Auditing Exam 2 Study Guide
A/P: PCAOB's Management Assertions in Financial Statements
1.) Existence/ Occurrence- Accounts Payable balances exist on the balance sheet. 2.) Completeness- Includes all accounts payable transactions that occurred during the period. 3.) Valuation/ Allocation- Recorded balances reflect true underlying value. 4.) Rights & Obligation-Company owes the liability for accounts payable 5.) Presentation & Disclosure- Accounts payable is properly classified on the balance sheet and disclosed of on the financial statements.
MARKETABLE SECURITIES: PCAOB Management Assertions in Financial Statements
1.) Existence/ Occurrence- Cash balance exists at the balance sheet date. 2.) Completeness- Cash balance includes all cash transactions that occurred during the period. 3.) Rights & Obligation- Company has title to the cash account as of the balance sheet date. 4.) Valuation/ Allocation- Recorded balances reflect the true underlying economic value of those assets. 5.) Presentation & Disclosure- Cash is properly classified on the balance sheet and disclosed on the financial statements.
INVENTORY: PCAOB Management Assertions in Financial Statements
1.) Existence/ Occurrence- Inventory actually exists 2.) Completeness- Inventory balances include all inventory transactions 3.)Valuation/ Allocation- Recorded balances reflect true value of assets. 4.) Presentation & Disclosure- Inventory is properly classified on the balance sheet and disclosed of in the financial statements.
A/R: PCAOB Management Assertions in Financial Statements
1.) Existence/Occurrence- Recorded sales and accounts receivable are valid. 2.) Completeness- All sales are recorded. 3.) Rights & Obligation- Pledged, assigned, recorded, and related party accounts receivable are properly accounted. 4.) Valuation/ Allocation- Sales and accounts receivable are properly valued and recorded in the proper period. 5.) Presentation & Disclosure- Accounts Receivable is properly classified on the balance sheet and disclosed on the financial statements.
What are negative confirmations?
A negative confirmation asks the customer to review the balance owed to the client, but requests the customer to respond directly to the auditor only if the customer disagrees with the indicated balance.
Observe/ test the client's annual physical inventory of finished goods. a. Existence/ Occurrence b. Completeness c. Valuation/ Allocation d. Rights & Obligations e. Presentation & Disclosure
A. Existence/ Occurrence
Send Confirmations to customers for a sample of accounts receivable. a. Existence/ Occurrence b. Completeness c. Valuation/ Allocation d. Rights & Obligations e. Presentation & Disclosure
A. Existence/ Occurrence
What determines a statistical sample's size?
Auditor's judgement is quantified, and sample size is determined by the probability theory.
Examine a sample of payments to vendors made after year-end. a. Existence/ Occurrence b. Completeness c. Valuation/ Allocation d. Rights & Obligations e. Presentation & Disclosure
B. Completeness
Trace a sample of shipping documents to the sales journal. a. Existence/ Occurrence b. Completeness c. Valuation/ Allocation d. Rights & Obligations e. Presentation & Disclosure
B. Completeness
Complete analytical review to identify any slow-moving inventory items. a. Existence/ Occurrence b. Completeness c. Valuation/ Allocation d. Rights & Obligations e. Presentation & Disclosure
C. Valuation/ Allocation
Reperform the client's reconciliations of significant bank accounts. a. Existence/ Occurrence b. Completeness c. Valuation/ Allocation d. Rights & Obligations e. Presentation & Disclosure
C. Valuation/ Allocation
Review the client's process for estimating uncollectible accounts receivable. a. Existence/ Occurrence b. Completeness c. Valuation/ Allocation d. Rights & Obligations e. Presentation & Disclosure
C. Valuation/ Allocation
Verify if any tangible assets have been pledged as collateral. a. Existence/ Occurrence b. Completeness c. Valuation/ Allocation d. Rights & Obligations e. Presentation & Disclosure
D. Rights & Obligation
How do yo find the sampling interval?
Divide the population by the sampling size.
Determine the client's intent to hold or sell marketable securities. a. Existence/ Occurrence b. Completeness c. Valuation/ Allocation d. Rights & Obligations e. Presentation & Disclosure
E. Presentation & Disclosure
Review for significant transactions with related parties. a. Existence/ Occurrence b. Completeness c. Valuation/ Allocation d. Rights & Obligations e. Presentation & Disclosure
E. Presentation and Disclosure.
What is Kiting?
Kiting is done by making transfers near year-end from one bank account to another bank account, recording the deposit in the second division's account, but not recording the disbursement on the first division's account until the next fiscal period.
Audit Procedures for Inventory Obsolescence
Noting potential obsolete inventory when observing the physical inventory count Calculating inventory turnover, number of days' sales in inventory, date of last sale or purchase, and other similar analytic techniques to identify potential obsolescence Calculating net realizable value for products by referring to current selling prices, cost of disposal, and sales commissions Monitoring trade journals and the Internet for information regarding the introduction of competitive products Inquiring of management about its approach to identifying and classifying obsolete items Monitoring turnover or age of products individually or by product lines and comparing the turnover with past performance and expectations for the current period Comparing current sales with budgeted sales Periodically reviewing, by product line, the number of days of sales currently in inventory Adjusting for poor condition of inventory, reported as part of periodic cycle counts Monitoring sales for amount of product markdown and periodic comparison of net realizable value with inventoried costs Reviewing current inventory in light of planned new-product introductions
What are positive confirmations?
Positive confirmations are correspondence (paper or electronic) sent to a sample of customers, asking them to review the current balance or unpaid invoice(s) due to the client and return the letters directly to the auditor indicating whether they agree with the balance.
What are fraud schemes related to revenue recognition?
Recognition of revenue on shipments that never occurred Hidden side letters, agreements containing contract terms that are not part of the formal contract, giving customers an irrevocable right to return the product Recording consignment sales as final sales Early recognition of sales that occurred after the end of the fiscal period Shipment of unfinished product Shipment of product before customers wanted or agreed to delivery Creation of fictitious invoices Shipment of more product than the customer ordered Recording shipments to the company's own warehouse as sales Shipping goods that had been returned and recording the reshipment as a sale of new goods before issuing credit for the returned sale Incorrect aging of accounts receivable and not recording write-downs of potentially uncollectible amounts Recording purchase orders as completed sales
What determines a non-statistical sample's size?
Sample size is determined by auditors judgement.
What is lapping?
To accomplish lapping, the employee first steals a payment from a customer. However, the employee does not give that customer credit for the payment. If no other action is taken, that customer will detect the absence of the credit for payment on the next monthly statement. To prevent detection, the employee then covers the fraud by posting another customer's payment to the first customer.
Which of the following statements is true? a. Existence and valuation assertions related to long-lived assets are usually the most relevant assertions. b. All of these statements are true. c. A concern regarding the existence of long-lived assets relates to whether management has properly recorded depreciation. d. Depletion expense is not an account that would be included when auditing long-lived assets.
a. Existence and valuation assertions related to long-lived assets are usually the most relevant assertions
A bank confirmation contains which of the following two parts? A part that seeks information on the client's deposit balances, the existence of loans, due dates of the loans, interest rates, dates through which interest has been paid, and collateral for loans outstanding A part that contains a listing of the last checks issued near year-end A part that seeks information about any loan guarantees A part that lists all transfers between the company's bank accounts for a short period of time before and after year-end a. 1 & 3. b. 2 & 4. c. 1 & 2. d. 2 & 3. e. 3 & 4
a. 1 & 3.
Assume that an auditor expected that the client's activities related to sales and accounts receivable would be similar to industry averages. Which of the following relationships detected as part of planning analytical procedures would suggest a heightened risk of material misstatement in the revenue cycle? a. All of these choices are correct. b. The gross margin increased from 16.7% to 18.3%, while the industry average changed from 16.7% to 16.3%. c. Accounts receivable increased 35% over the prior year, while sales stayed relatively stable. d. The number of days' sales in accounts receivable increased from forty-four days in the prior year to sixty-five days in the year being audited. The industry average increased from forty-five to forty-seven days.
a. All of these choices are correct
King Corporation often transfers funds from its general account into a special account that is used exclusively to make debt payments. Near the end of the year, the company had the following transfers: From General Account To Special Account Amount Recorded in Books Recorded by Bank Recorded in Books Recorded by Bank $35,000 12/29/13 1/2/14 12/31/13 12/31/13 $20,000 12/30/13 12/31/13 1/2/14 1/2/14 $30,000 12/31/13 1/2/14 12/31/13 1/2/14 $40,000 1/2/14 1/4/14 12/31/13 1/3/14 Given the information above, choose the correct statement about King's cash balance: a. Cash is overstated by $20,000. b. Cash is overstated by $15,000. c. Cash is overstated by $40,000. d. Cash is fairly stated.
a. Cash is overstated by $20,000
An employee in the accounting department accounts for pre-numbered sales invoices, investigating any unexpected gaps. This control procedure relates to which management assertion. a. Completeness b. Existence/ Occurence c. Valuation/ allocation d. Rights & Obligations
a. Completeness.
Which of the following auditing procedures will provide evidence to support management's assertions regarding the allocation and valuation of inventories? a. Determining the replacement cost of inventories. b. Vouching inventories to receiving documents. c. Tracing items reported in the accounting records to inventory counts. d. Vouching inventory counts to accounting records.
a. Determining the replacement cost of inventories.
Which of the following statements is true regarding assertions in the revenue cycle? a. If a client has an incentive to overstate revenues, the existence assertion would be more relevant than the completeness assertion. b. It is typical that all five assertions for revenue are equally important. c. Audit evidence about the existence of revenues is also the most appropriate evidence about the valuation of receivables. d. The allowance for doubtful accounts has important implications for the ownership assertion of accounts receivable.
a. If a client has an incentive to overstate revenues, the existence assertion would be more relevant than the completeness assertion.
An opportunity for fraud involving lapping of accounts receivable is more likely when which two duties involving accounts receivable are not segregated? a. Opening the mail and recording. b. Authorization and reconciliation. c. Receipt of returned goods and recording. d. Recording and reconciliation.
a. Opening the mail and recording.
Which of the following audit procedures would be used to test the existence assertion for inventory? a. Review the client's proposed physical inventory procedures to determine whether they are likely to result in a complete and correct physical inventory. b. Perform year-end cutoff tests by noting the last shipping and receiving document numbers used before physical inventory is taken. c. Make inquiries of the client regarding the segregation of duties between the purchasing department and the receiving department. d. Make inquiries of the client regarding allowances made for expected returns. e. All of these choices are correct.
a. Review the client's proposed physical inventory procedures to determine whether they are likely to result in a complete and correct physical inventory.
A fraud scheme common for long-lived assets is the overstatement of assets though overvaluing the existing assets. a. True b. False
a. True
A substantive procedure appropriate for testing rights and obligations associated with inventory would be to review vendor invoices when testing disbursements to determine that proper title is conveyed. a. True b. False
a. True
Auditors usually perform relatively limited substantive analytical procedures for cash accounts but instead focus on substantive test of details. a. True b. False
a. True
Current U.S. auditing standards do not require the confirmation of accounts receivable if the accounts receivable balance is not material. a. True b. False
a. True
GAS would be useful for completing the following tasks: footing a file, doing arithmetic calculations, checking for gaps in processing sequences, and printing confirmations. a. True b. False
a. True
If a client's long-lived assets involve only a few assets of relatively high value, it might be most efficient to test long-lived assets by using only substantive tests of details. a. True b. False
a. True
In testing controls over whether sales are properly valued, the auditor could take a sample of recorded sales invoices and agree the price on the invoice to an authorized price list. a. True b. False
a. True
Lapping occurs when an employee steals a payment from one customer, and covers it up by using payments from another customer to disguise the theft. a. True b. False
a. True
Research by COSO (2010) indicates that the majority of financial statement frauds involved inappropriate recording of revenue. a. True b. False
a. True
Sampling can be used for both tests of controls and substantive tests of account balances and assertions. a. True b. False
a. True
The division of a population into two or more subgroups is referred to as stratification. a. True b. False
a. True
The major judgmental challenges that auditors face in auditing marketable securities include corroborating management's intent in classifying these assets into the proper categories and determining fair market value. a. True b. False
a. True
The most common concerns for inventory are that purchases are understated or ending inventory is overstated, both of which will result in lower cost of goods sold and higher net income. a. True b. False
a. True
The pervasiveness of management estimates is a factor that heightens the inherent risk associated with long-lived assets. a. True b. False
a. True
Using prenumbered shipping documents is a control that can provide reasonable assurance that all sales are recorded. a. True b. False
a. True
When auditing cash, the auditor will perform a relatively larger percentage of tests of details for a high-risk client compared to a low-risk client. a. True b. False
a. True
When testing potential impairment of assets, the auditor may need to rely on work performed by a specialist/expert. a. True b. False
a. True
When auditing intangible assets, the auditor would likely recompute amortization and determine whether management's recorded amount is reasonable. When performing this procedure, which assertion is the auditor primarily gathering evidence for? a. Valuation. b. Rights and obligations. c. Existence. d. Completeness
a. Valuation
Upon examining repair and maintenance costs recorded by Cane Company during the year, an auditor finds a material amount that should have been capitalized in property, plant and equipment. If this error is left uncorrected, how would it affect Cane's reported net income and assets in its year-end financial statements? Net Income Assets a. Overstate Understate b. Understate Understate c. Overstate Overstate d. Understate Overstate
b. Understate Understate
Refer to Exhibit 10.6. Which of the following represents a monitoring control that the auditor may want to test? a. Reviews of discrepancies in cash balances. b. All of these choices are correct. c. Reviews of weekly reporting of customer complaints regarding posting of cash balances and prompt investigation to follow up on cause of complaints. d. Daily review of cash budgets and comparison of them with actual cash balances. e. Reviews of reconciliations of reported cash receipts with remittances prepared by independent parties.
b. All of these choices are correct.
Which of the following definitions is correct? a. Tolerable misstatement—A monetary amount set by the auditor in respect of which the auditor seeks to obtain an appropriate level of assurance that the monetary amount set by the auditor is not exceeded by the actual misstatement in the population. b. All of these choices are correct. c. Factual misstatement—A misstatement that has been specifically identified and about which there is no doubt. d. Expected misstatement—The level of misstatement that the auditor expects to detect. e. Projected misstatement—The auditor's best estimate of the misstatement in a given population based on projecting the sample results to the population.
b. All of these choices are correct.
Which of the following analyses might an auditor perform as part of planning analytical procedures for long-lived assets? a. Develop an overall estimate of depreciation expense. b. All of these could be performed as part of planning analytical procedures. c. Compare capital expenditures with the client's capital budget. d. Perform a trend analysis of the ratio of depreciation expense to total depreciable long-lived tangible assets.
b. All of these could be performed as part of planning analytical procedures.
Which of the following fraud schemes might be detected through the use of a bank cutoff statement? a. Checks received by the cashier were not deposited and accounts receivable was not appropriately reduced. b. Checks were written near year-end to reduce the balance in accounts payable, but were not mailed until a week after year-end. c. Checks were written to nonexistent payees and mailed to the home addresses of officers. d. Checks were written in amounts in excess of invoice amounts in a collusion scheme in which the accounts payable clerk was misappropriating refunds of excess payments.
b. Checks were written near year-end to reduce the balance in accounts payable, but were not mailed until a week after year-end.
Which of the following factors is not a motivation for clients to fraudulently misstate revenue? a. Management bonuses are contingent on a certain revenue goal. b. Controls over revenue process are ineffective. c. Bankruptcy may be imminent. d. Management wants to meet publicly announced earnings expectations.
b. Controls over revenue process are ineffective.
A substantive procedure appropriate for testing the existence of inventory would be to perform year-end cutoff tests by noting the last shipping and receiving document numbers used before the physical inventory count is taken. a. True b. False
b. False
Assume a client setting where there are weak controls and client incentives to capitalize items that should be expensed. In such a setting, the auditor likely obtains most of the audit evidence through tests of controls. a. True b. False
b. False
Because a primary concern is that cash will be stolen and is thus understated, the auditor is not usually concerned about overstatements of cash. a. True b. False
b. False
Factual misstatements are those that are the auditor's best estimate of misstatements in a given population based on sample results. a. True b. False
b. False
In responding to identified risks of material misstatement related to the completeness of the revenue account, the auditor will always perform a significant amount of tests of details. a. True b. False
b. False
In terms of planning analytical procedures, assume that the client has introduced a new product with a low price point and significant customer demand. The auditor would expect inventory turnover to increase and days' sales in inventory to also increase. a. True b. False
b. False
MUS is most often used in situations in which the auditor expects a significant number of large understatements in recorded balances. a. True b. False
b. False
Planning analytical procedures are particularly useful to the auditor in gaining assurance about the cash account because the usually small ending balances in cash tend to be stable over time. a. True b. False
b. False
The quality of evidence obtained from positive and negative confirmations is about the same. a. True b. False
b. False
When conducting the audit of the acquisition and payment cycle for a client with a high risk of material misstatement in its inventory accounts, the following mix of evidence would be appropriate: significant tests of internal control, significant reliance on substantive analytical procedures, and limited tests of details. a. True b. False
b. False
The auditor may discover evidence of lapping by preparing an interbank transfer schedule. a. True b. False
b. False that is Kiting
An auditor discovers that an account balance believed to be materially misstated based on an audit sample was not materially misstated based on the total population of the account balance. This is an example of which of the following sampling types of risks? a. Assessing control risk too low. b. Incorrect rejection. c. Incorrect acceptance. d. Assessing control risk too high.
b. Incorrect rejection.
Which of the following audit procedures would be most effective in providing evidence regarding the existence of cash and cash equivalents? a. Test translation of foreign currency transactions. b. Review bank confirmations to verify bank balances. c. Perform analytical procedures to determine if amounts and volume of transactions match expectations. d. Review bank reconciliations to verify amounts.
b. Review bank confirmations to verify bank balances.
The auditor is concerned that fictitious sales have been recorded. Which of the following procedures would be the best audit procedure to identify the existence of any fictitious sales? a. Select a sample of customer purchase orders to determine whether a valid customer actually exists. b. Select a sample of recorded sales invoices and trace to shipping documents (bills of lading and packing slips) to verify shipment of goods. c. Select a sample of customer purchase orders and trace through to the generation of a sales invoice. d. Select a random sample of shipping documents (bills of lading) and trace to the sales invoice to determine whether the invoice was properly recorded.
b. Select a sample of recorded sales invoices and trace to shipping documents (bills of lading and packing slips) to verify shipment of goods.
An auditor was satisfied that the carrying value of factory equipment was fairly stated as of the beginning of the period. During the period, the entity had several transactions involving the purchase and disposal of equipment. Which of the following would be the most effective in providing evidence that all equipment reported in the financial statements actually exists? a. Select items from the accounting records and trace them to purchase documents. b. Select items from the accounting records and observe them in the entity's factory. c. Select items on the factory floor and trace them to the accounting records. d. Evaluate the entity's policies for capitalizing and expensing costs related to the acquisition of equipment
b. Select items from the accounting records and observe them in the entity's factory
Which of the following activities would be most likely to be accomplished using sampling? a. Sorting a file to identify the largest items. b. Selecting items and tracing back to source documents. c. Footing the file. d. Scanning for unusual transactions.
b. Selecting items and tracing back to source documents.
Which of the following statements is false? a. The audit sampling evaluation reflects the sum of top-stratum items and the projected misstatement derived from lower-stratum items. b. Stratification of the population into several subpopulations generally reduces audit efficiency. c. Because the auditor knows the amount of errors in the top stratum (all items were evaluated), no estimate of errors is required. d. None of these choices are correct. e. Top-stratum items are population items whose book values exceed the sampling interval and are therefore all included in the sample.
b. Stratification of the population into several subpopulations generally reduces audit efficiency.
X Company prepares a sales invoice, using a pre-printed sequentially numbered form, upon receipt of a copy of a bill of lading from the shipping department indicating that goods have been shipped. An auditor wishes to obtain evidence that all sales that that were recorded during the period actually occurred. Which of the following procedures would likely be most effective for that purpose? a. Trace a sample of sales invoices to bills of lading. b. Trace entries from the sales journal to sales invoices and bills of lading. c. Trace a sample of bills of lading to the sales journal. d. Trace a sample of receiving reports to the sales journal.
b. Trace entries from the sales journal to sales invoices and bills of lading
Which of the following planning analytical relationships is most typically suggestive of a heightened risk of fraud in the acquisition and payment cycle? a. Unexpected decreases in gross margin. b. Unexpected increases in gross margin. c. Expense accounts that have significant debit entries. d. Inventory that is growing at a rate slower than sales.
b. Unexpected increases in gross margin.
A client has disposed of several pieces of manufacturing equipment at a significant gain. This raises questions as to which assertion in regard to property, plant, and equipment? a. Existence b. Valuation and allocation c. Completeness d. Rights and obligations
b. Valuation and allocation
Which mix of evidence would be most appropriate for the following scenario? This is a client where the auditor has assessed the risk of material misstatement related to the existence of inventory at a relatively low level. Top management appears to have a high level of integrity. Management has spent the resources necessary to ensure effective design, implementation, and operation of controls. a. 50% tests of details, 10% substantive analytics, 40% tests of controls. b. 100% tests of details. c. 20% tests of details, 40% substantive analytics, 40% tests of controls. d. 70% tests of details, 10% substantive analytics, 20% tests of controls.
c. 20% tests of details, 40% substantive analytics, 40% tests of controls
An auditor performs attribute sampling to test for proper cancellation of payment vouchers. In a sample population of 100, two vouchers are missing the proper cancellation, while one simply cannot be located. The error rate of the sample is a. 2% b. 4% c. 3% d. Cannot be determined without knowing standard deviation.
c. 3%
Which of the following controls would be most useful in providing reasonable assurance about the valuation of tangible assets? a. Written policies requiring authorization for the acquisition of long-lived assets. b. A formal budgeting process. c. A policy requiring that deprecation categories and lives be periodically reassessed. d. A policy requiring the reconciliation of the physical asset count with the property ledger.
c. A policy requiring that deprecation categories and lives be periodically reassessed.
Inherent risk for cash is usually assessed as high for which of the following reasons? a. The electronic transfer of cash and the automated controls over cash are such that if errors are built into computer programs, they will be repeated on a large volume of transactions. b. Cash can be easily manipulated. c. All of these choices are correct. d. The cash account is more susceptible to fraud because cash is liquid and easily transferable. e. The volume of transactions flowing through cash accounts throughout the year makes the account more susceptible to error.
c. All of these choices are correct.
Which of the following is an inherent risk relating to inventory? a. Inventory is easily transportable. b. Inventory is often returned by customers, so care must be taken to separately identify returned merchandise, check it for quality, and record it at net realizable value. c. All of these choices are correct. d. Inventory may become obsolete because of technological advances even though there are no visible signs of wear.
c. All of these choices are correct.
Which of the following is not an inherent risk related to long-lived asset accounts? a. Failing to record asset disposals. b. Changing depreciation estimates to manage earnings. c. All of these choices are inherent risks related to long-lived asset accounts. d. Capitalizing repairs and maintenance expense.
c. All of these choices are inherent risks related to long-lived asset accounts.
When auditing an entity's reported amount for property, plant, and equipment, which assertion will be supported with evidence obtained by the auditor during an examination of the repairs and maintenance expense account? a. Existence b. Rights and obligations c. Completeness d. Valuation and allocation
c. Completeness
Even though an audit is well planned and properly executed, a material misstatement due to fraud may not be detected. This may be due to: Fraud may involve collusion or false documentation making it more difficult to detect. Auditing employs the use of sampling and a sample without evidence of fraud may not be representative of the population. The evaluation of fraud risk factors requires the application of judgment and is not precise. a. I and III only. b. II and III only. c. I, II, and III. d. I and II only.
c. I, II, and III
Which of the following represents the correct calculation of the sampling interval? a. Tolerable error × Risk of incorrect acceptance. b. Tolerable error ÷ Risk of incorrect acceptance. c. Population size ÷ Sample size. d. Sample size ÷ Population size.
c. Population size ÷ Sample size.
In testing management's rights and obligations assertion in relation to inventories, which of the following procedures would the auditor most likely consider most reliable? a. Make inquiries and analyze inventory turnover to identify slow-moving or obsolete items. b. Trace inventory in accounting records to inventory counts. c. Review consignment agreements. d. Vouch inventory counts to accounting records.
c. Review consignment agreements.
An auditor established a $100,000 tolerable misstatement for an asset with an account balance of $7,500,000. The auditor selected a sample of every fiftieth item from the population that represented the asset account balance and discovered overstatements of $2,200 and understatements of $300. Under these circumstances, the auditor most likely would conclude that a. There is an unacceptably high risk that the tolerable misstatement exceeds the sum of actual overstatements and understatements. b. There is an unacceptably high risk that the actual misstatements in the population exceed the tolerable misstatement because the total projected misstatement is more than the tolerable misstatement. c. The asset account is fairly stated because the total projected misstatement is less than the tolerable misstatement. d. The asset account is fairly stated because the tolerable misstatement is less than the net of projected actual overstatements and understatements.
c. The asset account is fairly stated because the total projected misstatement is less than the tolerable misstatement.
Which of the following will generally not be included in a standard bank confirmation? a. Balances in deposit accounts as of the balance sheet date. b. Agreements related to compensating balances and collateral for loans. c. The dates on which inactive accounts were closed. d. Balances of outstanding loan as of the balance sheet date.
c. The dates on which inactive accounts were closed.
The fact that a company has significant amounts of cash in the form of foreign currency would raise the inherent risk of which management assertion regarding cash? a. Completeness. b. Presentation and disclosure. c. Valuation or allocation. d. Rights and obligations
c. Valuation or allocation.
In a probability-proportional-to-size (PPS) sample with a sampling interval of $10,000, an auditor discovered that a selected account receivable with a recorded amount of $12,000 had an audited amount of $11,000. If this were the only misstatement discovered by the auditor, the projected misstatement of this sample would be a. $960 b. $833 c. $10,000 d. $1,000
d. $1,000
Refer to Exhibit 8.6. Assume a 5% risk of overreliance, a tolerable deviation rate of 8%, a sample size of 100, and that the number of deviations is five. What is the upper limit of the possible deviation rate, and what does it mean? a. 10.3%. The auditor is 95% confident that the real error rate in the population is no greater than 5%. b. 5%. The auditor is 92% confident that the real error rate in the population is no greater than 10.3%. c. 5%. The auditor is 92% confident that the real error rate in the population is no greater than 5%. d. 10.3%. The auditor is 95% confident that the real error rate in the population is no greater than 10.3%.
d. 10.3%. The auditor is 95% confident that the real error rate in the population is no greater than 10.3%
Under the FASB's and IASB's forthcoming guidance on revenue recognition, a contract must have which of the following characteristics in order to be judged as persuasive? a. The terms of payment must be identifiable. b. It must have commercial substance. c. Rights with respect to the contract are identifiable. d. All of these choices are correct. e. The parties to the contract must have approved it and be committed to perform their respective actions.
d. All of these choices are correct
A company employs three clerks and one purchasing manager. Their responsibilities are as follows: Employee Responsibility Purchasing Manager Approves purchase requests before they are processed and negotiates terms with vendors. Clerk 1, Purchasing Places orders with vendors. Clerk 2, Accounts Payable Prepares payment vouchers after verifying accuracy of vendor invoices and comparing supporting documents. Clerk 3, Receiving Receives delivery of goods from vendors. Which of the following would indicate a weakness in the company's internal control? a. The Purchasing Manager frequently attends vendor events with all expenses paid by the company. b. Clerk 1 reports to the Purchasing Manager, who has significant influence over Clerk 1's pay and career progression. c. Clerk 3 conducts manual counts of goods received, unaware of the quantities actually ordered. d. Clerk 2 has custody of unused purchase orders.
d. Clerk 2 has custody of unused purchase orders.
Which of the assertions related to accounts receivable will confirmations be least likely to provide evidence in support of? a. Existence. b. Completeness. c. Allocation and valuation. d. Rights and obligations.
d. Completeness
For which of the following audit tests would an auditor most likely use variables sampling? a. Confirming proof of cancellation for a sample of payment vouchers associated with cash disbursements. b. Confirming that monthly reconciliations of key balance sheet accounts were conducted. c. Inspecting purchase orders for proper approval by supervisors. d. Determining that all payables are recorded at year end.
d. Determining that all payables are recorded at year end.
For effective internal control, the treasurer generally should Act as the ultimate authority for purchases. Sign checks prepared by the accounts payable department. Mail signed checks. a. II only. b. I and II only. c. I only. d. II and III only.
d. II and III only.
When would it not be appropriate to apply analytical procedures in an audit of financial statements? a. Overall engagement review. b. Performing substantive tests. c. Planning the engagement. d. Performing tests of controls.
d. Performing tests of controls.
Refer to Exhibit 10.14. Which of the following assertions is relevant to the audit procedure for marketable securities that requires the auditor to examine selected documents to identify any restrictions on the securities? a. Existence/occurrence. b. Valuation or allocation. c. All of these choices are correct. d. Rights and obligations. e. Completeness.
d. Rights and obligations.
Which audit procedure would most likely be used to test for understatement of accounts payable? a. Select a sample of entries in the cash disbursements journal and compare with related voucher packages. b. Select a sample of voucher packages and identify those for which no cash disbursement exists. c. Select a sample of cash payments made before year-end and identify those for which there is no related payable at year-end. d. Select a sample of cash payments made after year-end and identify those for which there is no related payable at year-end.
d. Select a sample of cash payments made after year-end and identify those for which there is no related payable at year-end.
Which of the following is least likely to be an indicator of potential impairment of a long-lived asset? a. The operating segment which utilizes the asset has experienced recent impairment of goodwill. b. Competitive pressures threaten to render the asset obsolete. c. The operating segment which utilizes the asset has a projected loss. d. The independently-verified fair value of similar assets approximates the asset's book value.
d. The independently-verified fair value of similar assets approximates the asset's book value.
While auditing inventory, the auditor analyzed the inventory turnover rates and made inquiries of production supervisors and inventory control personnel about slow-moving or obsolete items in inventory. These procedures are designed to provide evidence to support management's assertion regarding: a. Completeness b. Rights and obligations c. Existence d. Valuation and allocation
d. Valuation and allocation
Which of the following is a legitimate rationale for centralizing the purchasing function in a separate purchasing department? a. It decentralizes control across functions. b. Both "It promotes efficiency and effectiveness" and "It decentralizes control across functions". c. It eliminates potential favoritism that could take place if individual department heads were allowed to place orders. d. It promotes efficiency and effectiveness. e. Both "It promotes efficiency and effectiveness" and "It eliminates potential favoritism that could take place if individual department heads were allowed to place orders".
e. Both "It promotes efficiency and effectiveness" and "It eliminates potential favoritism that could take place if individual department heads were allowed to place orders"
The first step in performing planning analytical procedures is to develop an expectation of the account balance. Which of the following does not typically represent a likely expected relationship for cash accounts? a. Operating cash flow is not significantly different from that of the prior year. b. All of these choices are represent likely expected relationships. c. No unusual large cash or other liquid asset transactions are found. d. Investment income is consistent with the level of and returns expected from the investments. e. The company reports consistent profits over several years, but operating cash flows are declining.
e. The company reports consistent profits over several years, but operating cash flows are declining.
