Audit Final
tolerable rate of deviation
A rate of deviation set by the auditor in respect of which the auditor seeks to obtain an appropriate level of assurance that the rate of deviation set by the auditor is not exceeded by the actual rate of deviation in the population.
client-imposed scope limitation
A restriction on auditors from gathering sufficient appropriate evidence because of the client's deliberate refusal to provide them access to evidence or to otherwise limit the auditors' application of auditing procedures.
engagement quality review
A review of audit documentation by an additional person (normally, a partner or equivalent with the firm) who has not been involved with the audit to ensure that the quality of the audit work and reporting is consistent with the quality standards of the public accounting firm.
If an audit team examined 100 transactions and found one deviation from an important control procedure, the audit conclusion could be that control risk can be assessed at the associated control risk level when
More information about decision criteria is available.
An example of a program in which the audit team would be most interested in testing automated application controls is a(n)
Payroll processing program.
In an environment that is highly automated, an auditor determines that it is not possible to reduce detection risk solely by using substantive tests of transactions. Under these circumstances, the auditor most likely would
Perform tests of controls to support a lower level of assessed control risk
Which of the following accounts would most likely be audited in connection with a related balance-sheet account?
Property Tax Expense
program change controls
Provide assurance that all modifications to programs are authorized and that the changes are completed, tested and properly implemented.
Budd, the purchasing agent of Lake Hardware Wholesalers, has a relative who owns a retail hardware store. Budd arranged for hardware to be delivered by manufacturers to the retail store on a cash-on-delivery (C.O.D) basis, thereby enabling his relative to buy at Lake's wholesale prices. Budd was probably able to accomplish this because of Lake's poor internal control over?
Purchase orders.
Which of the following accounts is not normally part of the revenue and collection cycle?
Purchases Returns and Allowances.
Auditors have a responsibility related to management's disclosure of new information related to subsequent events until
The audit report release date.
attributes sampling
a statistical, probabilistic method of sample evaluation that results in an estimate of the proportion of items in a population containing a characteristic or attribute of interest
nonrepresentative sample
a subgroup that differs in important ways from the larger group (or population) to which it belongs
search for unrecorded liabilities
a substantive procedure to test the completeness assertion for liability accounts
Utilizing third-party data to supplement "traditional" analytical procedures during planning, gives auditors access to increased volume of data on the client but has the potential to have an initial negative impact on audit
efficiency
Subsequent Events
events occurring between the date of the financial statements and the date of the auditor's report
One way to test all items in a population of occurrences for a particular control activity is to use ______________testing, which is now possible due to the emergence of ADA.
exception
uncorrected misstatement
a misstatement that the auditors have identified and accumulated during the audit that the client has not corrected (or adjusted), often because of materiality or cost/benefit considerations
sequential sampling
a plan in which an initial sample is selected and the audit team (1) draws a final conclusion regarding the effectiveness of the control or (2) selects additional items before drawing a final conclusion regarding the effectiveness of the control; also referred to as stop-or-go sampling
Qualified Opinion
a report issued when the auditor believes that the overall financial statements are fairly stated but that either the scope of the audit was limited or the financial data indicated a failure to follow GAAP
Disclaimer of Opinion
a report issued when the auditor is not able to become satisfied that the overall financial statements are fairly presented or the auditor is not independent
Departure from GAAP
situation in which an entity does not follow GAAP in preparing its financial statements. Auditors can issue qualified or adverse opinions for material departures from GAAP
circumstance-imposed scope limitation
situation in which auditors cannot gather sufficient appropriate evidence because of circumstances beyond the auditors' and client's control such as late appointment of the auditors
going-concern uncertainty
situation in which questions are raised about an entity's ability to continue operations and meet its obligations as they become due
division of responsibility
situation in which the component auditors are involved with the examination of a subsidiary, branch, component, or investment that is included in the financial statements audited by group auditors
unasserted claim
a representation that no formal lawsuit or assertion has been filed or threatened on behalf of others against the audit client but that circumstances such as a catastrophe, accident, or other physical occurrence could result in a suit or assertion being filed in the future
nonstatistical sampling methods
a sampling method that does not attempt to measure the audit team's exposure to sampling risk in determining sample size or evaluating sample results
integrated report
a single report issued by auditors expressing their opinion on the fairness of the financial statements and effectiveness of internal control over financial reporting
Control Totals
subtotals of selected fields for an entire batch of transactions
ADA has a major impact on transaction level control testing by enabling the auditor to more easily
test the entire population
factor
the action to sell accounts receivable to another party at a discount from face value
component auditor
the auditor who audits divisions, subsidiaries, or components that are included in the group financial statements
group auditors
the auditors who perform the audit of a material portion of the assets, liabilities, revenues, and expenses of an entity's group financial statements; also known as principal auditors
updated report
the auditors' report on prior-year financial statements that is based on both the prior-year audit and information that has come to the auditors' attention in the most recent audit
audit trail
the chain of evidence provided through coding, cross-references, and documentation connecting account balances and other summary results with the original transaction source documents
date of the financial statements
the date of the end of the latest period covered by the financial statements
Date of the auditor's report
the date on which auditors have obtained sufficient appropriate evidence to support their opinion
Revenue Recognition
The GAAP principle that revenue is recorded on the date it is earned even if cash has not been received.
upper limit rate of deviation (ULRD)
a measure that adjusts the sample rate of deviation for the audit team's acceptable level of sampling risk
Which of the following statements is most likely to be included in an attorney letter?
"Please furnish to our auditors such explanation, if any, that you consider necessary to supplement the foregoing information."
Which of the following responses to an accounts receivable confirmation at December 31 would cause an audit team the most concern?
"These goods were returned for credit on November 15."
audit report release date
-Date on which auditors allow the client to use the auditor's reports in conjunction with the financial statements
attorney letter
A communication prepared by the client but sent by the auditors to the client's attorneys that details all pending litigation, claims, and assessments against the client and that requests the attorneys to comment on these matters directly to the client's auditors.
Baily Cox, an audit manager, judged that the test of controls of the company's 50,000 purchase transactions should be based on a tolerable rate of deviation of 6 percent, a risk of overreliance of 5 percent, and an expected population deviation rate of 3 percent. Using AICPA sample size tables, Cox determined that the appropriate sample size in this situation would be
195
Assume that Dylan Lee found two deviations in a sample of 90 transactions. Using AICPA sample evaluation tables, Lee determined that the ULRD at a 5 percent risk of overreliance is
6.9 percent.
Modified Opinion
A qualified opinion, an adverse opinion, or a disclaimer of opinion.
vendor's invoice
A bill sent from the vendor to the entity purchasing the goods or services
significant deficiency
A deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness yet important enough to merit attention by those charged with governance.
Material Weakness
A deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected, on a timely basis.
Discovery Sampling
A form of attribute sampling that is used to determine a specified probability of finding at least one example of an occurrence (attribute) in a population
Ambrose is auditing the financial statements of Mays (dated December 31, 2020). The date of the auditor's report is February 17, 2021, and the audit report release date is February 20, 2021. For which of the following matters would Ambrose have the least responsibility?
A major loss due to a catastrophe that occurred and was known by Ambrose on March 1, 2021.
explanatory paragraph
A paragraph added to an auditors' report that either provides information fundamental to users' understanding of the financial statements (emphasis-of-matter paragraph) or is relevant to users' understanding of the audit, the auditor's responsibility, or auditors' report (other-matter paragraph).
emphasis of matter paragraph
A paragraph added to an auditors' report that provides information fundamental to users' understanding of the financial statements (such as consistency or going-concern uncertainties).
other-matter paragraph
A paragraph added to the auditors' report that is relevant to users' understanding of the audit, the auditor's responsibility, or the auditors' report
aged trial balance
A schedule that lists each individual receivable and indicates whether it is current or past due and if past due, for how long. The total should equal the accounts receivable general ledger balance
Scope Limitation
A situation in which the auditors are unable to obtain sufficient appropriate evidence. If material, a scope limitation results in the issuance of either a qualified opinion or disclaimer of opinion.
access to programs and data controls
A type of general control that provides reasonable assurance that access to programs and data is granted only to authorized users
random selection
A way of ensuring that a sample of people is representative of a population by giving everyone in the population an equal chance of being selected for the sample
written representation
A written assertion provided by management to auditors related to the entity's financial statements, the information provided to the auditors, and management's internal control over financial reporting to confirm certain matters and support other evidence obtained during the audit
During the confirmation of accounts receivable, an auditor receives a confirmation via the client's fax machine. Which of the following actions should the auditor take?
Accept the confirmation but verify the source and content through a telephone call to the respondent.
A client's purchasing system ends with the recording of a liability and its eventual payment. Which of the following best describes auditors' primary concern with respect to liabilities resulting from the purchasing system?
Accounts payable are not materially understated.
When auditing the revenue and collection cycle, auditors normally select balances to confirm from the
Accounts receivable listing
dual-purpose procedure
An audit procedure that simultaneously serves the substantive purpose (obtain direct evidence about the dollar amounts in account balances) and the test of controls purpose (obtain evidence about the company's performance of its own control activities).
Which of the following would not result in the audit team's selecting a larger sample of controls for examination?
An increase in the tolerable rate of deviation from 3 percent to 6 percent.
sales invoice
An invoice used as a source document for recording a sale on account
Unmodified Opinion
An opinion issued when the auditors conclude that the financial statements present the financial condition, results of operations, and cash flows in accordance with GAAP (until recently, known as an unqualified opinion).
Audit teams can obtain evidence of the proper functioning of password access control to a accounting information system by
Attempting to sign on to the accounting information system with a false password.
Which of the following automated application controls would offer reasonable assurance that inventory data were completely and accurately entered?
Batch totals.
A customer intended to order 100 units of product Z96014 but incorrectly ordered product Z96015, which is not an actual product. Which of the following controls most likely would detect this error?
Check digit verification.
Which of these persons generally does not participate in writing the management letter?
Client's outside attorneys.
Which of the following substantive procedures should auditors ordinarily perform regarding subsequent events?
Compare the latest available interim financial statements with the financial statements being audited.
When auditing account balances of liabilities, auditors are most concerned with management's assertion about
Completeness
In a test of controls, auditors may trace receiving reports to vouchers recorded in the voucher register. This is a test for
Completeness.
Which of the following would reduce the effectiveness of internal control in an accounting information system?
Computer operators have access to operator instructions and detailed program lists.
Audit teams use the test data method to gain certain assurances with respect to
Control procedures contained within the program.
automated application controls
Controls applied to specific business activities within a computerized processing system to address management assertions regarding the financial statements; major categories are input controls, processing controls, and output controls.
Processing Controls
Controls designed to provide reasonable assurance that the correct program is used for processing, all transactions are processed, and the transactions update appropriate files.
General Controls
Controls that relate to the overall information processing environment and have a pervasive effect on the entity's computer operations.
The primary reason auditors request responses to attorney letters is to provide auditors
Corroboration of the information furnished by management about litigation, claims, and assessments.
For which of the following accounts would the matching concept be the most appropriate?
Cost of goods sold.
Which of the following steps in attributes sampling is most closely related to identifying key controls corresponding to the relevant management assertions?
Determine the objective of sampling.
After the audit report release date, auditors determine that an important auditing procedure was omitted. Which of the following initial courses of action is most appropriate?
Determine whether the omitted procedure is important in supporting the auditors' opinion on the entity's financial statements
Which report would not be appropriate for a public accounting firm to provide on the ICFR for issuers?
Disclaimer of opinion—significant deficiencies exist.
Jerry Tim is examining an important internal control in the audit of Langly Company. In past audits, deviations from this control have been observed at a minimal rate (less than 0.1 percent); however, because the account balance affected by this control is highly susceptible to fraud, it is important that Tim obtain a high level of assurance that deviations occur at no higher than a predetermined (low) rate. Which of the following sampling methods would Tim most likely use to evaluate this control? Multiple Choice
Discovery sampling.
When an audit team does not receive a response on a positive accounts receivable confirmation, auditors should do all of the following except:
Do nothing for immaterial balances.
Which of the following persons is responsible for controlling access to systems documentation and access to program and data files?
Librarians.
Which of the following is true with respect to fraud risk factors in an IT environment?
Employees have increased access to information systems and computer resources in an IT environment.
Which of the following is the best reason for prenumbering in numerical sequence documents such as sales orders, shipping documents, and sales invoices
Enables personnel to check the numerical sequence for missing documents and unrecorded transactions
An audit team is auditing sales transactions. One step is to vouch a sample of debit entries from the accounts receivable subsidiary ledger back to the supporting sales invoices. The purpose of this audit procedure is to establish that
Entries in the accounts receivable subsidiary ledger were properly invoiced.
Audit documentation often includes a client-prepared, aged trial balance of accounts receivable as of the balance sheet date. The audit team uses this aging primarily to:
Estimate credit losses.
In which step of a sampling plan is nonstatistical sampling different from statistical sampling?
Evaluate the sample results.
Which of the following is the best audit procedure for determining the existence of unrecorded liabilities?
Examine a sample of cash disbursements in the period subsequent to year-end
Which of the following tests of details most likely would help an auditor determine whether accounts payable have been misstated?
Examining vendor statements for amounts not reported as purchases.
In the audit of accounts receivable, the most important emphasis should be on the
Existence assertion.
Confirmation of individual accounts receivable balances directly with debtors will, of itself, normally provide the strongest evidence concerning the:
Existence of the balances confirmed
Controls used in the management of a computer center to minimize the possibility of using an incorrect file or program are
External labels
Before performing analytics, it is essential to understand the nature of the data and make sure it is properly modeled for use on the audit. True false question. True
F
The increased use of data and analytical tools has the potential of improving the efficiency of risk assessment procedures, but will not likely increase the effectiveness of analytical procedures during the planning stages of the audit.
F
If the auditors decide to present separate reports on the entity's financial statements and ICFR in the audit of an issuer, which of the following should be modified to refer to the other report?
FS and ICFR reports
subsequently discovered facts
Facts that become known to the auditor after the date of the auditor's report that, had they been known to the auditor at that date, may have caused the auditor to revise the auditor's report.
Which of the following would not overstate current-period net income?
Failing to record a check paying an item in Vouchers Payable.
An auditor noted that client sales increased 10 percent for the year. At the same time, Cost of Goods Sold as a percentage of sales had decreased from 45 percent to 40 percent and year-end accounts receivable had increased by 8 percent. Based on this information, the auditor is most likely concerned about:
Fictitious sales.
Which of the following would be the best protection for a company that wishes to prevent the "lapping" of trade accounts receivable?
Have customers send payments directly to the company's depository bank.
The client's computerized exception reporting system helps audit teams conduct a more efficient audit because it
Highlights abnormal conditions.
A major objective of written representations is to
Impress on management its ultimate responsibility for the financial statements and disclosures
When using test data, why are audit teams required to prepare only one transaction to test each IT control?
In an IT environment, each transaction is handled in an identical manner
If the sample evidence does not support the planned level of control risk, the audit team could
Increase the assessed level of control risk. Perform additional substantive procedures, reducing the necessary level of detection risk. Expand the sample to achieve an observed upper limit rate of deviation less than the tolerable rate of deviation.
If an audit team calculated an ULRD of 5 percent when the tolerable rate of deviation was 4 percent, both at the same risk of overreliance, control risk should be
Increased and substantive procedures should be adjusted accordingly.
Which of the following might be detected by auditors' cutoff review and examination of sales journal entries for several days prior to the balance sheet date?
Inflating sales for the year.
The financial records of the Movitz Company show that R. Dennis owes $4,100 on an account receivable. An independent audit is being carried out, and the auditors send a positive confirmation to R. Dennis. What is the most likely reason as to why a positive confirmation rather than a negative confirmation was used here?
Inherent risk was particularly high for accounts receivable.
Which of the following substantive procedures would auditors most likely perform to obtain evidence about the occurrence of subsequent events?
Investigate changes in shareholders' equity occurring after the date of the financial statements.
When verifying debits to the perpetual inventory records of a nonmanufacturing company, auditors would be most interested in examining a sample of purchase
Invoices.
A material weakness in ICFR is a situation in which
It is reasonably possible that a material misstatement would not be detected on a timely basis.
J. Griffith audited the financial statements of Mets Magnificat Corporation for the year ended December 31, 2020. She completed gathering sufficient appropriate evidence on January 30 and later learned of a stock split voted by the board of directors on February 5. The financial statements were changed to reflect the split, and she now needs to dual date the report on the entity's financial statements. Which of the following is the proper form?
January 30, 2021, except as to Note X, which is dated February 5, 2021.
An audit team would most likely examine the detail support for charges to which of the following accounts?
Legal expense.
Which of the following is not required by generally accepted auditing standards?
Management letter.
Hall accepted an engagement to audit the year 1 financial statements of XYZ Company. XYZ completed the preparation of the year 1 financial statements on February 13, year 2, and its auditors began the fieldwork on February 17, year 2. Hall completed gathering sufficient appropriate evidence on March 24, year 2; Hall's report and XYZ's financial statements were released on March 28, year 2. The written representations normally would be dated
March 24, year 2.
An auditor is required to confirm accounts receivable if the accounts receivable balances are:
Material
The scope of an audit is not restricted when an attorney letter limits the response to
Matters to which the attorney has given substantive attention in the form of legal representation.
An auditor noted that client sales increased 10 percent for the year. At the same time, Cost of Goods Sold as a percentage of sales had decreased from 45 percent to 40 percent and year-end accounts receivable had increased by 8 percent. Based on this information, the auditor interviewed the sales manager, who stated that the increase in sales without a corresponding increase in cost of goods sold was due to a price increase enacted by the company during the year. How would the auditor test the sales manager's representation?
Obtain copies of all price lists in use during the year and vouch the prices to sales invoices.
Which of the following is ordinarily performed last in the audit examination?
Obtaining signed written representations
Which of the following major stages of the audit is most closely related to attributes sampling?
Performing tests of controls.
A furniture company ordered 84 tables from a supplier. The supplier accidentally sent only 48 tables, but the receiving department at the furniture company accepted the tables. The invoice was eventually received but was for the original 84 tables. The furniture company paid the entire amount. Which of the following controls would have been least likely to have prevented this erroneous payment?
Personnel in the furniture company's purchasing department should compare the purchase requisition with the purchase order.
Which of the following sampling risks does the audit team control in an attributes sampling application (ROO = risk of overreliance, ROU = risk of underreliance)?
ROO YES ROU NO
Which of the following results of analytical procedures would most likely indicate possible unrecorded liabilities?
Ratio of accounts payable to total current liabilities of 3:1, compared to 5:1 for the prior period.
To determine whether accounts payable are complete, auditors perform a test to verify that all merchandise received has been recorded. The population for this test consists of all
Receiving reports.
Curtis, a maintenance supervisor, submitted maintenance invoices from a phony repair company and received the checks at a post office box. This should have been prevented by
Refusal by the purchasing department to approve the vendor.
unrestricted random selection
a method of choosing items in which all items in the population are assigned a number and selected based on random numbers picked from a random number table or generated from a computer program
Which of the following normally occurs earliest in the audit examination?
Review of audit documentation.
When processing controls within the accounting information system may not leave visible evidence that could be inspected by audit teams, the teams should
Review transactions submitted for processing and compare them to related output.
What is an auditor's primary method to corroborate information on litigation, claims, and assessments?
Reviewing the response from the client's lawyer to a letter of audit inquiry
To conceal a theft involving receivables, a dishonest bookkeeper might charge which of the following accounts?
Sales Returns
When a sample of customer accounts receivable is selected for vouching debits, auditors will vouch them to
Sales invoices with shipping documents and customer sales invoices.
Which of the following accounts does not appear in the acquisition and expenditure cycle?
Sales returns.
Which of the following best describes the method of determining the ULRD?
Sample rate of deviation + Allowance for sampling risk.
Which of these substantive procedures is not used to obtain evidence about contingencies?
Scanning expense accounts for credit entries.
Which of the following procedures is least likely to be performed before the balance-sheet date?
Search for unrecorded liabilities.
In which of the following circumstances would the audit team most likely use attributes sampling?
Selecting purchase orders for indication of proper authorization.
A client has a separate sales group for its largest "preferred" customers, a select group of customers who normally make purchases in excess of $250,000 and often have accounts receivable balances in excess of $1 million. Which of the following audit procedures would the auditor most likely perform?
Send out positive confirmations on a large sample of these customers.
When accounts receivable are confirmed at an interim date, auditors need not be concerned with:
Sending negative confirmations to all customers as of the year-end date.
Which of the following internal control activities most likely would deter lapping of collections from customers?
Separation of duties between receiving cash and posting the accounts receivable ledger.
A type of sampling application in which a relatively small initial sample is examined and decisions regarding expanding that sample are based on the results of this initial sample is known as
Sequential sampling.
Subsequent knowledge of which of the following would cause the entity to adjust its December 31 financial statements?
Settlement of litigation in February for $100,000 that had been estimated at $12,000 in the December 31 financial statements.
block selection
a method of choosing sample items in which a series of contiguous (or adjacent) items is chosen from the population
When an audit team traces a sample of shipping documents to the related sales invoice copies, they are trying to find relevant evidence that
Shipments to customers were invoiced
The primary benefit of using nonstatistical sampling is that
Simple to use
Which of the following information would be included in the Basis for Opinion section of the auditors' report on ICFR if the report is presented separately from the auditors' report on the entity's financial statements of an issuer?
Statements identifying the responsibility of the auditors and management for ICFR
Test of Details
Substantive tests that concentrate on the details of items contained in the account balance and disclosure.
An audit firm is testing controls within the purchasing cycle. In which of the following procedures would the firm most likely apply sampling techniques?
Testing of operating effectiveness of controls over authorization of purchase orders
An audit client sells 15 to 20 units of product annually. A large portion of the annual sales occur in the last month of the fiscal year. Annual sales have not materially changed over the past five years. Which of the following approaches would be most effective concerning the timing of audit procedures for revenue?
The auditor should inspect transactions occurring in the last month of the fiscal year and review the related sale contracts to determine that revenue was posted in the proper period.
haphazard selection
a method of selecting sample items in an unstructured manner but without any intentional bias
Revenues are normally considered to have been earned when:
The company has substantially accomplished what it must to be entitled to the benefits.
What does the auditor need to document when there is substantial doubt that a client will continue as a going concern?
The conditions or events that suggest there is a going concern uncertainty. Management's plan (or lack thereof) to mitigate the conditions and to continue as a going concern. The auditor's conclusion on whether, after evaluating management's plan, substantial doubt exists regarding the company's ability to continue as a going concern and whether any report modifications are needed.
The auditing standards regarding subsequently discovered facts refers to knowledge obtained after
The date of the auditor's report.
Expected population deviation rate
The deviation rate that the auditor expects to exist in the population.
The interpretation of the ULRD in an attributes sampling application is
The estimated rate of deviation in the population with probability equal to the risk of overreliance that the population deviation rate is higher.
system-generated reports
any report that is generated by the audit clients information system that is used to execute its internal control procedures or produce its financial statements.
Which of the following statements is not true with respect to written representations?
The failure of management to furnish them is a significant scope limitation, resulting in either an adverse opinion or a disclaimer of opinion.
Which of the following is an internal control activity that could prevent a paid disbursement voucher from being presented for payment a second time?
The official who signs the check should compare the check with the voucher and should stamp "PAID" on the voucher documents.
individual(s) charged with governance
The persons responsible for overseeing the client's financial reporting process, including the internal control over financial reporting; individuals charged with governance may include the client's management and full board of directors, but typically refers to public entities' audit committee of the board of directors.
physical representation of the population
The population from which the auditors sample
Sampling Risk
The possibility that the sample drawn is not representative of the population and that, as a result, the auditor reaches an incorrect conclusion about the reliability of the control, the account balance, or class of transactions based on the sample.
roll-forward procedures
The procedure(s) performed by auditors to extend the conclusions from an interim date to the date of the financial statements
rollover method
The process used when evaluating the effect of uncorrected misstatements that considers only the current-period income effect(s) of the potential adjustment
Which of the following statements is not true with respect to the auditors' report on ICFR?
The report will be dated as of the date of the financial statements.
Why is the audit team more concerned with controlling the exposure to the risk of overreliance than with the risk of underreliance?
The risk of overreliance can ultimately result in the audit team's failing to reduce audit risk to acceptable levels.
An audit team was testing source documents in the purchasing cycle and identified the following circumstances. Which of the following would be the most indicative of source document fraud?
The same invoice date appears on different invoices from the same vendor.
voucher package
The set of documents used to authorize payment to a supplier. It consists of a purchase order, receiving report, and supplier invoice.
systematic selection
The technique of selecting a sample by drawing every nth item in the population, following one or more random starting points.
Which of the following is not an element or statement included in the Basis for Opinion Section of a standard (unmodified) report on the financial statements of an issuer?
The tenure of the auditor.
sales cutoff tests
The tests that ensure that sales are recorded in the proper period - generally, when they are shipped - and that the cost of sales is recorded and removed from inventory.
Write-offs of doubtful accounts should be approved by:
The treasurer.
Allowance for sampling risk
The uncertainty that results from sampling; the difference between the expected mean of the population and the tolerable deviation or misstatement.
Key Audit Matters
Those matters that, in the auditor's professional judgment, were of most significance in the audit of the financial statements during the current period. These key audit matters are selected from those matters communicated with those charged with governance. The PCAOB and IAASB do not view critical audit matters and key audit matters fundamentally differently; these are slightly different terms to articulate the same underlying idea.
Which of the following best describes the role of analytical procedures near the end of the audit engagement?
To provide an overall review of the financial information and assessment of the adequacy of evidence gathered during the audit engagement.
Which of the following factors used to determine sample size is normally based on the extent to which the audit team expects to rely on the internal control being examined?
Tolerable rate of deviation.
Which of the following statements most likely represents a control consideration for an entity that performs its accounting using mobile computing devices?
Unauthorized persons find it easy to access the computer and alter the data files.
Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this defalcation and be least likely to be detected by an auditor?
Understating the sales journal.
Auditors sometimes use comparisons of ratios as audit evidence. An unexplained decrease in the ratio of gross profit to sales may suggest which of the following possibilities?
Unrecorded sales.
In which of the following circumstances would an auditor expect to find that an entity had implemented automated controls to reduce risks of misstatement?
When transactions are high volume and recurring
The control procedure "credit sales approved by credit department" is directed toward which assertion?
Valuation/Accuracy.
association w the FS
Which of the following information would be included in the Basis for Opinion section of the auditors' report on ICFR if the report is presented separately from the auditors' report on the entity's financial statements of an issuer?
Which of the following internal control activities will most likely prevent the concealment of a cash shortage by improperly writing off a trade account receivable?
Write-offs must be approved by a responsible officer after review of credit department recommendations and supporting evidence.
management letter
a communication that provides a summary of auditors' recommendations resulting from the audit engagement that allows the client to improve the effectiveness and efficiency of its operations
internal control deficiency
a condition that exists when the design or operation of a control does not allow the entity's management or employees to detect or prevent misstatements in a timely fashion
reissued report
a copy of a previously issued report that auditors provide or grant entities permission to use in another document after its original date; the report is not modified to consider events occurring subsequent to the date of the original report
Distributed Ledger Technology (DLT)
a distributed network of ledgers that is designed to assist in the safeguarding of financial transactions for the virtual currency
packing slip
a document listing the quantity and description of each item included in a shipment
receiving report
a document that records details about each delivery, including the date received, shipper, supplier, quantity received
Variables Sampling
a form of examination used to examine a population to estimate the amount or value of some characteristic of that population; used by auditors during their substantive procedures
negative confirmation
a form sent to a customer by auditors requesting that the customer respond only if the balance shown on it is incorrect
purchase requisition
a form used to request the responsible person or department to purchase merchandise or other property
bill and hold
a fraudulent financial reporting activity by which a company recognizes a sale even though it does not ship the merchandise to the customer but holds it in its own warehouse
contingency
a future event or circumstance that is possible but cannot be predicted with certainty
positive confirmation
a letter sent to a customer by auditors requesting that the customer respond whether the balance shown on it is correct or not
approved vendor list
a list of vendors approved for use by the purchasing function
Program Development controls
a type of general control implemented to provide reasonable assurance that (1) acquisition or development of computer programs and software is properly authorized, is conducted in accordance with entity policies and supports the entity's financial reporting requirements (2) appropriate users participate in the software acquisition or program development process (3) programs and software are tested and validated prior to being placed in operation (4) all software and programs have appropriate documentation
purchase order
a written order by a buyer for merchandise or other property specified in the purchase requisition
computer forensics
acquiring, preserving, and presenting data that have been processed electronically and stores on computer media
omitted procedures
after the audit report has been issued, the auditor may discover that an important audit procedure was not performed
data
an elemental level of numbers and/or characteristics that are used within an audit client's organization. To be useful for decision makers, the data must be thought about within a meaningful context which would allow it to be understood
The systematic computational analysis of data in a manner that yields insight in the audit process is, at a basis level
analytics
Analytics
analytics in auditing are deliberate and systematic analysis of data in a manner that are designed to yield insights in the financial statement audit process.
"The science and art of discovering and analyzing patterns, identifying anomalies, and extracting other useful information in data underlying or related to the submit matter of an audit through analysis, modeling, and visualization for the purpose of planning or performing the audit" is the definition of
audit data analytics
Test data approach
auditors will create a set of test data which will be processed by the client's computer programs under the auditor's control.
The steps of the analytics chain (in order) are understanding
cleansing, modeling, evaluation
In this new world of audit data analytics, it is important to
consider the usefulness of the data
iron curtain method
considers the aggregate effect of the adjustments on the entity's balance sheet
Input Controls
controls designed by an organization to ensure that the information to be processed by the computer is authorized, accurate, and complete
output controls
controls designed to ensure that computer-generated data are valid, accurate, complete, and distributed only to authorized people
Facts and/or statistics that are collected together for some type of reference point or analysis, ultimately within a context is
data
an elemental level of numbers and/or characters within an organization
data
heat map
data visualization that illustrates the magnitude of each risk and the likelihood of each risk in a matter that improves understandability
deviation
departure or wandering away from the accepted standard
Recalculations of depreciation expense using the entire database and exact purchase dates to improve the precision of testing is an example of a test of
details
bill of lading
document issued by a transport carrier to an exporter to prove that merchandise has been shipped
information produced by the entity
info produced by the company's information system that is used by the auditor for substantive testing procedures or used by the audit client to execute a control activity
The data chain consists of
information wisdom knowledge
Big Data
large datasets that are generally unstructured. t time, the datasets are so large they cannot be processed by traditional analytical tools.
Lee and Kerzman is the auditor for Nance Corporation. During the course of the audit, the audit team noticed that Nance Corporation showed signs of financial distress. In particular, Nance Corporation was at risk for defaulting on several key loans and had therefore begun the process of restructuring their debt. This, among other indicators, led the audit team to have substantial doubt regarding Nance Corporation's ability to continue as a going concern. The next step the team should take is to:
obtain and discuss with management their plan to continue as a going concern and assess the likelihood the plan will be successful.
Sample
part of a population
In order for auditors to be able to achieve a high level of substantive comfort, when designing a test, auditors need to think carefully about ______ when finalizing the audit plan.
predictability
A client's accounts receivable consists of 200,000 accounts. The auditor has concluded that all but 75 of the accounts have an extremely low likelihood of being misstated. As a result, the auditor decides to perform a positive confirmation procedure with those 75 accounts. In regards to the other 199,275 accounts, the professional standards currently
provide no guidance in determining the level of evidence this confirmation procedure will provide
computer operations controls
relate to processing of transactions and backup and recovery of data
Sales are normally recorded on the date of the
sales invoice
group financial statements
the financial statements of more than one component (division, subsidiary, or other segment)
risk of overreliance
the likelihood that the auditors' sample will provide evidence that the client's controls are functioning effectively when they are not functioning effectively
risk of underreliance
the likelihood that the auditors' sample will provide evidence that the client's controls are not functioning effectively when they are functioning effectively
systematic random selection
the method of choosing sample items in which a starting point is selected and a fixed number of items are bypassed between selections
Adverse Opinion
the opinion issued when the auditors conclude that the financial statements do not present the financial condition, results of operations, and cash flows in accordance with GAAP
Systems Development Life Cycle (SDLC)
the process used to plan, develop, and implement new computerized processing systems
Analytical Procedures
the reasonableness tests used to gain an understanding of financial statement accounts and relationships
sampling interval
the standard distance between elements selected from a population for a sample
dual date
the use of two dates in the auditor's report to limit the responsibility beyond the date of the auditor's report to a specific subsequent event identified in the report
f the _____ exceeds the _____, the audit team would decide to rely on internal control as planned and maintain control risk at planned levels.
tolerable rate of deviation; ULRD.
sufficient, appropriate evidence when considering the data chain
wisdom