls pertaining to internal control components.

Which of the following situations increases the reliability of data being used for substantive analytical procedures? Broad industry averages will be used in comparison with the client's data. During the prior-year audit, the data was subjected to audit testing. The source of the data is the client's internal budget reports. Controls over the data have not been tested.

During the prior-year audit, the data was subjected to audit testing.

Which of the following factors would most likely cause an auditor to use audit sampling versus audit data analytics? -Relevant data are clean or can be cleaned up easily. -Relevant data are reliable and internal controls over the reliability of data are strong. -Evidence to support the audit test is not available in electronic form. -The audit population is large, and the auditor's tests are supported by reliable and relevant data in electronic form, making ADA efficient.

Evidence to support the audit test is not available in electronic form.

The more judgment that is involved in conducting the substantive procedures and evaluating the results, the less documentation is needed. True False

False

When evidence is collected at an interim date, substantive tests are more effective. True False

False

Assessing control risk at below the maximum level most likely would involve: -Reducing inherent risk for most of the assertions relevant to significant account balances. -Changing the timing of substantive tests by omitting interim-date testing and performing the tests at year end. -Identifying specific internal control structure policies and procedures relevant to specific assertions. -Performing more extensive substantive tests with larger sample sizes than originally planned.

Identifying specific internal control structure policies and procedures relevant to specific assertions.

Which three of the following are included in common inherent limitation in internal control? (Select all that apply.) Ineffective understanding of the purpose of a control Collusion by two or more individuals to circumvent a control A control within a software that cannot be overridden or disabled Human error that results in a breakdown in internal control

Ineffective understanding of the purpose of a control Collusion by two or more individuals to circumvent a control Human error that results in a breakdown in internal control

Which of the following can be used as both a risk assessment procedure and a substantive procedure for the audit of accounting estimates? -Inquire of management about the methods and assumptions used in developing the estimate. -Inspect documentation for proper approval of the accounting estimate. -Gain an understanding of what is required by the applicable financial reporting framework. -Inspect events happening after year-end and up to the date of the auditor's report.

Inquire of management about the methods and assumptions used in developing the estimate.

An auditor is going to test the client's controls over bank reconciliations. The auditor will perform which of the following audit procedures for this test of controls? Inquiry of the person performing the bank reconciliation. Inquiry of the person performing the bank reconciliation and reperformance of the bank reconciliation procedure. Software-based audit techniques using test data. Reperformance of the bank reconciliation procedure.

Inquiry of the person performing the bank reconciliation and reperformance of the bank reconciliation procedure.

Which of the following procedures would provide the most reliable audit evidence? Analytical procedures performed by the auditor on the entity's trial balance. Inspection of prenumbered client purchase orders filed in the vouchers payable department. Inquiries of the client's internal audit staff held in private. Inspection of bank statements obtained directly from the client's financial institution.

Inspection of bank statements obtained directly from the client's financial institution.

What does COSO define as a process effected by an entity's board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of the objectives related to operations, reporting and compliance? Risk assessment Internal control Compliance Reporting

Internal control

Which of the following situations would most likely preclude an auditor from performing substantive procedures during an interim period? Internal controls are strong and the risk of material misstatement is low. Internal controls are strong and the risk of material misstatement is high. Internal controls are weak and the risk of material misstatement is low. Internal controls are weak and the risk of material misstatement is high.

Internal controls are WEAK and the risk of material misstatement is HIGH.

Which of the following best describes the distinguishing feature of statistical sampling? -It allows the auditor to have the same degree of sampling risk as with nonstatistical sampling but with substantially less work. -It provides for measuring mathematically the degree of uncertainty that results from examining only a part of the data. -It provides for measuring the actual misstatements in financial statements in terms of sampling risk and allowance for sampling risk. -It allows the auditor to substitute sampling techniques for audit judgment.

It provides for measuring mathematically the degree of uncertainty that results from examining only a part of the data.

A primary objective of procedures performed to obtain an understanding of internal control is to provide an auditor with: Knowledge necessary to assess the risk of misstatement. Information necessary to prepare flowcharts. Audit evidence to use in reducing detection risk. A basis from which to modify tests of controls.

Knowledge necessary to assess the risk of misstatement.

Which of the following actions should the auditor take in response to discovering a deviation from the prescribed control procedure? Report the matter to the next higher level of authority within the entity. Assume that the deviation is an isolated occurrence without audit significance. Increase sample size of tests of controls. Make inquiries to understand the potential consequence of the deviation.

Make inquiries to understand the potential consequence of the deviation.

Management's attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment when: Management is dominated by one individual who is also a shareholder. Internal auditors have direct access to the board of directors and entity management. The audit committee is active in overseeing the entity's financial reporting policies. External policies established by parties outside the entity affect its accounting practices.

Management is dominated by one individual who is also a shareholder.

Which of the following refers to a deficiency where there is more than a remote possibility that a material misstatement could occur in the financial statements due to a breakdown in the system of internal control? Control deficiency Insignificant deficiency Material weakness Significant deficiency

Material weakness

When performing a test of a control with respect to control over cash receipts, an auditor may use a systematic sampling technique with a start at any randomly selected item. The biggest disadvantage of this type of sampling is that the items in the population: ~May systematically occur more than once in the sample. ~Must be recorded in a systematic pattern before the sample can be drawn. ~Must be systematically replaced in the population after sampling. ~May occur in a systematic pattern, thus destroying the sample randomness.

May occur in a systematic pattern, thus destroying the sample randomness.

Which of the following audit techniques most likely would provide an auditor with the most assurance about the effectiveness of the operation of an internal control procedure? Confirmation with outside parties. Inquiry of client personnel. Observation of client personnel. Recomputation of account balance amounts.

Observation of client personnel.

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? -Compare the cash balance in the general ledger with the bank confirmation request. -Inquire about employees' access to recorded but undeposited cash. -Observe the consistency of the employees' use of cash registers and tapes. -Trace the deposits in the cash receipts journal to the cash balance in the general ledger.

Observe the consistency of the employees' use of cash registers and tapes.

Which of the following is NOT a part of tests of control? Inspection of physical evidence Performance Inquiry Observation

Performance

Immediately upon receipt of cash, a responsible employee should: Prepare a remittance listing. Update the subsidiary accounts receivable records. Prepare a deposit slip in triplicate. Record the amount in the cash receipts journal.

Prepare a remittance listing.

Which of the following tends to be most predictable for purposes of analytical procedures applied as substantive tests? Relationships involving balance sheet accounts Transactions subject to management discretion Data subject to audit testing in the prior year Relationships involving income statement accounts

Relationships involving income statement accounts

A letter issued regarding significant deficiencies relating to an entity's internal control observed during an audit of financial statements should include a: Paragraph describing management's evaluation of the effectiveness of the control structure. Statement of compliance with applicable laws and regulations. Description of tests performed to search for material weaknesses. Restriction on the distribution of the report.

Restriction on the distribution of the report.

The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the: -Operating effectiveness of internal control policies and procedures. -Risk that material misstatements exist in the financial statements. -Possibility that the nature and extent of substantive tests may be reduced. -Factors that raise doubts about the auditability of the financial statements.

Risk that material misstatements exist in the financial statements.

Which three of the following key issues are considered when planning an audit data analytics (ADA) application? (Select all that apply.) -Selection of financial statement items, accounts or disclosures, and related assertions to be audited -Selection of the audit population being analyzed or tested using audit data analytics -The overall purpose of the audit data analytics application and how it will contribute to the balance of the audit -A comparison of the results of ADA with those of other audit analysis methods

Selection of financial statement items, accounts or disclosures, and related assertions to be audited Selection of the audit population being analyzed or tested using audit data analytics The overall purpose of the audit data analytics application and how it will contribute to the balance of the audit

When an auditor identifies internal control deficiencies, what levels of internal control deficiencies must be reported to those charged with governance of the entity? Significant deficiencies only. Deficiencies and significant deficiencies in internal control. Material weaknesses only. Significant deficiencies and material weaknesses in internal control.

Significant deficiencies and material weaknesses in internal control.

In the context of the impact of risk of material misstatement (RMM) on the level of substantive testing, which of the following statements are true in the case of small sample sizes? (Select all that apply.) Substantive tests are less effective. The acceptable level of detection risk is high. The combined assessed level of inherent risk and control risk is low. Evidence is collected at year-end.

Substantive tests are less effective. The acceptable level of detection risk is high. The combined assessed level of inherent risk and control risk is low. -evidence is collected @ interim/throughout

A senior auditor conducted a dual-purpose test on a client's invoice to determine whether the invoice was approved and to ascertain the amount and other terms of the invoice. Which of the following lists two tests that the auditor performed? Substantive procedures and analytical procedures Tests of details and substantive procedures Tests of controls and tests of details Substantive analytical procedures and tests of controls

Tests of controls and tests of details

An auditor may decide to increase the risk of incorrect rejection when: Many differences (audit value minus recorded value) are expected. The cost and effort of selecting additional sample items are low. Increased reliability from the sample is desired. Initial sample results do not support the planned level of control risk.

The cost and effort of selecting additional sample items are low.

When considering the internal control structure, an auditor should be aware of the concept of reasonable assurance, which recognizes that: -Internal control policies and procedures may be ineffective due to mistakes in judgment and personal carelessness. -Adequate safeguards over access to assets and records should permit an entity to maintain proper accountability. -The cost of an entity's internal control structure should not exceed the benefits expected to be derived. -Establishing and maintaining the internal control structure is an important responsibility of management.

The cost of an entity's internal control structure should not exceed the benefits expected to be derived.

Which of the following is an example of data that needs to be cleaned before it can be analyzed? The data comes from a system with poor internal controls. The data has information from customers in data files from two different divisions. The data has dates in two different formats (MM/DD/YY and DD/MM/YY). The data contains misstatements.

The data has dates in two different formats (MM/DD/YY and DD/MM/YY).

Which of the following factors is most likely to affect the extent of the documentation of the auditor's understanding of a client's system of internal controls? -The degree to which the auditor intends to use internal audit personnel to perform substantive tests. -The relationship between management, the board of directors, and external stakeholders. -The degree to which information technology is used in the accounting function. -The industry and the business and regulatory environments in which the client operates.

The degree to which information technology is used in the accounting function.

When planning a classical variables sample, the risk of incorrect acceptance and the risk of incorrect rejection are related to what GENERAL factor that influences sample size? The desired level of assurance from the sample. Expected misstatement. Tolerable misstatement. The use of stratification when sampling.

The desired level of assurance from the sample.

Which two of the following principles are within the monitoring component of the seventeen COSO principles of internal control? (Select all that apply.) -The organization selects, develops, and performs ongoing and/or separate evaluations to ascertain whether the components of internal control are present and functioning. -The organization communicates with external parties regarding matters affecting the functioning of internal control. -The organization internally communicates information, including objectives and responsibilities for internal control, necessary to support the functioning of internal control. -The organization evaluates and communicates internal control deficiencies in a timely manner to those parties responsible for taking corrective action, including senior management and the board of directors, as appropriate.

The organization selects, develops, and performs ongoing and/or separate evaluations to ascertain whether the components of internal control are present and functioning. The organization evaluates and communicates internal control deficiencies in a timely manner to those parties responsible for taking corrective action, including senior management and the board of directors, as appropriate.

An auditor of a nonissuer should design tests of details to ensure that sufficient audit evidence supports which of the following? Management's assertions that internal controls exist and are operating efficiently. The effectiveness of internal controls. The planned level of assurance at the relevant assertion level. The planned level of control risk.

The planned level of assurance at the relevant assertion level.

Which of the following is an important consideration when deciding the nature of tests to use in a financial statement audit? The use of tests of controls should be considered without regard to the level of assurance required. The procedures to be applied on a particular engagement are a matter of the auditor's professional judgment. Tests of details typically provide a low level of assurance. Analytical procedures are an inefficient means of obtaining assurance.

The procedures to be applied on a particular engagement are a matter of the auditor's professional judgment.

Which of the following represents an example of an IT application control? -The accounts receivable manager reviews credit balances in accounts receivable quarterly to determine their causes. -All changes to software applications must be reviewed and approved by the department affected by the application. -The assistant controller performs a monthly bank reconciliation and follow-up of unexpected outstanding items. -The software application compares all sales invoices with underlying shipping information on the bills of lading and packing slips with sales invoices. If differences are revealed, a report is generated for review and follow-up by the billing supervisor.

The software application compares all sales invoices with underlying shipping information on the bills of lading and packing slips with sales invoices. If differences are revealed, a report is generated for review and follow-up by the billing supervisor.

Which of the following is a good example of an IT application control over the occurrence of revenue transactions? -The software application compares information on a sales invoice with information from the bill of lading to ensure that sales invoices are only prepared for actual shipments. Any exceptions are not processed and are set aside for manual follow-up. -Strong segregation of duties exists between IT operations and IT program development. -Physical access to IT systems is limited only to specific personnel who work in the revenue cycle. -The software changes to the revenue program must be tested and authorized before they may be used with live da

The software application compares information on a sales invoice with information from the bill of lading to ensure that sales invoices are only prepared for actual shipments. Any exceptions are not processed and are set aside for manual follow-up.

Determining fair value of a transaction or financial statement item for inclusion in the financial statements is a type of accounting estimate. True False

True

If the assessed risk of material misstatement for an assertion is high, auditors need to gather more persuasive audit evidence. True False

True

When the entity's control environment has been assessed as effective, limited roll-forward procedures such as substantive analytical procedures are necessary. True False

True

Which of the following sample planning factors would influence the sample size for a substantive test of details for a specific account? Expected amount of misstatements: Measure of tolerable misstatement:

YES YES

When performing tests of controls, the auditor is making _______. certain that he or she will ultimately be in a position to render absolute assurance on the financial statements and internal control a "yes or no" decision with respect to effectiveness multiple decisions sure that all controls are working perfectly, with no errors, material or immaterial

a "yes or no" decision with respect to effectiveness

Internal control is defined as: -a process, implemented by management, to ensure the integrity of the entity's management information system. -a process, effected by an entity's board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of the objectives related to operations, reporting, and compliance. -the entity's system to prevent, or detect and correct, misstatements in the financial statements. -the entity's system to ensure that management and those charged with governance of the entity have quality information for decision making.

a process, effected by an entity's board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of the objectives related to operations, reporting, and compliance.

An audit strategy can take _______. -a reliance on procedures approach, a substantive approach, or a combination of both -an approach whereby only internal control is audited -neither a reliance on controls approach, nor a substantive approach -a reliance on controls approach, a substantive approach, or a combination of both

a reliance on CONTROLS approach, a substantive approach, or a combination of both

Financial statements include _______. ~a variety of items that can be measured precisely and must be estimated by client management ~a variety of items that cannot be measured precisely and must be estimated by client management ~a variety of items that cannot be measured precisely and must be estimated by the internal auditors ~a variety of items that can be measured precisely and should not be estimated by client management

a variety of items that cannot be measured precisely and must be estimated by client MANAGEMENT

AU-C 540 Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures states the objective of the auditor is to obtain sufficient appropriate evidence that _______. ~accounting estimates are reasonable, but disclosures are not adequate ~accounting estimates are reasonable, and disclosures are adequate ~disclosures are adequate ~the accounting estimates are reasonable

accounting estimates are reasonable, and disclosures are adequate

Probability Proportionate to Size (PPS) sampling is _______. -an approach that uses non-statistical sampling theory to express a conclusion in dollar amounts -rarely used in auditing, due to its prohibitive cost -an approach that uses attribute sampling theory to express a conclusion in dollar amounts -required to be used in the auditing of publicly traded companies

an approach that uses ATTRIBUTE sampling theory to express a conclusion in dollar amounts

An accounting estimate is _______. -an exact monetary amount when a precise means of measurement is available -a figure that should be left to the external auditor to determine at the end of the year -prohibited by GAAP and should be questioned by the auditor -an approximation of a monetary amount when a precise means of measurement is not available

an approximation of a monetary amount when a precise means of measurement is not available

Audit sampling is when _______. ~an auditor selects less than 100% of a population ~a client requests a sample of accounts be audited ~an auditor selects the total population ~the auditor selects certain accounts to audit from the client's chart of accounts

an auditor selects less than 100% of a population

Analytical procedures _______. -are evaluations of financial information through analysis of plausible relationships among both financial and non-financial data -are evaluations of financial information through analysis of plausible relationships using financial data only -are optional, and generally unnecessary if the system of internal control is strong -are evaluations of financial information through analysis of plausible relationships using non-financial data only

are evaluations of financial information through analysis of plausible relationships among both financial and non-financial data

Advances in the technological landscape _______. have had no bearing on inherent risk whatsoever are providing opportunities to increase the cost of an audit are providing opportunities to rethink how an audit is performed have rarely affected the profession auditing and how an audit is conducted

are providing opportunities to RETHINK how an audit is performed

Analytical procedures: -can be used as substantive tests but cannot be used as primary tests of a balance. -are used to test controls and are not substantive procedures. -are required during the planning and substantive testing phases of the audit. -are substantive procedures and cannot be used at any other stage of the audit.

are required during the planning and substantive testing phases of the audit.

Audit data analytics can be used _______. as a risk assessment tool. as a test of controls. as a test of details. All these answer choices are correct.

as a risk assessment tool. as a test of controls. as a test of details.

Audit data analytics can be used _______. at virtually any phase of the audit by the internal audit function only only at the beginning of the audit only at the end of the audit

at virtually any phase of the audit

It is important for an auditor to understand a public company's system of internal control in order to: audit internal control over financial reporting. make a preliminary assessment of control risk. develop an audit strategy. All of these answer choices are correct.

audit internal control over financial reporting. make a preliminary assessment of control risk. develop an audit strategy.

Audit data analytics should _______. be customized to the individual client and industry should be the same for both client and the industry in which they operate should be the same for each client, but differ among industries be tailored to the individual client but consistent across an industry

be customized to the individual client and industry

An audit testing strategy that can be used to allow evidence obtained in prior audit periods to support a conclusion about IT application controls in the current audit period is known as _______. statistical benchmarking benchmarking prior period inference nonstatistical sampling

benchmarking

The auditor begins selecting controls to test by _______. -checking the same controls as the prior year -asking management which controls they would prefer the auditor to test -by understanding the entity and all other industries and determining the risk of material fraud or error at the financial statement level -by understanding the entity and the business and determining the risk of material fraud or error at the financial statement level

by understanding the ENTITY and the BUSINESS and determining the risk of material fraud or error at the financial statement level

Documenting internal controls: -can be handled with a combination of narratives and flowcharts or logic diagrams. -is always handled through the use of checklists and preformatted questionnaires. -is done after internal controls are tested so that the results can be included in the documentation. -is not done for smaller clients because of the risk of management override.

can be handled with a combination of narratives and flowcharts or logic diagrams.

One of the steps in the five step AICPA process to follow when planning, performing, and evaluating results from audit data analytics (ADA) is _______. prepare a suitable population and representative sample pass the results to management for analysis and evaluation consider the relevance and reliability of the data used consideration of internal control

consider the relevance and reliability of the data used

A management letter: -is only required for public company audits. -contains recommendations for improving significant deficiencies and material weaknesses in internal control discovered during the course of the audit. -lists only the material weaknesses discovered during the audit. -is written by management to the auditor at the start of the audit.

contains recommendations for improving significant deficiencies and material weaknesses in internal control discovered during the course of the audit.

An auditor is most likely to use audit data analytics (ADA) when _______. data is available that is relevant to an audit assertion of interest, whether as a risk assessment procedure or a substantive test. the available data is reliable and comes from a strong system of internal controls. the available data is relatively clean and does not require significant work to make it usable. All of these answer choices are correct.

data is available that is relevant to an audit assertion of interest, whether as a risk assessment procedure or a substantive test. the available data is reliable and comes from a strong system of internal controls. the available data is relatively clean and does not require significant work to make it usable.

The software application compares all sales invoices with underlying shipping information on the bills of lading and packing slips with sales invoices. If differences are revealed, a report is generated for review and follow-up by the billing supervisor. This is an example of a(n): IT general control. detective control. IT-dependent manual control. preventive control.

detective control.

At the outset of substantive testing, the auditor needs to _______. ~determine the population being tested ~the assertion or assertions being tested ~if the auditor is trying to estimate the total dollar value of the population, or the total amount of misstatement that might exist in the population All of these answer choices are correct.

determine the population being tested the assertion or assertions being tested if the auditor is trying to estimate the total dollar value of the population, or the total amount of misstatement that might exist in the population

A key aspect of preparing the data for ADA is: determining if the data is complete. determining the validity of data obtained from an external source. determining the source of the data. evaluating the reliability of internally generated evidence.

determining if the data is complete.

The choice of statistical or non-statistical sampling _______. -is best determined by management, who know the company best -does not affect the selection of procedures, or the competence of evidence obtained about individual sample items -does not affect the selection of procedures, or the competence of evidence obtained about individual population items -affects the selection of procedures, or the competence of evidence obtained about individual sample items

does not affect the selection of procedures, or the competence of evidence obtained about individual SAMPLE items

When the auditor is performing audit data analytics (ADA) as a substantive test of details of a population of transactions or balances, the auditor will have _______. evaluated audit risk evaluated inherent risk already audited every account in the population confirmed the tests with management prior to conducting them

evaluated inherent risk

When an auditor asks management how it makes sure the reconciliation is prepared correctly and on a timely basis, this is an example of _______. professional skepticism inquiry interrogation audit scanning techniques

inquiry

Accounting estimates, by their nature _______. should cause little or no variance at the end of the period involve objective decision making on the part of management involve subjective decision making on the part of management should not be estimated by management, but rather by the auditor at the end of the period

involve subjective decision making on the part of management

When performing ADA as a risk assessment procedure, a notable item: -is indicative of a risk of material misstatement not previously identified by the auditor. -is indicative of a higher risk of material misstatement than anticipated by the auditor. -provides information useful in designing procedures to address the risk of material misstatement. All of these answer choices describe notable items.

is indicative of a risk of material misstatement not previously identified by the auditor. is indicative of a higher risk of material misstatement than anticipated by the auditor. provides information useful in designing procedures to address the risk of material misstatement.

A representative audit sample _______. ~should not involve the auditor ~should be agreed upon by management and the auditor ~is unlikely to provide a reasonable basis for drawing a conclusion about an entire population ~is likely to provide a reasonable basis for drawing a conclusion about an entire population

is likely to provide a REASONABLE basis for drawing a conclusion about an entire population

The choice of using audit sampling vs. audit data analytics (ADA) _______. ~should be determined by the client's legal counsel ~is often a matter of what is most effective and efficient in determining whether a control is presented fairly, in all material respects ~is typically left up to senior management ~is often a matter of what is most effective and efficient in determining whether an assertion is presented fairly, in all material respects

is often a matter of what is most effective and efficient in determining whether an ASSERTION is presented fairly, in all material respects

An entity's risk assessment process: -is the entity's process for identifying and responding to business risks and the results of those risks. -is designed to help an entity think about risk in the same way that an auditor thinks about risk. -never allows management of an entity to decide to accept a risk without taking any action. -is established only if the entity is subject to unusually high risk.

is the entity's process for identifying and responding to business risks and the results of those risks.

Nonsampling risk: only applies to samples taken for the purposes of substantive testing. does not occur if an auditor relies on unreliable evidence. is the risk that an auditor arrives at an inappropriate conclusion for a reason unrelated to sampling issues. only occurs if you test every item of the population.

is the risk that an auditor arrives at an inappropriate conclusion for a reason unrelated to sampling issues.

Sampling risk: is the risk that the sample chosen by the auditor is not representative of the population of transactions. can be eliminated by taking a random sample. is the risk that the results of the test will be misinterpreted by the auditor. applies only to samples for substantive testing.

is the risk that the sample chosen by the auditor is not representative of the population of transactions.

The nature of an audit procedure refers to: when the procedure is performed. the sample size required to perform the procedure. its purpose and its type. the assessed level of detection risk.

its purpose and its type.

The use of audit sampling _______. is prohibited by the AICPA may be a function of the efficiency and effectiveness of the audit procedure is mandatory for all publicly-traded companies may be a function of the efficiency and effectiveness of the internal auditors

may be a function of the efficiency and effectiveness of the AUDIT PROCEDURE

The auditor's conclusion based on the sample _______. ~should always be applied to the population only and not the sample ~will always be the same as the conclusion drawn if the auditor had audited the entire population ~may be different than the conclusion drawn if the auditor had audited the entire population ~should always be applied to the sample only and not the population

may be different than the conclusion drawn if the auditor had audited the entire population

The purpose of the management letter is to ________. -inform management of the auditors pending desire to withdraw from the engagement -meet the auditor's responsibility for communicating external control matters in writing on a timely basis with those charged with governance -meet the auditor's responsibility for communicating internal control matters in writing on a timely basis with those charged with governance -request management confirm the makeup and composition of its board of directors and any associated conflicts of interest

meet the auditor's responsibility for communicating INTERNAL CONTROL matters in writing on a timely basis with those charged with governance

As with all audit procedures, auditors must _______. -pay little attention to the work of the prior auditor on a first-year engagement -must carefully plan the nature, timing, and extent of audit data analytics (ADA) to be used for each client -must let the client's management choose the nature, timing, and extent of ADA to be used for each client -always outsource at least some of the audit work to the internal audit function

must carefully plan the nature, timing, and extent of audit data analytics (ADA) to be used for each client

The ultimate purpose of a substantive test is to _______. obtain absolute assurance that an assertion is presented fairly in all material respects ensure that all controls are functioning properly guarantee that no error or fraud exists in the financial statements obtain reasonable assurance that an assertion is presented fairly in all material respects

obtain reasonable assurance that an ASSERTION is presented fairly in all material respects

The objectives of internal control include: -risk assessment objectives, compliance objectives, and reporting objectives. -operations objectives, internal control objectives, and financial reporting objectives. -operations objectives, reporting objectives, and compliance objectives. -operations objectives, control environment objectives, and financial reporting objectives.

operations objectives, reporting objectives, and compliance objectives.

The auditor is most likely going to perform audit data analytics (ADA) as a substantive test when the auditor has _______. -performed tests of controls and concluded that the entity has strong controls -completed the audit and is ready to issue the audit report -performed tests of controls and concluded that the entity has weak controls -confirmed the procedures to be conducted with the internal audit function

performed tests of controls and concluded that the entity has STRONG controls

An auditor normally obtains an understanding of transaction-level controls by: performing a system walkthrough. testing the entity's risk assessment process. conducting an interview with senior management. reading the prior year's management letter.

performing a system walkthrough.

The auditor testing the effectiveness of manual follow-up to see whether items put on an exception report were appropriately cleared is an example of _______. observation reperformance inspection of physical evidence inquiry

reperformance

When an audit procedure is tested on an ENTIRE group of transactions, _______. the sample should be discarded, and a new random sample drawn non-statistical sampling is required sampling is not required statistical sampling is required

sampling is not required

The control environment: -only applies to public companies. -directly addresses adequacy of segregation of duties. -sets the tone of an entity with respect to internal control and influences the control consciousness of its people. -is focused on how the entity addresses information technology risks.

sets the tone of an entity with respect to internal control and influences the control consciousness of its people.

If the auditor is able to collect evidence that IT general controls are strong, then the auditor can conclude that: IT transactions are adequately supported by source documents. application controls function properly and put the correct transactions on exception reports. the risk of batch totals failing to detect misstatements is low. software applications are more likely to operate consistently over time.

software applications are more likely to operate consistently over time.

An auditor is testing accounts receivable for a client that has 1,000 customers with customer balances that range from $150 to $185,000. The auditor subdivided the receivables into three groups: group 1 has all customers with receivable balances between $185,000 and $100,000, group 2 has all customers with receivable balances between $100,000 and $25,000, and group 3 has all customers with receivable balances less than $25,000. The auditor then randomly selects customers out of each group. This is known as: haphazard selection. random selection. stratified sampling. block selection.

stratified sampling.

In order to determine the extent of testing of controls, _______. the auditor should inquire of management as to their preferences the auditor can use either statistically based sampling techniques or nonstatistical techniques the auditor can use non nonstatistical techniques only the auditor can use statistically based sampling techniques only

the auditor can use either statistically based sampling techniques or nonstatistical techniques

If the auditor determines that an effective compensating control does not exist, or tests of controls show that the compensating control is not functioning as designed, _______. the auditor concludes that internal control is weak, and issues an appropriate opinion the auditor makes no changes to the overall audit risk assessment for the related account and assertion, and the planned audit strategy the auditor revises the overall audit risk assessment for the related account and assertion, and the planned audit strategy the auditor would lower inherent risk surrounding the engagement as a whole

the auditor revises the overall audit risk assessment for the related account and assertion, and the planned audit strategy

When performing an integrated audit (to issue an opinion on the financial statements and an opinion on internal controls over financial reporting), _______. the auditor uses a bottom-up approach to determine which controls to select the auditor should be careful to issue the same audit opinion for both the financial statements and internal control the auditor should be careful to issue different audit opinions for the financial statements and internal control the auditor uses a top-down approach to determine which controls to select

the auditor uses a top-down approach to determine which controls to select

If the test results do not confirm the preliminary evaluation of controls, _______. the auditor should obtain additional written assurances from management the auditor should consider withdrawing from the engagement the auditor will consider whether there is a compensating control that might prevent and correct a misstatement missed by the original control being tested the auditor will consider whether there is a compensating control that might detect and correct a misstatement missed by the original control being tested

the auditor will consider whether there is a compensating control that might DETECT and CORRECT a misstatement missed by the original control being tested

The auditor always needs to investigate any control exceptions (deviations) that he or she identifies during testing to find out, to the extent practical, _______. the causes and the amounts involved. the financial statement accounts affected. the potential effect on other audit procedures. All of these answer choices are correct.

the causes and the amounts involved. the financial statement accounts affected. the potential effect on other audit procedures.

The population consists of _______. the class of transactions or the account balance to be tested neither the class of transactions nor the account balance to be tested all accounts in the client's chart of accounts account balances only

the class of transactions or the account balance to be tested

The internal control component that addresses how an organization holds an individual accountable for his or her internal control responsibilities in pursuit of objectives is related to: risk assessment. the control environment. information and communication. control activities.

the control environment.

The more complex the client's operations and its internal controls, _______. the more inexperienced the auditor who performs the work needs to be the more experienced the auditor who performs the work needs to be the lower inherent risk is assessed by the auditor the less audit staff should be assigned to the client engagement

the more EXPERIENCED the auditor who performs the work needs to be

The auditor decides which controls to test by considering: the points at which fraud or error can occur. the nature of controls implemented by management. the significance of each control in achieving its control objective. All of these answer choices are correct.

the points at which fraud or error can occur. the nature of controls implemented by management. the significance of each control in achieving its control objective.

Designing substantive procedures responds to: the risk of all types of misstatements at the assertion level. the risk of all types of misstatements at the entity level. the risk of material misstatement at the entity level. the risk of material misstatement at the assertion level.

the risk of material misstatement at the ASSERTION level.

Estimation uncertainty is defined as _______. -the susceptibility of an accounting estimate and related disclosures to be accurate -the susceptibility of an accounting estimate and related disclosures due to an inherent lack of precision in its measurement -the uncertainty surrounding which staff members to assign to a particular audit -the uncertainty surrounding the ultimate cost of the audit

the susceptibility of an accounting estimate and related disclosures due to an inherent lack of precision in its measurement

The critical difference between statistical and nonstatistical sampling is: -the use of the laws of probability in statistical sampling to determine sample size and develop a confidence interval around -the results of the sample. -the elimination of nonsampling risk with statistical sampling. -that more representative samples are attained with statistical sampling. -the required use of judgment in nonstatistical sampling.

the use of the laws of probability in statistical sampling to determine sample size and develop a confidence interval around the results of the sample.

With respect to audit sampling, _______. the auditors should ideally select a sample size which is larger than the population there is no relationship between assurance and sample size there is a direct relationship between assurance and sample size the choice of which accounts to sample should be as non-random as possible

there is a DIRECT relationship between assurance and sample size

After auditors have completed testing controls and drawn a conclusion about control risk, _______. they make decisions about the nature, timing, and extent of substantive testing they make decisions about the nature and timing of substantive testing they are ready to issue the audit opinion they should withdraw if control risk is assessed as high

they make decisions about the nature, timing, and extent of substantive testing

The choice of using audit sampling versus audit data analytics (ADA) is often a matter of _______. -what is most effective and efficient in determining whether a control is presented fairly, in all material respects -determining which method management would prefer the auditor use -which method will be more cost efficient for the client -what is most effective and efficient in determining whether an assertion is presented fairly, in all material respects

what is most effective and efficient in determining whether an ASSERTION is presented fairly, in all material respects

The auditor is more likely to use audit sampling _______. when the audit committee requests the auditor do so when internal controls are weak if the client agrees to pay extra fees associated with this procedure when internal controls are strong

when internal controls are weak

With respect to timing, tests of controls _______. are usually carried out after the firm's financial statement date will usually be carried out at an interim date, often about six months prior to year-end are usually carried at the firm's financial statement date will usually be carried out at an interim date, often about three months prior to year-end

will usually be carried out at an interim date, often about THREE MONTHS prior to year-end

The _______ clearly lays out the purpose of the test of the control, the nature and extent of the work performed at an interim date, the results of the audit tests, and the auditor's conclusion about control risk. controls testing paper audit documentation audit report working paper

working paper