Audit Exam 3
5. Confirmation requests should contain a "business reply" envelope addressed to the auditors at the client's address. True False
False
5. Lapping of accounts receivable by an employee is not possible when there is adequate segregation of duties with respect to cash disbursements. True False
False
6. CPAs use negative accounts receivable confirmations more frequently than positive accounts receivable confirmations. True False
False
6. Confirmations for cash balances should be mailed only to the financial institutions with which the client has a cash balance at year-end. True False
False
6. Using ratio and difference estimation for a sample is an example of a dual purpose test. True False
False
7. A proof of cash is an audit procedure that is performed on almost every engagement. True False
False
8. A compensating balance agreement generally requires that cash be reclassified as a noncurrent asset. True False
False
10. Material accounts receivable from related parties should be stated separately from other receivables. True False
True
2. Control over the receipt of cash sales is best achieved when two or more employees participate in each transaction. True False
True
2. Discovery sampling is equivalent to an attributes sampling plan with a specified expected deviation rate of 0 percent. True False
True
3. An aged trial balance of accounts receivable may provide evidence on the adequacy of the allowance for uncollectible accounts. True False
True
3. Increases in the number of deviations in an attributes sample results in an increase in the achieved upper deviation rate of the attributes sample. True False
True
4. Confirmation of accounts receivable by direct communication with the debtor tests the existence of accounts receivable. True False
True
5. Statistical sampling cannot be used to test all control activities. True False
True
7. Confirmation of accounts receivable provides some assurance that no lapping or other manipulation affecting accounts receivable is being carried on. True False
True
7. Increases in the tolerable misstatement result in a decreased sample size when using mean-per-unit estimation. True False
True
8. Analytical procedures are used by auditors to gain evidence about the adequacy of the allowance for uncollectible accounts. True False
True
8. The mean book value of the items included in a mean-per-unit sample is not directly used in the evaluation of sample results. True False
True
9. Verification of cash and other liquid assets be verified on the same date may prevent substitution of one form of asset for another. True False
True
9. When evaluating the results of a variables sampling plan, the projected misstatement is calculated and compared to the tolerable misstatement. True False
True
9. When it is impossible to confirm accounts receivable, the auditors may be able to satisfy themselves as to the existence of accounts receivable by alternative procedures. True False
True
24. An increase in the tolerable misstatement has what effect on the planned allowance for sampling risk? A. Increases. B. Decreases. C. No effect. D. Indeterminate.
A. Increases.
25. Which of the following controls would be most likely to reduce the risk of diversion of customer receipts by a company's employees? A. A bank lockbox system. B. Approval of all disbursements by an individual independent of cash receipts. C. Monthly bank cutoff statements. D. Prenumbered remittance advices.
A. A bank lockbox system.
53. The Parmalat fraud case apparently involved A. A fraudulent cash confirmation. B. Kiting of funds between banks in India and banks in Pakistan. C. A bank reconciliation performed by the client that systematically understated cash. D. Major unrecorded disbursements for equipment.
A. A fraudulent cash confirmation.
74. Which of the following best illustrates the concept of sampling risk? A. A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest. B. An auditor may select audit procedures that are not appropriate to achieve the specific objective. C. An auditor may fail to recognize deviations in the documents examined for the chosen sample. D. The documents related to the chosen sample may not be available for inspection.
A. A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest.
16. What type of error is the CPA most likely to discover when he/she examines all shipping reports dated in January of 20X1, shipped FOB shipping point, which were recorded in December of 20X0 as credit sales? A. Accounts receivable are overstated at December 31, 20X0. B. Accounts receivable are understated at December 31, 20X0. C. Operating expenses are overstated for the 12 months ended December 31, 20X0. D. Sales returns and allowance are overstated at December 31, 20X0.
A. Accounts receivable are overstated at December 31, 20X0.
28. By preparing a four-column bank reconciliation ("proof of cash") for the last month of the year, an auditor will generally be able to detect: A. An unrecorded check written at the beginning of the month which was cashed during the period covered by the reconciliation. B. A cash sale which was not recorded on the books and was stolen by a bookkeeper. C. An embezzlement of unrecorded cash receipts on receivables before they had been deposited into the bank. D. A credit sale which has been recorded twice in the sales journal.
A. An unrecorded check written at the beginning of the month which was cashed during the period covered by the reconciliation.
12. By preparing a four-column bank reconciliation ("proof of cash") at year-end, an auditor will generally be able to detect: A. An unrecorded deposit made at the bank at the end of the month. B. A second payment of an account payable which had already been paid in full two months earlier. C. An embezzlement of cash receipts not recorded in the cash receipts journal before they had been deposited into the bank. D. A receivable collected that had previously been written off as uncollectible.
A. An unrecorded deposit made at the bank at the end of the month.
37. The auditors expect a population deviation rate of billing errors of two percent, and have established a tolerable rate of five percent. The sampling approach most likely to be used is: A. Attributes sampling. B. Stratified sequential sampling. C. Discovery sampling. D. None, as sampling does not seem appropriate in this situation.
A. Attributes sampling.
28. When performing tests of controls over authorization of cash receipts, which of the following sampling methods would be most appropriate? A. Attributes. B. Ratio. C. Stratified. D. Variables.
A. Attributes.
54. Banks may process electronic "substitute checks" in place of customer written hard copy checks due to the: A. Check Clearing for the 21stCentury Act B. Public Company Accounting Oversight Board's Standard No. 2. C. Foreign Corrupt Practices Act. D. Sarbanes-Oxley Act
A. Check Clearing for the 21stCentury Act
55. Which of the following is not one of the criteria for revenue recognition? A. Collectibility is certain. B. Delivery has occurred or services have been rendered. C. Evidence of an arrangement exists and is persuasive. D. A fixed or determinable price to buyer exists.
A. Collectibility is certain.
30. An auditor who uses a transaction cycle approach to assessing control risk most likely would test control activities related to transactions involving the sale of goods to customers with the A. Collection of receivables. B. Purchase of merchandise inventory. C. Payment of accounts payable. D. Sale of long-term debt.
A. Collection of receivables.
34. Which of the following is the best audit procedure for the detection of lapping? A. Comparison of postings of cash receipts to accounts with the details of cash deposits. B. Confirmation of the cash balance. C. Reconciliation of the cash account balances. D. Preparing a proof of cash.
A. Comparison of postings of cash receipts to accounts with the details of cash deposits.
55. When a client engages in transactions involving derivatives, the auditor should A. Develop an understanding of the economic substance of each derivative. B. Confirm with the client's broker whether the derivatives are for trading purposes. C. Notify the audit committee about the risks involved in derivative transactions. D. Add an explanatory paragraph to the auditor's report describing the risks associated with each derivative.
A. Develop an understanding of the economic substance of each derivative.
69. In assessing sampling risk, the risk of incorrect rejection and the risk of assessing control risk too high relate to the: A. Efficiency of the audit. B. Effectiveness of the audit. C. Selection of the sample. D. Audit quality controls.
A. Efficiency of the audit.
20. Which of the following is a likely procedure to test the adequacy of the allowance for doubtful accounts? A. Examine cash receipts received after year-end. B. Confirm receivables. C. Examine dates of purchase orders. D. Foot the receivables lead schedule.
A. Examine cash receipts received after year-end.
44. It is sometimes impossible for the auditors to use normal accounts receivable confirmation procedures. In such situations the best alternative procedure the auditors might resort to would be: A. Examining subsequent receipts of year-end accounts receivable. B. Reviewing accounts receivable aging schedules prepared at the balance sheet date and at a subsequent date. C. Requesting that management increase the allowance for uncollectible accounts by an amount equal to some percentage of the balance in those accounts that cannot be confirmed. D. Applying analytical procedures to accounts receivable and sales on a year-to-year basis.
A. Examining subsequent receipts of year-end accounts receivable.
34. When the auditors have chosen to test a control, what relationship will the tolerable rate normally have when compared to the expected rate of deviations in the sample? A. Exceed. B. Equal. C. Be less than. D. Indefinite.
A. Exceed.
56. In your review of ABC Company's financials, you note that Receivables have increased approximately 200% from the previous year, while Cash has declined. Further investigation reveals that 70% of ABC's receivables were booked within 7 days of the end of the quarter. If financial statement fraud is involved, which type is most likely? A. Fictitious revenues B. Timing differences C. Improper asset valuations D. Improper disclosures
A. Fictitious revenues
36. When using sampling for tests of controls, which of the following audit consequences may follow? A. If sample results indicate that the control is operating effectively, but in fact it is not, control risk will be assessed too low. B. If sample results indicate that the control is operating effectively, but in fact it is not, control risk will be assessed too high. C. If sample results indicate that the control is not operating effectively, but in fact it is operating effectively, the audit is likely to be faulty because of reduced substantive tests. D. If sample results indicate that the control is not operating effectively, but in fact it is operating effectively, control risk will be assessed too low.
A. If sample results indicate that the control is operating effectively, but in fact it is not, control risk will be assessed too low.
22. If all other factors specified in an attributes sampling plan remain constant, decreasing the tolerable rate and decreasing the risk of assessing control risk too low would have what effect on sample size? A. Increase. B. Remain the same. C. Decrease. D. Indeterminate, depends upon exact change being made.
A. Increase.
23. If all other factors specified in an attributes sampling plan remain constant, decreasing the tolerable rate and increasing the estimated population deviation rate would have what effect on sample size? A. Increase. B. Remain the same. C. Decrease. D. Indeterminate, depends upon exact change being made.
A. Increase.
68. An advantage of using statistical sampling techniques is that such techniques: A. Mathematically measure risk. B. Eliminate the need for judgmental decisions. C. Define the values of allowance for sampling risk and tolerable misstatement required to provide audit satisfaction. D. Have been established in the courts to be superior to judgmental sampling.
A. Mathematically measure risk.
52. An auditor should perform alternative procedures to substantiate the existence of accounts receivable when: A. No reply to a positive confirmation request is received. B. No reply to a negative confirmation request is received. C. Collectibility of the receivables is in doubt. D. Pledging of the receivables is probable.
A. No reply to a positive confirmation request is received.
18. An auditor may obtain information on the December 31 month end balance per bank in which of the following? A. Option A B. Option B C. Option C D. Option D
A. Option A
22. For effective internal control, the billing function should not be performed by the: A. Sales department. B. Accounting department. C. Finance department. D. Information Processing department.
A. Sales department.
32. Which of the following is not a universal rule for achieving internal control over cash? A. Separate recordkeeping from accounting for cash to the extent possible. B. Deposit each day's cash receipts intact. C. Separate cash handling from recordkeeping. D. Have monthly bank reconciliations prepared by employees not responsible for the issuance of checks.
A. Separate recordkeeping from accounting for cash to the extent possible.
30. Which of the following is generally not true about statistical sampling as compared to nonstatistical sampling? A. Statistical samples are more representative of the population. B. Statistical sample plans involve additional costs of evaluation. C. Statistical sampling allows a more objective evaluation of sample results. D. Statistical sampling may assist the auditors in designing more efficient samples.
A. Statistical samples are more representative of the population.
54. A CPA examines a sample of copies of December and January sales invoices for the initials of the person who verified the quantitative data. This is an example of a: A. Test of a control. B. Substantive test. C. Cutoff test. D. Statistical test.
A. Test of a control.
15. When control risk for the existence assertion is assessed at a high level, which of the following is a likely effect with respect to the auditors' confirmation of receivables? A. The account balances as of year end will generally be confirmed. B. The auditors will in general use blank rather than positive confirmations. C. The auditors will be required to confirm accounts as of an interim date (during the year under audit) and as of year end. D. Confirmations will not in general be used as the auditor will rely primarily upon support such as vendors' invoices, purchase orders and receiving reports.
A. The account balances as of year end will generally be confirmed.
52. The auditors have audited a sample with a standard deviation of audited values larger than they had originally estimated. In this situation, to maintain the risk of incorrect acceptance at its predetermined level without increasing the size of the sample, which of the following statements is correct? A. The adjusted allowance for sampling risk will be smaller than had been planned. B. The adjusted allowance for sampling risk will be larger than had been planned. C. The risk of incorrect rejection will necessarily decrease. D. The size of the population must be decreased.
A. The adjusted allowance for sampling risk will be smaller than had been planned.
59. Which of the following statements is correct about the sample size in statistical sampling when testing internal controls? A. The auditor should consider the tolerable rate of deviation from the controls being tested in determining sample size. B. As the likely rate of deviation decreases, the auditor should increase the planned sample size. C. The allowable risk of assessing control risk too low has no effect on the planned sample size. D. Of all the factors to be considered, the population size has the greatest effect on the sample size.
A. The auditor should consider the tolerable rate of deviation from the controls being tested in determining sample size.
14. Which of the following would be least likely to diminish the validity of evidence obtained through confirmation of accounts receivable? A. The confirmations are sent on the client's letterhead. B. The confirmations are mailed to customers by the internal auditors. C. The client's mailroom personnel closely monitor and inspect confirmations during mailing. D. The return address on the envelope used to send the confirmation request is that of the client.
A. The confirmations are sent on the client's letterhead.
67. Which of the following statements is correct concerning statistical sampling in tests of controls? A. The population size has little effect on determining sample size except for very small populations. B. The expected population deviation rate has little or no effect on determining sample size except for very small populations. C. As the population size doubles, the sample size also should double. D. For a given tolerable rate, a larger sample size should be selected as the expected population deviation rate decreases.
A. The population size has little effect on determining sample size except for very small populations.
55. Which of the following situations will result in the auditors concluding that the risk of material misstatement is too high when using nonstatistical sampling for substantive tests? A. The projected misstatement exceeds the tolerable misstatement. B. The allowance for sampling risk exceeds the projected misstatement. C. The risk of incorrect acceptance exceeds the risk of incorrect rejection. D. The tolerable misstatement exceeds the sample net misstatement.
A. The projected misstatement exceeds the tolerable misstatement.
40. Which of the following types of risk is of critical importance to auditors in performing tests of controls? A. The risk of assessing control risk too low. B. The risk of assessing control risk too high. C. The risk of incorrect acceptance. D. The risk of incorrect rejection.
A. The risk of assessing control risk too low.
26. In performing a test of a control last year the auditors specified a tolerable deviation rate of X percent. This year the auditors have specified a tolerable rate of less than X percent. Assuming that all other factors remain the same, which of the following is true regarding the relationship between this year's sample size compared to last year's sample size? A. This year's sample is larger than last year's sample. B. This year's sample is smaller than last year's sample. C. This year's sample is equal to last year's sample. D. This year's sample is indeterminate in relation to last year's sample.
A. This year's sample is larger than last year's sample.
35. To obtain the best evidence regarding the completeness of recorded accounts receivable, the auditors: A. Trace a sample of the bills of lading to sales invoices. B. Confirm a sample of accounts payable. C. Review the aging of accounts receivable. D. Trace a sample of recorded sales to shipping documents.
A. Trace a sample of the bills of lading to sales invoices.
35. Which of the following manipulations of cash transactions would overstate the cash balance on the financial statements? A. Understatement of outstanding checks. B. Overstatement of outstanding checks. C. Understatement of deposits in transit. D. Overstatement of bank services charges.
A. Understatement of outstanding checks.
79. Use of the ratio estimation sampling technique to estimate dollar amounts is inappropriate when: A. The total book value is known and corresponds to the sum of all the individual book values. B. A book value for each sample item is unknown. C. There are some observed differences between audited values and book values. D. The audited values are nearly proportional to the book value.
B. A book value for each sample item is unknown.
16. By preparing a four-column bank reconciliation ("proof of cash") at year-end, an auditor will generally not be able to detect: A. An unrecorded deposit made at the bank at the end of the month. B. A second payment of an account payable which had already been paid in full two months earlier. C. An unrecorded check cashed during that month. D. A bank charge during the month not recorded on the books.
B. A second payment of an account payable which had already been paid in full two months earlier.
21. Which of the following is most likely to be used in determining a proper amount to be included in the allowance for doubtful accounts? A. Accounts receivable divided by Cost of goods sold. B. Aging of accounts receivable. C. Cash Sales divided by Accounts receivable D. Year 2 accounts receivable compared to year one accounts receivable.
B. Aging of accounts receivable.
49. Tracing copies of sales invoices to shipping documents will provide evidence that all A. Shipments to customers were recorded as receivables. B. Billed sales were shipped. C. Debits to the subsidiary accounts receivable ledger are for sales shipped. D. Shipments to customers were billed.
B. Billed sales were shipped.
52. Which of the following procedures in the cash disbursements cycle should not be performed by the accounts payable department? A. Comparing the vendor's invoice with the receiving report. B. Canceling supporting documentation after payment. C. Verifying the mathematical accuracy of the vendor's invoice. D. Preparing the check for signature by an authorized person.
B. Canceling supporting documentation after payment.
47. On receiving the bank cutoff statement, the auditor should trace: A. Deposits in transit on the year-end bank reconciliation to deposits in the cash receipts journal. B. Checks dated prior to year end to the outstanding checks listed on the year-end bank reconciliation. C. Deposits listed on the cutoff statement to deposits in the cash receipts journal. D. Checks dated subsequent to year end to the outstanding checks listed on the year-end bank reconciliation.
B. Checks dated prior to year end to the outstanding checks listed on the year-end bank reconciliation.
22. The auditors use a bank cutoff statement to compare: A. Deposits in transit on the year-end cash general ledger account to deposits in the cash receipts journal. B. Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation. C. Deposits listed on the cutoff statement to disbursements in the cash disbursements journal. D. Checks dated subsequent to year-end to the outstanding checks listed on the year-end bank statement.
B. Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation.
28. Which of the following manipulations would understate receivables on the financial statements? A. Understatement of cash sales. B. Closing the sales journal prior to year-end. C. Closing the cash receipts journal prior to year-end. D. Underestimating the allowance for doubtful accounts.
B. Closing the sales journal prior to year-end.
13. Kiting would least likely be detected by: A. Analyzing details of large cash deposits around year end. B. Comparing customer remittance advices with recorded disbursements in the cash disbursements journal. C. Preparing a four-column bank reconciliation for all major cash accounts. D. Preparing a schedule of interbank transfers by using the client's records and bank statements around year end.
B. Comparing customer remittance advices with recorded disbursements in the cash disbursements journal.
23. A practical and effective audit procedure for the detection of lapping is: A. Preparing an interbank transfer schedule. B. Comparing recorded cash receipts in detail against items making up the bank deposit as shown on duplicate deposit slips validated by the bank. C. Tracing recorded cash receipts to postings in customers' ledger cards. D. Preparing a proof of cash.
B. Comparing recorded cash receipts in detail against items making up the bank deposit as shown on duplicate deposit slips validated by the bank.
38. Which of the following is not true about the confirmation of accounts receivable? A. Confirmation requests should bear the auditors' return address. B. Confirmation requests should be signed by the auditors. C. Confirmation requests should be mailed directly by the auditors. D. Confirmation requests should include a return envelope addressed to the office of the auditors.
B. Confirmation requests should be signed by the auditors.
33. Changing from a sampling plan using random selection with replacement to random selection without replacement has what effect on the required sample size? A. Increases. B. Decreases C. No effect. D. An indeterminate effect.
B. Decreases
35. Increases in the planned allowance for sampling risk have what effect on required sample size? A. Increases. B. Decreases. C. No effect. D. Indeterminate.
B. Decreases.
42. What effect does obtaining a sample with a standard deviation larger than that estimated during planning have on the adjusted allowance for sampling risk? A. Increases. B. Decreases. C. No effect. D. Indeterminate.
B. Decreases.
25. The confirmation of accounts receivable is most closely associated with A. Business risk. B. Detection risk. C. Inherent risk. D. Relative risk.
B. Detection risk.
19. A dual purpose test simultaneously. A. Addresses two different accounts. B. Functions as a substantive test and as a test of controls. C. Functions as an analytical procedure and a substantive test. D. Substantiates an ending balance and the transactions making up the balance.
B. Functions as a substantive test and as a test of controls.
17. Which of the following is not typically considered to be an alternate procedure for handling nonreplies to accounts receivable confirmations? A. Examine sales invoices. B. Inclusion of the information in the engagement letter. C. Examine correspondence. D. Examine any subsequent cash receipts.
B. Inclusion of the information in the engagement letter.
71. 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. This situation illustrates the risk of: A. Incorrect acceptance. B. Incorrect rejection. C. Assessing control risk too high. D. Assessing control risk too low.
B. Incorrect rejection.
39. Which of the following is not true about the auditors' verification of notes receivable? A. The interest revenue on notes receivable is usually audited by independent computation. B. Inspecting the notes is sufficient evidence of existence of the notes. C. The auditors may evaluate the collectibility of notes by inspecting credit files. D. Confirmation of notes payable to banks may be accomplished in conjunction with the confirmation of cash balances.
B. Inspecting the notes is sufficient evidence of existence of the notes.
43. When scheduling the audit work to be performed on an engagement, the auditors should consider confirming accounts receivable balances at an interim date if: A. Subsequent collections are to be reviewed. B. Internal control over receivables is good. C. Negative confirmations are to be used. D. There is a simultaneous examination of cash and accounts receivable.
B. Internal control over receivables is good.
30. Jones embezzled $10,000 from his company's account in Bank A. At year-end he hid the shortage by making a deposit on December 31 in Bank A, drawn on Bank B. He has not recorded the transaction on the books. This is an example of: A. Lapping. B. Kiting. C. Effective cash management. D. Related party transactions.
B. Kiting.
70. When performing a test of a control over cash disbursements, a CPA 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: A. Must be recorded in a systematic pattern before the sample can be drawn. B. May occur in a systematic pattern and destroy the sample randomness. C. May systematically occur more than once in the sample. D. Must be systematically replaced in the population after sampling.
B. May occur in a systematic pattern and destroy the sample randomness.
27. Tracing recorded sales transactions in the sales journal to the shipping documents (bills of lading) provides evidence about the: A. Completeness of recording of sales transactions. B. Occurrence of sales transactions. C. Billing of all sales transactions. D. Presentation of payables.
B. Occurrence of sales transactions.
19. An auditor may obtain information on the December 31 month end balance per bank in which of the following? A. Option A B. Option B C. Option C D. Option D
B. Option B
12. Which of the following is least likely to be typically considered to be an alternate procedure for handling nonreplies to accounts receivable confirmations? A. Examine bills of lading. B. Physically examine items sold. C. Examine correspondence. D. Examine subsequent cash receipts.
B. Physically examine items sold.
53. In the past, the auditors have found that the book value of a receivable account has been related to the amount the account is misstated (i.e., large accounts have large misstatements and small accounts have small misstatements). Which of the following techniques is most likely to be efficient? A. Mean-per-unit estimation. B. Ratio estimation. C. Difference estimation. D. Sequential sampling estimation.
B. Ratio estimation.
17. Which procedure is an auditor most likely to use to detect a check outstanding at year-end that was not recorded as outstanding on the year-end bank reconciliation? A. Prepare a bank transfer schedule using the client's cash receipts and cash disbursements journal. B. Receive a cutoff statement directly from the client's bank. C. Prepare a four column bank reconciliation using the year-end bank statement. D. Confirm the year end balance using the standard form to confirm account balance information with financial institutions.
B. Receive a cutoff statement directly from the client's bank.
32. Which of the following procedures is least likely to help auditors to assess the adequacy of management's accounting estimate of the allowance for doubtful accounts? A. Investigate confirmation exceptions for indication of amounts in dispute. B. Review accounts which have been written off as uncollectible prior to year-end. C. Investigate credit ratings for large accounts receivable. D. Discuss with the credit manager the current status of doubtful accounts.
B. Review accounts which have been written off as uncollectible prior to year-end.
59. The individual looking for guidance on revenue recognition is most likely to appropriately review: A. APB 99. B. SAB 104. C. ASR 44. D. B1 Document
B. SAB 104.
29. In October, three months before year-end, the bookkeeper erroneously recorded the receipt of a one year bank loan with a debit to cash and a credit to miscellaneous revenue. Select the most effective method for detecting this type of error. A. Foot the cash receipts journal for October. B. Send a bank confirmation as of year-end. C. Prepare a bank reconciliation as of year-end. D. Prepare a bank transfer schedule as of year-end.
B. Send a bank confirmation as of year-end.
23. Which procedure would be of most assistance to an auditor discovering a large credit sale that has erroneously been recorded twice? A. Footing the sales journal. B. Sending accounts receivable confirmations. C. Tracing the total sales in the sales journal to the general ledger. D. Observation of the physical inventory count at year-end.
B. Sending accounts receivable confirmations.
29. Which of the following statistical sampling techniques involves taking samples in a series of stages? A. Systematic sampling. B. Sequential sampling. C. Continuous sampling. D. Multiple location sampling.
B. Sequential sampling.
77. An important statistic to consider when using a statistical sampling audit plan is the population variability. The population variability is measured by the: A. Sample mean. B. Standard deviation. C. Standard error of the sample mean. D. Estimated population total minus the actual population total.
B. Standard deviation.
29. You were surprised to note that approximately 95% of returned positive accounts receivable confirmations indicated that the customers thought that they owed a larger balance than the amount that had been printed by your client on the confirmation. This might be explained by the fact that: A. The cash receipts journal was closed before year-end. B. The cash receipts journal was held open after year-end. C. There are many unrecorded liabilities. D. The sales journal was held open after year-end.
B. The cash receipts journal was held open after year-end.
49. Which of the following is a correct statement with respect to evaluating results when using nonstatistical sampling for substantive tests? A. When the projected misstatement exceeds the tolerable misstatement, the auditor should conclude that the population is not misstated. B. The closer the projected misstatement is to the tolerable misstatement, the higher the risk of material misstatement. C. When the projected misstatement is equal to zero, the auditors may conclude with certainty that no misstatements exist in the account. D. When the projected misstatement percentage exceeds the risk of incorrect acceptance the auditors will generally conclude that the population is materially misstated.
B. The closer the projected misstatement is to the tolerable misstatement, the higher the risk of material misstatement.
32. When the auditors have decided to use statistical rather than nonstatistical sampling, a disadvantage is that: A. Designing efficient samples is more difficult. B. The costs of training staff may be higher. C. Sampling without replacement must be used. D. Objectively evaluating results is impossible.
B. The costs of training staff may be higher.
41. Auditors may use positive and/or negative forms of confirmation requests for accounts receivable. Of the following, which combination is it most likely that the auditors will use? A. The positive form for small balances, and the negative form for large balances. B. The positive form used for large balances and the negative form for the small balances. C. The positive form used for trade receivables and the negative form for other receivables. D. The positive form when controls related to receivables are satisfactory, and the negative form when controls related to receivables are unsatisfactory.
B. The positive form used for large balances and the negative form for the small balances.
39. The Standard Form to Confirm Account Balances with Financial Institutions includes information on all of the following except: A. Date due of a direct liability. B. The principal amount paid on a direct liability. C. Description of collateral for a direct liability. D. The interest rate of a direct liability.
B. The principal amount paid on a direct liability.
60. 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.
26. Which of the following is not a control that generally is established over cash receipts? A. To prevent abstraction of cash, a control listing of cash receipts should be prepared by mailroom personnel. B. To insure accurate posting, the accounts receivable clerk should post the customers' receipts from customers' checks. C. To insure accuracy of the accounts receivable records, the records should be reconciled monthly to the accounts receivable controlling account. D. To prevent theft of cash, receipts should be deposited daily.
B. To insure accurate posting, the accounts receivable clerk should post the customers' receipts from customers' checks.
49. Which of the following cash transfers is most likely to result in a misstatement of cash at December 31, 19X7? A. Transfer A B. Transfer B C. Transfer C D. Transfer D
B. Transfer B
50. Contact with banks for the purpose of opening company bank accounts should normally be the responsibility of the corporate: A. Board of Directors. B. Treasurer. C. Controller. D. Executive Committee.
B. Treasurer.
72. An auditor plans to examine a sample of 20 checks for counter signatures as prescribed by the client's control procedures. One of the checks in the chosen sample of 20 cannot be found. The auditor should consider the reasons for this limitation and: A. Evaluate the results as if the sample size had been 19. B. Treat the missing check as a deviation for the purpose of evaluating the sample. C. Treat the missing check in the same manner as the majority of the other 19 checks, i.e., countersigned or not. D. Choose another check to replace the missing check in the sample.
B. Treat the missing check as a deviation for the purpose of evaluating the sample.
57. An auditor compares annual revenues and expenses with similar amounts from the prior year and investigates all changes exceeding 10%. This procedure most likely could indicate that A. Fourth quarter payroll taxes were properly accrued and recorded, but were not paid until early in the subsequent year. B. Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities. C. The annual provision for uncollectible accounts expense was inadequate because of worsening economic conditions. D. Notice of an increase in property tax rates was received by management, but was not recorded until early in the subsequent year.
B. Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities.
73. There are many kinds of statistical estimates that an auditor may find useful, but basically every statistical estimate in auditing is of either a quantity or of an error rate. The statistical terms that roughly correspond to "quantities" and "occurrence rate", respectively, are: A. Attributes and variable. B. Variables and attributes. C. Constants and attributes. D. Constants and variables.
B. Variables and attributes.
65. Which of the following factors does an auditor need to consider in planning a particular audit sample for a test of control? A. Number of items in the population. B. Total dollar amount of the items to be sampled. C. Acceptable level of risk of assessing control risk too low. D. Tolerable misstatement.
C. Acceptable level of risk of assessing control risk too low.
11. To test the existence assertion for recorded receivables, an auditor would select a sample from the. A. Sales orders file. B. Customer purchase orders. C. Accounts receivable subsidiary ledger. D. Shipping documents (bills of lading) file.
C. Accounts receivable subsidiary ledger.
39. Which of the following may be used to reduce the risk of nonsampling errors? A. Increasing the size of audit samples. B. Stratifying audit samples. C. Adequately planning audit samples. D. Using statistical sampling techniques.
C. Adequately planning audit samples.
36. Which of the following generally provides the least evidence regarding the valuation of accounts receivable? A. Reviewing an aging of accounts receivable. B. Examination of cash receipts subsequent to the balance sheet date. C. Confirming current (0-30 day) year-end accounts receivable. D. Reviewing credit files for selected account.
C. Confirming current (0-30 day) year-end accounts receivable.
27. After the CPAs have selected particular accounts receivable for confirmation: A. As a control measure, the CPAs should carefully list the audited values of all of those accounts before turning the letters over to the client to type and mail. B. It is important that every account selected that has a material balance ultimately be verified by confirmation or the application of alternative procedures; immaterial balances never require any follow-up through alternative procedures. C. All requests for confirmation should be mailed in envelopes bearing the CPA firm's return address and should include a return envelope addressed to the CPA firm. D. All differences between confirmation replies and book values should be reconciled by the CPAs, rather than the client.
C. All requests for confirmation should be mailed in envelopes bearing the CPA firm's return address and should include a return envelope addressed to the CPA firm.
60. To determine sample size in an attribute sampling application, what must be specified? A. Population mean, expected error rate, allowance for sampling risk. B. Allowance for sampling risk, risk of assessing control risk too low, standard deviation. C. Allowance for sampling risk, risk of assessing control risk too low, expected deviation rate. D. Population mean, standard deviation, allowance for sampling risk.
C. Allowance for sampling risk, risk of assessing control risk too low, expected deviation rate.
18. Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal control over the revenue cycle? A. Fictitious transactions may be recorded that cause an understatement of revenues and an overstatement of receivables. B. Claims received from customers for goods returned (and unpaid for) may be intentionally recorded in other customers' accounts permitting a misappropriation of cash. C. Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash. D. The failure to prepare shipping documents may lead to an understatement of inventory balances.
C. Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash.
75. Which of the following statistical selection techniques is least desirable for use by an auditor? A. Systematic selection. B. Stratified selection. C. Block selection. D. Sequential selection.
C. Block selection.
42. The auditors obtain audit evidence for accounts receivable by using positive or negative confirmation requests. Under which of the following circumstances might the negative form of the accounts receivable confirmation be useful? A. A substantial number of accounts are in disputes. B. The combination of inherent risk and control risk is high. C. Client records include a large number of relatively small balances. D. The auditors believe that recipients of the requests are unlikely to give them consideration.
C. Client records include a large number of relatively small balances.
31. Jones embezzled $10,000 from his company's account in Bank A. At year-end he hid the shortage by making a deposit on December 31 in Bank A, drawn on Bank B. He has not recorded the transaction on the books. Which of the following is most likely to be effective in detecting this fraud? A. Bank confirmation. B. Bank transfer schedule prepared using only the cash receipts and cash disbursements journals. C. Comparison of bank cutoff statement to the cash receipts and disbursements records. D. Receivable confirmation.
C. Comparison of bank cutoff statement to the cash receipts and disbursements records.
21. Which of the following statements is not correct? A. Cash is important to the audit process because of its vulnerability to misappropriation, despite the fact that the balance at the balance sheet date may be immaterial. B. Payroll cash account balances kept on an imprest basis are more easily controlled than others not so kept. C. Confirmation of cash should only be performed as of the balance statement date because the auditor expresses an opinion as of that date. D. Reviewing interbank transfers is important to the auditor because of the possibility that the client may be engaged in kiting.
C. Confirmation of cash should only be performed as of the balance statement date because the auditor expresses an opinion as of that date.
41. The auditors' count of the client's cash should be coordinated to coincide with the: A. Consideration of the internal controls with respect to cash. B. Close of business on the balance sheet date. C. Count of investment securities. D. Count of inventories.
C. Count of investment securities.
64. If all other factors specified in an attributes sampling plan remain constant, changing the specified tolerable rate from 6% to 10%, and changing the specified risk of assessing control risk too low from 3% to 7% would cause the required sample size to: A. Increase. B. Remain the same. C. Decrease. D. Change by 4%.
C. Decrease.
66. When using a statistical sampling plan, the auditors would probably require a smaller sample if the: A. Population increases. B. Desired allowance for sampling risk decreases. C. Desired risk of incorrect acceptance increases. D. Expected deviation rate increases.
C. Desired risk of incorrect acceptance increases.
33. Which of the following is not a control over cash disbursements? A. Disbursements should be made by check. B. A check protecting machine should be used. C. Documents supporting the payment of a disbursement should be canceled by the person preparing the check to prevent reuse. D. Voided checks should be defaced and filed with paid checks.
C. Documents supporting the payment of a disbursement should be canceled by the person preparing the check to prevent reuse.
58. Which of the following revenue related transactions is not linked to the accounts indicated? A. Recognize revenues too early--accounts receivable and revenue. B. Understate allowance for doubtful accounts--Bad debt expense, allowance for doubtful accounts. C. Don't write off uncollectible receivables--sales returns, sales discounts. D. Don't record discounts given to customers--Cash, sales discounts, accounts receivable.
C. Don't write off uncollectible receivables--sales returns, sales discounts.
45. The audit working papers often include a client-prepared, aged trial balance of accounts receivable as of the balance sheet date. This aging is best used by the auditors to: A. Consider internal control over credit sales. B. Test the accuracy of recorded charge sales. C. Estimate credit losses. D. Verify the validity of the recorded receivables.
C. Estimate credit losses.
13. Your client performed the physical count of inventory as of November 30, one month prior to year-end. Subsequently, your client closed the sales journal on 12/29/XX, two days before year end, and reported those two days' credit sales in January of the next year. Assuming the client uses a perpetual inventory system which of the following is most likely to be overstated relating to the year XX financial statements? A. Sales. B. Cash. C. Inventory. D. Accounts receivable.
C. Inventory.
58. Statistical sampling generally may be applied to test internal control when the client's internal control procedures: A. Depend primarily on appropriate segregation of duties. B. Are carefully reduced to writing and are included in client accounting manuals. C. Leave an audit trail in the form of evidence of compliance. D. Enable the detection of material fraud in the accounting records.
C. Leave an audit trail in the form of evidence of compliance.
31. When using statistical sampling, which of the following need not be known to evaluate the results of an attributes sample? A. Sample size. B. Risk of assessing control risk too low. C. Number of deviations in the population. D. Number of deviations found in the sample.
C. Number of deviations in the population.
34. Tracing recorded sales transactions to the bills of lading provides evidence about the: A. Completeness of sales transactions. B. Collectibility of sales transactions. C. Occurrence of sales transactions. D. Billing of all sales transactions.
C. Occurrence of sales transactions.
25. Which of the following is not generally used for selecting samples? A. Random number tables. B. Random number generators. C. Physical representation numbers. D. Systematic selection.
C. Physical representation numbers.
44. Which of the following is one of the better auditing techniques that might be used by an auditor to detect kiting? A. Review composition of authenticated deposit slips. B. Review subsequent bank statements and canceled checks received directly from the banks. C. Prepare a schedule of bank transfers. D. Prepare year-end bank reconciliations.
C. Prepare a schedule of bank transfers.
53. Johnson is engaged in the audit of a utility which supplies power to a residential community. All accounts receivable balances are small and internal control is effective. Customers are billed bi-monthly. In order to determine the validity of the accounts receivable balances at the balance sheet date, Johnson would most likely: A. Examine evidence of subsequent cash receipts instead of sending confirmation requests. B. Send positive confirmation requests. C. Send negative confirmation requests. D. Use statistical sampling instead of sending confirmation requests.
C. Send negative confirmation requests.
63. An auditor wishes to estimate inventory shrinkage by weighing a sample of inventory items. From experience, the auditor knows that a few specific items are subject to unusually large amounts of shrinkage. In using statistical sampling, the auditor's best course of action is to: A. Eliminate any of the items known to be subject to unusually large amounts of shrinkage. B. Increase the sample size to lessen the effect of the items subject to unusually large amounts of shrinkage. C. Stratify the inventory population so that items subject to unusually large amounts of shrinkage are reviewed separately. D. Continue to draw new samples until a sample is drawn which includes none of the items known to be subject to large amounts of shrinkage.
C. Stratify the inventory population so that items subject to unusually large amounts of shrinkage are reviewed separately.
33. Which of the following is consistent with effective internal control over sales transactions? A. The accounting department prepares a shipping report authorizing the shipment of goods. B. The accounting department accounts for all receiving reports. C. The billing department accounts for all shipping documents. D. The accounts payable department annually approves the extension of credit to customers.
C. The billing department accounts for all shipping documents.
45. Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom? A. The cashier prepares the daily deposit. B. The cashier makes the daily deposit at a local bank. C. The cashier posts the receipts to the accounts receivable subsidiary ledger. D. The cashier endorses the checks.
C. The cashier posts the receipts to the accounts receivable subsidiary ledger.
26. Analytical procedures performed during an audit indicate that accounts receivable doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client explanations would satisfy the auditor? A. A greater percentage of accounts receivable are listed in the "more than 120 days overdue" category than in the prior year. B. Internal control activities over the recording of cash receipts have been improved since the end of the prior year. C. The client opened a second retail outlet during the current year and its credit sales approximately equaled the older outlet. D. The client tightened its credit policy during the current year and sold considerably less merchandise to customers with poor credit ratings.
C. The client opened a second retail outlet during the current year and its credit sales approximately equaled the older outlet.
46. As one of the year-end audit procedures, the auditor instructed the client's personnel to prepare a confirmation request for a bank account that had been closed during the year. After the client's treasurer has signed the request, it was mailed by the assistant treasurer. What is the major flaw in this audit procedure? A. The confirmation request was signed by the treasurer. B. Sending the request was meaningless because the account was closed before the year end. C. The request was mailed by the assistant treasurer. D. The CPA did not sign the confirmation request before it was mailed.
C. The request was mailed by the assistant treasurer.
18. If the projected misstatement in a nonstatistical sampling is $8,000, while the tolerable misstatement is $9,000, what would an auditor likely conclude? A. Since the projected misstatement is less than the tolerable misstatement, the account is not misstated. B. Since the projected misstatement is less than the tolerable misstatement, the account is misstated. C. The risk is high that the account is materially misstated. D. The analysis has been improperly performed since the projected misstatement is unequal to the tolerable misstatement.
C. The risk is high that the account is materially misstated.
31. Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle? A. Merchandise received is not promptly reconciled to the outstanding purchase order file. B. Obsolete items included in inventory balances are rarely reduced to the lower of cost or market value. C. The write-off of receivables by personnel who receive cash permits the misappropriation of cash. D. Fictitious transactions are recorded that cause an understatement of revenue and overstatement of receivables.
C. The write-off of receivables by personnel who receive cash permits the misappropriation of cash.
24. An audit basically consists of having the auditor form an opinion regarding management's financial statement assertions. The auditor therefore develops general and specific program steps to apply to the accounts and transactions. In a particular case, s/he might do this by: A. Tracing sales invoices to shipping documents to tests the completeness of reported sales. B. Tracing shipping documents to sales invoices to test the occurrence of reported sales. C. Tracing sales invoices to shipping documents to test the occurrence of reported sales. D. Tracing sales invoices to shipping documents to test the completeness of recorded accounts receivable.
C. Tracing sales invoices to shipping documents to test the occurrence of reported sales.
46. Which of the following is not a primary objective of the auditors in the examination of accounts receivable? A. Determine the approximate realizable value. B. Consider the adequacy of internal control. C. Establish the existence of receivables. D. Determine the expected day of collection of each of the receivables.
D. Determine the expected day of collection of each of the receivables.
56. During the final planning of the accounts receivable program a CPA specified a tolerable misstatement of $30,000, instead of the $20,000 contained in the preliminary audit program. What would be the impact of this change? A. A decrease in population standard deviation. B. An increase in sample standard deviation. C. An increase in required sample size. D. A decrease in the required sample size.
D. A decrease in the required sample size.
37. Which of the following would indicate the need to use positive accounts receivable confirmations? A. A large population consisting of small balances. B. Good internal control over accounts receivable. C. Most accounts are with large reputable companies. D. A large number of accounts receivable are in dispute.
D. A large number of accounts receivable are in dispute.
40. The auditors should insist that a representative of the client be present during the physical examination of securities in order to: A. Lend authority of the auditor's directives. B. Detect forged securities. C. Coordinate the return of all securities to proper locations. D. Acknowledge the receipt of securities returned.
D. Acknowledge the receipt of securities returned.
78. In variables estimation sampling, the sample standard deviation is used to calculate the A. Point estimate of central tendency. B. Tainting of the sample interval. C. Risk of incorrect acceptance. D. Adjusted allowance for sampling risk.
D. Adjusted allowance for sampling risk.
50. Assume a mean-per-unit estimation variables sampling application with a tolerable misstatement of $70,000 and a book value of $700,000. After performing the sampling plan, the auditors calculated an adjusted allowance for sampling risk of $45,000 and a point estimate of the population's total audited value to be $650,000. Based on these results, the auditor would: A. Because the tolerable misstatement exceeds the adjusted allowance for sampling risk, conclude that the population does not contain a material misstatement. B. Because the total audited value ± tolerable misstatement includes the book value, conclude that the population does not contain a material misstatement. C. Because the tolerable misstatement exceeds the adjusted allowance for sampling risk, conclude that there is too great a risk that the account balance is materially misstated. D. Because the total audited value ± adjusted allowance for sampling risk does not include the book value, conclude that there is too great a risk that the account balance is materially misstated.
D. Because the total audited value ± adjusted allowance for sampling risk does not include the book value, conclude that there is too great a risk that the account balance is materially misstated.
48. Which of the following sets of duties would ordinarily be considered basically incompatible in terms of good internal control? A. Preparation of monthly statements to customers and maintenance of the accounts payable subsidiary ledger. B. Posting to the general ledger and approval of additions and terminations relating to the payroll. C. Custody of unmailed signed checks and maintenance of expense subsidiary ledger. D. Collection of receipts on account and maintaining accounts receivable records.
D. Collection of receipts on account and maintaining accounts receivable records.
43. Jones was engaged to audit the financial statements of Gamma Corporation for the year ended June 30, 200X. Having completed an examination of the investment securities, which of the following is the best method of verifying the accuracy of recorded dividend income? A. Tracing recorded dividend income to cash receipts records and validated deposit slips. B. Utilizing analytical techniques and statistical sampling. C. Comparing recorded dividends with amounts appearing on federal information form 1099s. D. Comparing recorded dividends with a standard financial reporting service's record of dividends.
D. Comparing recorded dividends with a standard financial reporting service's record of dividends.
38. In a manufacturing company which one of the following audit procedures would give the least assurance of the existence of the assets in the general ledger balance of investment in stocks and bonds at the audit date? A. Confirmation from the broker. B. Inspection of year-end brokers' statements. C. Vouching all changes during the year to brokers' advises and statements. D. Examination of paid checks issued in payment of securities purchased.
D. Examination of paid checks issued in payment of securities purchased.
47. Once a CPA has determined that accounts receivable have increased due to slow collections in a "tight money" environment, the CPA would be likely to: A. Increase the balance in the allowance for bad debts accounts. B. Review the going concern ramifications. C. Review the credit and collection policy. D. Expand tests of collectibility.
D. Expand tests of collectibility.
48. To gather evidence regarding the balance per bank in a bank reconciliation, an auditor could examine all of the following except A. Cutoff bank statement. B. Year-end bank statement. C. Bank confirmation. D. General ledger.
D. General ledger.
57. Which of the following is an advantage of systematic selection over random number selection? A. It provides a stronger basis for statistical conclusions. B. It enables the auditor to use the more efficient "sampling with replacement" tables. C. There may be correlation between the location of items in the population, the feature of sampling interest, and the sampling interval. D. It does not require establishment of correspondence between random numbers and items in the population.
D. It does not require establishment of correspondence between random numbers and items in the population.
57. Recognizing a loan received as revenue instead of as a liability has a positive effect on the reported financial statements for all of the following except: A. It understates liabilities. B. It overstates revenues C. It overstates net income. D. It overstates assets.
D. It overstates assets.
76. Various factors influence the sample size for a substantive test of details of an account balance. All other factors being equal, which of the following would lead to a larger sample size? A. Lower assessment of control risk. B. Greater reliance on analytical procedures. C. Smaller expected frequency of misstatements. D. Smaller measure of tolerable misstatement.
D. Smaller measure of tolerable misstatement.
51. When there are a large number of relatively small account balances, negative confirmation of accounts receivable is feasible if the combination of inherent risk and control risk is: A. Low, and the individuals receiving the confirmation requests are unlikely to give them adequate consideration. B. High, and the individuals receiving the confirmation requests are likely to give them adequate consideration. C. High, and the individuals receiving the confirmation requests are unlikely to give them adequate consideration. D. Low, and the individuals receiving the confirmation requests are likely to give them adequate consideration.
D. Low, and the individuals receiving the confirmation requests are likely to give them adequate consideration.
20. Which of the following is correct concerning "window dressing" for cash? A. A segregation of duties within the cash function effectively eliminates its occurrence. B. It generally involves manipulation of inventory. C. It is illegal, and an audit is designed to provide reasonable assurance of its detection. D. Many forms of it require no action by the auditors.
D. Many forms of it require no action by the auditors.
14. Your client left the cash receipts journal open after year-end for an extra day and included January 1 cash receipts in the 12/31/XX totals. All of those cash receipts were due to cash sales. Assuming the client uses a periodic inventory system with a 12/31/XX count of the physical inventory, which of the following is most likely to be true relating to the year XX financial statements? A. Sales are understated. B. Accounts receivable are understated. C. Inventory is overstated. D. Net income is overstated.
D. Net income is overstated.
42. The auditors compare information on canceled checks with information contained in the cash disbursement journal. The objective of this test is to determine that: A. Recorded cash disbursement transactions are properly authorized. B. Proper cash purchase discounts have been recorded. C. Cash disbursements are for goods and services actually received. D. No discrepancies exist between the data on the checks and the data in the journal.
D. No discrepancies exist between the data on the checks and the data in the journal.
38. The auditors expect a population deviation rate of billing errors of eight percent, and have established a tolerable rate of five percent. The sampling approach most likely to be used is: A. Attributes sampling. B. Stratified random sampling. C. Variables sampling. D. None, as sampling does not seem appropriate in this situation.
D. None, as sampling does not seem appropriate in this situation.
41. The auditors' failure to recognize a misstatement in an amount or a deviation in an internal control data processing procedure is described as a: A. Statistical error. B. Sampling misstatement. C. Standard error of the mean. D. Nonsampling error.
D. Nonsampling error.
62. In testing accounts receivable, an auditor sends out positive confirmation requests to 100 randomly selected customers. A customer returns the confirmation indicating that the balance is correct when, in fact, the balance is overstated. This is an example of: A. Projected misstatement. B. Sampling error. C. Standard error. D. Nonsampling error.
D. Nonsampling error.
24. Which of the following is not a control that generally is established over cash transactions? A. Separating cash handling from recordkeeping. B. Centralizing the receipt of cash. C. Depositing each day's receipts intact. D. Obtaining a receipt for every disbursement.
D. Obtaining a receipt for every disbursement.
56. A company's decision to use the fair value option for valuation of marketable securities is most likely to affects which of the following assertions the most? A. Completeness. B. Existence. C. Fairness. D. Presentation and Disclosure
D. Presentation and Disclosure
4. Signed checks should be returned to the cash disbursements clerk for mailing. True False
False
4. The definition of a "deviation" for a test of a control should include only those deviations that result in misstatements in the financial statements. True False
False
54. Which of the following statements is correct concerning the use of nonstatistical sampling for substantive tests? A. Its use is generally acceptable only for populations with an immaterial book value. B. It requires the use of structured sample size selection techniques to be acceptable. C. It may be especially useful in circumstances in which the combination of inherent and control risk is at the maximum level. D. Results will be projected to the population.
D. Results will be projected to the population.
19. A client might overstate December 31 accounts receivable balances by dating and recording January transactions in December. Such entries recorded in which journal are most likely to achieve this end? A. Cash receipts. B. Payroll. C. Purchases. D. Sales.
D. Sales.
37. Internal control over marketable securities is enhanced when: A. Securities are held by the cashier. B. Securities are registered in the name of the custodian. C. Detailed records of securities are maintained by the custodian of the securities. D. Securities are held under joint control of two or more officials.
D. Securities are held under joint control of two or more officials.
36. Which of the following is not confirmed on the standard form used for cash balances at financial institutions? A. Cash checking account balances. B. Cash savings account balances. C. Loans payable. D. Securities held for the client by the financial institution.
D. Securities held for the client by the financial institution.
15. An internal control questionnaire indicates that an approved receiving report is required to accompany every check request for payment of merchandise. Which of the following procedures provides the best evidence on operating effectiveness? A. Select and examine receiving reports and test whether the related canceled checks are dated no earlier than the receiving reports. B. Select and examine receiving reports and test whether the related canceled checks are dated no later than the receiving reports. C. Select and examine canceled checks and test whether the related receiving reports are dated no earlier than the checks. D. Select and examine canceled checks and test whether the related receiving reports are dated no later than the checks.
D. Select and examine canceled checks and test whether the related receiving reports are dated no later than the checks.
27. The auditor using nonstatistical attributes sampling, but who nevertheless has chosen the sample in conformity with random selection procedures: A. Need not consider the risk of assessing control risk too low. B. Has committed a nonsampling error. C. Will have to use discovery sampling techniques to evaluate the results. D. Should compare the deviation rate of the sample to the tolerable rate.
D. Should compare the deviation rate of the sample to the tolerable rate.
51. Properly designed internal control will permit the same employee to: A. Receive and deposit checks, and also approve write-offs of customer accounts. B. Approve vouchers for payment, and also receive and deposit cash. C. Reconcile the bank statements, and also receive and deposit cash. D. Sign checks, and also cancel supporting documents.
D. Sign checks, and also cancel supporting documents.
11. An auditor's analytical procedures have revealed that the accounts receivable of a client have doubled since the end of the prior year. However, the allowance for doubtful accounts, as a percentage of accounts receivable remained about the same. Which of the following client explanations most likely would satisfy the auditor? A. Credit standards were liberalized in the current year. B. Twice as many accounts receivable were written off in the prior year as compared to this year. C. A greater percentage of accounts were currently listed in the "more than 90 days overdue" category than in the prior year. D. The client opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.
D. The client opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.
50. Which of the following is the best argument against the use of negative accounts receivable confirmations? A. The cost-per-response is excessively high. B. There is no way of knowing if the intended recipients received them. C. Recipients are likely to feel that in reality the confirmation is a subtle request for payment. D. The inference drawn from receiving no reply may not be correct.
D. The inference drawn from receiving no reply may not be correct.
61. The tolerable deviation rate in sampling for tests of controls is: A. Used to determine the probability of the auditor's conclusion based upon reliance factors. B. The probability that the financial statements are not materially in error. C. A measure of the reliability of substantive tests. D. The rate the auditor will tolerate without modifying the planned assessment of control risk.
D. The rate the auditor will tolerate without modifying the planned assessment of control risk.
40. To verify that all sales that have been shipped to customers have been recorded, a test of transactions should be completed on a representative sample drawn from: A. The sales journal. B. The billing clerk's file of sales orders. C. Duplicate copies of sales invoices. D. The shipping clerk's file of duplicate copies of bills of lading.
D. The shipping clerk's file of duplicate copies of bills of lading.
1. The auditors should count small petty cash funds at year-end to make sure that balance is not understated on the financial statements. True False
False
1. The department approving a sales transaction should be the shipping department. True False
False
10. Auditors project the misstatements found in the sample to the population when using statistical sampling, but not when using nonstatistical sampling. True False
False
10. For investments in securities accounted for by the equity method, the auditors are primarily concerned with verifying the market value of the investments. True False
False
2. Accounts receivable that are written-off should not be turned over to a collection agency. True False
False
3. Mailroom personnel of a company should prepare a control listing of incoming cash receipts and deposit them intact daily. True False
False
1. Stratification of the population generally results in a more efficient sampling plan. True False
True
