Test 2 Auditing

•In a monetary-unit sample with a sampling interval of $5,000, an auditor discovers that a selected account receivable with a recorded amount of $10,000 has an audit amount of $8,000. If this were the only error discovered by the auditor, the projected misstatement for this sample would be

$2,000

•The client reported 4th quarter sales of $120 million in the current year. Sales in the first three quarters of the current year are $100, $101, and $104 million, respectively. The client does not operate in a cyclical industry (i.e., sales are generally fairly consistent across fiscal quarters). This information suggests that auditors should be most concerned with the __________ of current year 4th quarter revenues?

-Cutoff -Occurrence

•Sampling Risk = 5% •Preliminary Control Risk Assessment = Moderate •Expected Deviation Rate (EDR) = 6% •Tolerable Deviation Rate (TDR) = 7% •Computed Upper Deviation Rate (UDR) = 8% •The auditors identify 4 deviations in their tests •The sample was comprised of 100 observations • •Calculate the allowance for sampling risk (ASR).

4%

•Sampling Risk = 5% •Preliminary Control Risk Assessment = Moderate •Expected Deviation Rate (EDR) = 6% •Tolerable Deviation Rate (TDR) = 7% •Computed Upper Deviation Rate (UDR) = 8% •The auditors identify 4 deviations in their tests •The sample was comprised of 100 observations • •Calculate the sample deviation rate (SDR).

4%. 4 deviations/100 sample size

in a monetary-unit sample with a sampling interval of $10,000 an auditor discovered that a selected account receivable with a recorded amount of $5,000 had an audit amount of $2,000. The projected misstatement of this sample was

6,000

•Sampling Risk = 5% •Preliminary Control Risk Assessment = Moderate •Expected Deviation Rate (EDR) = 6% •Tolerable Deviation Rate (TDR) = 7% •Computed Upper Deviation Rate (UDR) = 8% •The auditors identify 4 deviations in their tests •The sample was comprised of 100 observations • •The confidence level is set at ____%. This means the auditor is _____% confident that the actual (true) population deviation is less than or equal to _____%.

95%, 95%, 8%

•Sampling Risk = 5% •Preliminary Control Risk Assessment = Moderate •Expected Deviation Rate (EDR) = 6% •Tolerable Deviation Rate (TDR) = 7% •Computed Upper Deviation Rate (UDR) = 8% •The auditors identify 4 deviations in their tests •The sample was comprised of 100 observations • •The confidence level is set at ____%. This means the auditor will need a (smaller/larger) sample than if the confidence level were set at 80%, all else equal.

95%, larger

•Auditors are most concerned about the client's incentives to understate depreciation expense. Therefore, the most critical assertion for this account is __________.

Completeness

•During the annual inventory observation (where the auditors count the client's inventory), auditors select an item from the warehouse floor and trace the item to the client's supporting documents. Which assertion is the auditor most concerned with during this procedure?

Completeness

•Indicate which assertion is best verified by the listed procedure. The relevant account is underlined within the statement. The auditor counts inventory on January 1 for a Dec. 31 year-end client. For this particular count, the auditor only counts floor to sheet.

Completeness

•The client's long-term debt balance increased by 50% over the prior year. There was no change in total interest expense. This information suggests that auditors should be most concerned about which assertion regarding interest expense?

Completeness

•The client's property, plant, and equipment balance increased by 20% over the prior year. There was no change in depreciation expense. This information suggests that auditors should be concerned about which assertion regarding depreciation expense?

Completeness

audit evidence can come in different forms with different degrees of reliability. Which of the following is the most persuasive type of evidence?"

Computations made by the auditor

How does population size affect sample size in attribute sampling?

Decreases sample size only when population is smaller than 1,000 items

What kind of relationship does desired confidence level have with sample size

Direct

what kind of relationship does expected population deviation rate have with sample size

Direct

All things equal, if the population size increases from 5,000 to 7,000, the sample size will increase

False

Control A has a population of 9,000 observations. Control B has a population of 11,000 observations. Assuming that all other factors affecting sample size are comparable for controls a and b, the sample size for control A would be significantly smaller than that for control B

False

If everything stays the same, if sample deviation rate increases, sample size increases

False

sampling procedures are used because they allow for tests that are more effective. The cost of this increase in testing effectiveness is a decrease in testing efficiency

False

under SOX 404(a) all public companies are required to have an external auditor opine on the effectiveness of their internal control over financial reporting

False

•While performing a substantive test of details during an audit, the auditor determined that the sample results supported the conclusion that the recorded account balance was materially misstated. It was, in fact, not materially misstated. Such a situation illustrates the risk of

Incorrect rejection

What kind of relationship does tolerable deviation rate have with sample size?

Inverse

to whom does an auditor report a significant deficiency inn internal control

Management, and audit committee

•When auditors perform a test procedure referred to as vouching for the accounts receivable balance, they obtain evidence pertaining to which assertion?

Occurence

•The auditor inquires of management to obtain information regarding whether the Company has sold or factored any of its accounts receivables. Which assertion is the auditor primarily concerned with during this procedure?

Rights and Obligations

•The auditor sends a confirmation to a financial institution asking for verification that the financial institution is holding investment securities in the client's name. The auditor is most likely gathering evidence in support of management's financial statement assertions of existence and which other assertion?

Rights and Obligations

monitoring is a major component of the COSO internal control--integrated framework. Which of the following is not correct in how the company can implement the monitoring component?

The independent auditor can serve as part of the entity's control environment and continuous monitoring

All things equal, if the tolerable deviation rate increases, sample size will decrease

True

All things equal, if tolerable deviation rate increases, sample size will decrease

True

Control A has an expected population rate of 5%. Control B has an expected population deviation rate of 7%. Assuming all other factors affecting sample size are comparable for controls A and B, the sample for control A would be smaller than that for control B

True

•An auditor inquired of warehouse personnel concerning possible obsolete or slow-moving inventory items. This procedure likely obtained evidence about which balance-related assertion for inventory?

Valuation

•In assessing the reasonableness of the allowance for doubtful accounts balance the auditor is primarily concerned with which assertion?

Valuation

the current file of the auditor's working papers should generally include

a copy of financial statements

a primary advantage of using generalized audit software packages to audit the financial statements of an entity that uses an IT system is that the auditor may

access information stored on computer files while having a limited understanding of the entity's hardware and software features

in testing the existence assertion of an asset, a auditor ordinarily works from the

accounting records to the supporting documents

an auditor's primary consideration regarding an entity's internal controls is whether they

affect financial statement assertions

internal control is a process designed to provide reasonable assurance regarding the achievement of which objective

all of the above are correct

which of the following presumptions is least likely to relate to the reliability of audit evidence

an auditors opinion is formed within a reasonable time to achieve a balance between benefit and cost

SOC 1, Type 2 reports issued by the service organization's auditor typically

assess whether the service organizations controls are suitably designed and operating effectively

the primary objective of final analytical procedures is to

assist the auditor in assessing the validity of the conclusions reached on the audit

Proper segregation of functional responsibilities in an effective system of internal control calls for separation of the functions of

authorization, recording, and custody

after obtaining an understanding of an entity's internal control system, an auditor may set control risk at high for some assertions because the auditor

believes the internal controls are unlikely to be effective

which of the following procedures would an auditor most likely rely on to verify management's assertion of completeness

comparing a sample of shipping documents to related sales invoices

assessing control risk below high involves all of the following except

concluding that controls are ineffective

which of the following controls would most likely be tested during an interim period?

controls that operate on a continuous basis

which of the following is not a factor that might affect the likelihood that a control deficiency could result in a misstatement in an account balance

controls to monitor the inventory taking process

a control deviation caused by an employee performing a control procedure that they are not authorized to perform is always considered a

deficiency in operation

All companies are required to maintain an effective system of internal control over financial reporting

false

All things equal, if the auditor's confidence level increases, sample size will decrease

false

an auditor anticipates assessing control risk at a low level in an IT environment. under these circumstances on which of the following controls would the auditor initially focus

general controls

Which of the following audit techniques would most likely provide an auditor with the least assurance about the effectiveness of the operation of a control

inquiry of entity personnel

an audit document that reflects the major components of an amount reported in the financial statements is reffered to as a

lead schedule

to whom does an auditor report a control deficiency in internal control

management

To whom does an auditor report a material weakness in internal control

management, audit committee, and shareholders via the audit report

The permanent file section of the working papers that is kept for each audit client most likely contains

narrative descriptions of the entity's accounting system and control procedures

the highest-quality and most reliable audit evidence that segregation of duties is properly implemented is obtained y

observation by the auditor of the employees performing control activities

which of the following types of audit evidence is the least reliable

prenumbered purchase order forms prepared by the entity

an auditor would be least likely to use confirmations in connection with the examination of

refundable income taxes

if the financial reporting risks for a location are low and the entity has a good entity level controls, management may rely on which of the following for its assertions

self-assessment processes in conjunction with entity-level controls

significant deficiencies and material weaknesses must be communicated to an entity's audit committee because they represent

significant deficiencies in the design or operation fo internal control

significant deficiencies are matters that come to an auditor's attention that should be communicated to an entity's audit committee because they represent

significant deficiencies in the design or operation of the internal control

regardless of the assessed level of control risk, an auditor would perform some

substantive procedures to restrict detection risk for significant transaction classes

the assurance bucket is filled with all the following types of evidence except?

the audit report

which of the following statements concerning conrol deficiencies is true

the auditor should communicate to management in writing all control deficiencies in internal control identified during the audit

SOX requires management to include a report on the effectiveness of ICFR in the entity's annual report. It also requires auditors to report on the effectiveness of ICFR. Which of the following statements concerning these requirements is false

the auditor should provide recommendations for improving internal control in the audit report

which of the following statements about internal control is correct

the cost-benefit relationship is primary criterion that should be considered in designing an internal control system

the substantive analytical procedure known as trend analysis is best described by

the examination of changes in an account over time

which of the following statements concerning audit evidence is correct?

the measure of the reliability of audit evidence lies in the auditor's judgement

which of the following most likely represents a weakness in internal control of an IT system

the systems analyst reviews output and controls the distribution of output from the IT department

when auditors report on the effectiveness of internal control "as of" a specific date and obtain evidence about the operating effectiveness of controls at an interim date, which of the following items would be the least helpful in evaluating the additional evidence to gather for the remaining period

the walkthrough of the control system conducted at interim

a walkthrough is one procedure used by an auditor as part of the internal control audit. It requires an auditor to

trace a transaction from each major class of transactions from origination through the entity's information system until it is reflected in the entity's financial reports

All things equal, if expected deviation rate decreases, sample size will decrease

true

Control A has a tolerable deviation rate of 5%. Control B has a tolerable deviation rate of 7%. Assuming that all other factors affecting sample size are comparable for controls A and B, the sample for control A would be larger than that for control B.

true

Under SOX 404(a) all managers of public companies are required to annually report on the effectiveness of internal control over financial reporting

true

sampling risk is the risk that an inappropriate conclusion will be reached because the sample selected is not representative of the population being tested

true

an auditor's flowchart of an entity's accounting system is a diagrammatic representation that depicts the auditor's

understanding of the system