BYU ACC 406 Final
Assume the following facts about an audit sample: 1) the pre-audit book value of the sample was $100,000; 2) the pre-audit total population book value was $900,000; 3) the sample results showed $7,000 of net overstatement errors. The point estimate of net error in the population is:
$63,000 overstatement
In which of the following cases would the auditor be most likely to conclude that all of the items in an account under consideration should be examined rather than tested on a sample basis? 1. Large tolerable, Low expected 2. Small tolerable, High expected 3. Large tolerable, High expected 4. Small tolerable, Low expected
2
The three steps in applying materiality are listed below in random order. Evaluate audit findings Determine tolerable misstatement Determine a materiality level for the overall financial statements The correct sequence from start to finish is:
3, 2, 1
The auditor set acceptable audit risk at 3%, assessed inherent risk at 100% and control risk at 50%, and determined a planned detection risk of 6%. If control risk had been assessed at 75%, planned detection risk would need to be ____ to keep acceptable audit risk at 3%.
4%
A primary goal of the Sarbanes-Oxley Act relating to audit committees and auditors is to: A. Ensure the independence of the auditor. B. Be sure that auditors are fairly compensated - neither overpaid nor underpaid. C. Increase the number of auditing firms and thereby increase competition for audit business. D. Expedite the audit process.
A
Communications between the auditor and those charged with governance should include all of the following except: A. a summary of specific audit procedures used. B. a summary of uncorrected misstatements. C. consultations with other accountants. D. major issues discussed with management before the auditor was retained.
A
If one or more material weaknesses existed during the year, management A. May assess internal control as effective if the weaknesses have been corrected and tested over a sufficient period of time prior to year-end. B. May not assess internal control as effective regardless of the circumstances. C. Should wait for the auditor's report before making its assessment. D. May assess internal control as effective if adjustments are made to the financial statements for the magnitude of the misstatements.
A
If the principal auditor decides to make reference to the other auditor's audit, the opinion section must specifically indicate the: A. portion of the financial statements examined by the other auditor. B. name of the other auditor. C. name of the consolidated subsidiary examined by the other auditor. D. type of opinion expressed by the other auditor.
A
In order to efficiently establish the correctness of the accounts payable cutoff, an auditor will be most likely to A. Coordinate cutoff tests with physical inventory observation. B. Compare the annual cutoff report with purchase orders. C. Compare vendors' invoices with vendors' statements. D. Coordinate mailing of confirmations with cutoff tests.
A
When obtaining evidence regarding litigation against an entity, the CPA would be least interested in determining: A. an estimate of when the matter will be resolved. B. the period in which the underlying cause of the litigation occurred. C. the probability of an unfavorable outcome. D. an estimate of the potential loss
A
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 with regard to a particular characteristic. B. An auditor may select audit procedures that are not appropriate to achieve the specific objective. C. An auditor may fail to recognize errors in the documents examined for the chosen sample. D. The documents related to the chosen sample may not be available for inspection.
A
Which of the following is not a misstatement related to the existence assertion for inventory? Unauthorized production activity has led to overstocked inventory Fictitious inventory is recorded in the ledger Recorded inventory is not on hand because of theft None of the above (all are misstatements of the inventory existence assertion)
A
Which of the following items should an auditor communicate to those charged with governance in a publicly traded company? A. Significant unusual transactions, critical estimates, and management's consultation with other accountants about significant accounting matters. B. Significant unusual transactions and critical estimates, but not management's consultation with other accountants about significant accounting matters. C. Management's consultation with other accountants about significant accounting matters but not significant unusual transactions and critical estimates. D. Neither significant unusual transactions, critical estimates, nor management's consultation with other accountants about significant accounting matters.
A
Which of the following procedures would an auditor most likely perform to verify management's assertion of completeness? A. Compare a sample of shipping documents to related sales transactions. B. Observe the client's distribution of payroll checks. C. Confirm a sample of recorded receivables by direct communication with the debtors. D. Review standard bank confirmations for indications of kiting.
A
Under AS5, the auditor must report all significant deficiencies to which of the following groups? (Select all that apply) A. Audit Committee or Board of Directors B. The PCAOB C. Management D. The public (i.e., investors) E. None of the above
A and C
Which of the following is the best definition for financial statement auditing?
A systematic process of objectively obtaining and evaluating evidence to determine and communicate whether economic assertions are reported in accordance with established criteria.
Management's assessment of internal control details a number of control deficiencies, including a material weakness, and the auditor agrees with management's assessment. Which of the following should be included in the auditor's report on the client's internal control over financial reporting?
An adverse opinion on the effectiveness of internal control.
Thomas's Drain and Plumbing reports that it has adequate internal control over all of its divisions' financial information. However, the company's external auditor discovers a significant deficiency in a control in one of the company's key operations. Which report should the auditor issue?
An unqualified opinion on the effectiveness of Thomas's internal control.
Assume that you are auditing a balance wherein tolerable misstatement is 27,000 and the reported population value before auditing is 264,000. In which of the following scenarios is the auditor most likely to accept the sample results as sufficient evidence that total misstatement in this account is unlikely to exceed tolerable misstatement? A. The book value of the sample before auditing is 31,000. Misstatements discovered in the sample totaled 1,900 (projected misstatement = 16,181). B. The book value of the sample before auditing is 235,000. Misstatements discovered in the sample totaled 18,000 (project misstatement = 20,221). C. The book value of the sample value before auditing is 211,000. Misstatements discovered in the sample totaled 22,000 (projected misstatement = 27,530). D. The book value of the sample before auditing is 76,000. Misstatements discovered in the sample totaled 5,500 (projected misstatement = 19,105).
B
In designing written audit programs, an auditor should establish specific audit procedures that are derived directly from the A. Cost-benefit of gathering evidence B. Management assertions C. Timing of audit tests D. Selected audit techniques
B
In the audit of financial statements, an auditor's primary consideration regarding an internal control policy or procedure is whether the policy or procedure A. Reflects management's philosophy and operating style. B. Affects management's financial statement assertions. C. Provides adequate safeguards over access to assets. D. Enhances management's decision-making processes.
B
Sarbanes-Oxley applies to: A. All companies that do business in the United States, whether publicly or privately held. B. All companies that are required to file reports with the Securities and Exchange Commission. C. Only publicly-held companies that have their primary headquarters in the U.S. D. Only privately-held companies that are headquartered in the U.S.
B
The primary responsibility for the adequacy of disclosures in the financial statements of a publicly held company rests with the A. Partner assigned to the audit engagement. B. Management of the company. C. Auditor in charge of the field work. D. Securities and Exchange Commission.
B
Valuation is most likely an issue for long-term debt if Bonds are sold on the open market. Bonds are issued at a discount or premium. The loans are from banks. The company has many short-term leases.
B
Which of the following audit procedures is least likely to detect an unrecorded liability? A. Analysis and recomputation of interest expense. B. Analysis and recomputation of depreciation expense. C. Mailing of standard bank confirmation forms. D. Reading of the minutes of meetings of the board of directors.
B
Which of the following best describes the reason why an independent auditor reports on financial statements? A. A management fraud may exist and it is more likely to be detected by independent auditors. B. Different interests may exist between the company preparing the statements and the parties using the statements. C. A misstatement of account balances may exist and is generally corrected as the result of the independent auditor's work. D. A poorly designed internal control system may be in place.
B
Which of the following is an internal control weakness? A. Supplies of relatively little value are expensed when purchased. B. The warehouse manager is responsible for maintenance of perpetual inventory records. C. The client uses the periodic inventory method. D. None of the above is a control weakness.
B
Which of the following is the typical auditor response with respect to a scope limitation? A. The auditor can choose to issue an adverse opinion or disclaim an opinion. B. The auditor will generally issue a qualified opinion or disclaim an opinion. C. The auditor may not issue an unqualified opinion even if the auditor can compensate for the scope limitation by performing alternative procedures. D. The auditor should withdraw from the engagement.
B
Which of the following is true if management fails to record a material fixed asset? A. Auditors are never concerned with these types of misstatement because the misstatement involves an understatement of assets and auditors are only concerned with overstatements of assets. B. Management has misstated the completeness assertion for fixed assets. C. The valuation assertion for fixed assets is misstated. D. All of the above are true.
B
Which of the following provides the best definition of planning materiality? A. The maximum amount by which management believes the financial statements could be misstated and still not affect the decision of users. B. The maximum amount by which the auditor believes the financial statements could be misstated and still not affect the decision of users. C. The amount determined by auditing standards that auditors must use when planning an audit. D. All of the above
B
Which of the following statements is not correct about materiality? A. The concept of materiality recognizes that some matters are important to users for fair presentation of the financial statements in conformity with GAAP, while other matters are not important. B. Materiality is defined as the total amount of each misstatement that could be material to any one of the financial statements individually. C. Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments. D. An auditor's consideration of materiality is influenced by the auditor's perception of the needs of a reasonable person who will rely on the financial statements.
B
Which of the following types of evidence should the auditor consider most reliable? A. A sales invoice issued by the client and supported by a delivery receipt from an outside trucker. B. Confirmation of an account payable balance mailed by and returned directly to the auditor. C. A check issued by the company and bearing the payee's endorsement which is included with the bank statement mailed directly to the auditor. D. A spreadsheet prepared by the client's controller and reviewed by the client's treasurer.
B
Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate control procedures over the invoicing function allow goods to be shipped that are not invoiced. The inadequate control procedures could cause an A. Understatement of revenues, receivables, and inventory. B. Overstatement of revenues and receivables, and an understatement of inventory. C. Understatement of revenues and receivables, and an overstatement of inventory. D. Overstatement of revenues, receivables, and inventory.
C
Analytical procedures are A. Never required. B. Required for planning, substantive testing, and overall review of the financial statements. C. Required for planning and overall review of the financial statements. D. Required during planning only.
C
As the planned level of detection risk increases, an auditor may change the A. Assessed level of control risk from below the maximum to the maximum level. B. Assurance provided by tests of controls by using a larger sample size than planned. C. Timing of substantive tests from year-end to an interim date. D. Nature of substantive tests from less effective to more effective procedures.
C
Dual dating is used A. to identify unrecorded contingent liabilities. B. to report Type I events. C. to limit the auditor's responsibility for subsequent events D. to "find the one" quickly
C
During the initial planning phase of an audit, a CPA most likely would A. Identify specific internal control activities that are likely to prevent fraud. B. Evaluate the reasonableness of the client's accounting estimates. C. Discuss the timing of the audit with the client's management. D. Inquire of the client's attorney as to whether any unrecorded claims are probable or asserted.
C
For an attributes sampling plan, the tolerable deviation rate is 4%, the computed upper deviation rate is 7%, the sample deviation rate is 3%, and the risk of assessing control risk too low is 5%. Which of the following is true? A. The auditor must increase control risk because the risk of assessing control risk too low is greater than the tolerable deviation rate. B. The auditor is likely to increase control risk because the risk of assessing control risk too low is greater than the tolerable deviation rate. C. The auditor should increase control risk because the computed upper deviation rate is greater than the tolerable deviation rate. D. The auditor is unlikely to increase control risk because the sample deviation rate is less than the tolerable deviation rate.
C
If an auditor encounters a significant scope limitation in conducting an audit, she or he appropriately can choose between which of the following possible response pairs? A. Disclaimer or adverse, depending on materiality B. Unqualified or adverse, depending on materiality C. Qualified or disclaimer, depending on materiality D. Qualified or adverse, depending on materiality
C
If interest expense is higher than expected, all of the following are potential explanations except that A. The client failed to record debt. B. Debt was recorded as equity. C. The client used the face interest rate to calculate interest expense on a bond issued at a discount. D. The client used the face interest rate to calculate interest expense on a bond issued at a premium.
C
In testing the client's purchases and sales cutoff at year-end, which of the following would the auditor consider an error? A. Inventory counted and recorded in the year-end inventory records is also recorded as sold after year-end. B. Inventory counted and recorded in the year-end inventory records is also recorded as purchased before year-end. C. Inventory counted and recorded in the year-end inventory records is also recorded as a sale before year-end. D. None of the above.
C
Increased fraud risk could lead to all of the following except A. Lower detection risk. B. Higher inherent risk. C. Lower control risk. D. Higher auditee risk.
C
Inherent risk and control risk differ from detection risk in that they Arise from the misapplication of auditing procedures. May be assessed in either quantitative or nonquantitative terms. Exist independently of the financial statement audit. Can be changed at the auditor's discretion.
C
The basic elements of a standard unqualified report include all of the following except: A. A statement that the financial statements are the responsibility of management. B. A title that includes the word "Independent." C. A statement that although estimates are believed to be reasonable, there are normally differences between actual and estimated results. D. A statement that an audit includes examining supporting evidence "on a test basis."
C
The third standard of fieldwork states that sufficient competent evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under audit. The substantive evidential matter required by this standard may be obtained, in part, through A. Flowcharting the internal control system B. Properly planning the audit engagement. C. Analytical procedures. D. Audit documents
C
The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the: A. Factors that raise doubts about the auditability of the financial statements. B. Operating effectiveness of internal control policies and procedures. C. Risk that material misstatements exist in the financial statements. D. None of the above.
C
When auditing contingent liabilities, which of the following procedures would be least effective? A. Reading the minutes of the board of directors. B. Inquiring of in-house legal counsel regarding outstanding lawsuits. C. Examining returned accounts receivable confirmations. D. Examining invoices for legal services purchased during the year.
C
Which of the following audit procedures would provide the least reliable evidence that the client has legal title to inventories? A. Confirmation of inventories at locations outside the client's facilities B. Analytical review of inventory balances compared to purchasing and sales activities C. Inquiry of purchasing department personnel regarding purchasing terms D. Examination of paid vendors' invoices
C
Which of the following audit tests would be regarded as a test of controls? A. Detailed tests of the items making up the balance in a given general ledger account. B. Vouching inventory pricing to vendors' invoices. C. Tests of the signatures on canceled checks to verify that the signer is authorized to sign checks. D. Physically inspecting additions to property, plant, and equipment.
C
Which of the following descriptions of audit sampling of accounts receivable balances has the lowest level of sampling risk? A. The auditor selected a sample of $24,300 of receivables from a population of $521,000 B. The auditor selected a sample of $215,000 of receivables from a population of $452,000. C. The auditor selected a sample of $21,000 of receivables from a population of $24,000. D. Cannot determine which of these has the lowest sampling risk without using statistical methods.
C
Which of the following equation is correct? A. Beginning inventory + Purchases + Cost of Goods Manufactured = Ending inventory B. Beginning inventory + Purchases - Ending inventory = Cost of Goods Manufactured C. Beginning inventory + Purchases - Ending inventory = Cost of Goods Sold D. Ending inventory - Beginning inventory = Cost of Goods Sold - Purchases
C
Which of the following financial ratios is not typically used to determine short-term liquidity? A. Quick Ratio B. Current Ratio C. Times Interest Earned D. Operating Cash Flow Ratio
C
Which of the following is not a misstatement related to the valuation assertion for inventory? Inventory flow assumptions (e.g., LIFO) are not properly reflected in the balance Obsolete inventory is recorded at cost Inventory that is fictitious is recorded at an amount above the going price Standard costs are not applied accurately
C
Which of the following statements is correct about the reliability of evidential matter? A. Information obtained indirectly from outside sources is the most reliable evidential matter. B. Reliability of evidential matter refers to the amount of corroborative evidence obtained. C. An effective internal control system provides more reliable evidential matter than an ineffective internal control system. D. None of the above.
C
Which of the following types of audit evidence would be most reliable in testing the existence of an account receivable? A. Analytical procedures B. Inspection of documents C. Confirmation D. Physical Examination
C
According to the text, all of the following are indicators of a material weakness except A. The commission of fraud by senior management B. A restatement of previous year financial statements to correct a material misstatement. C. An ineffective audit committee. D. The finding of a "known error" in the current year audit that is not material to the financial statements.
D
An auditor learns that their audit client in an industry in which common stock is valued based on the price-earnings ratio soon will have an initial public offering. All of the following are true except: A. Materiality should be reduced. B. Inherent risk should increase. C. Fraud risk should increase. D. Acceptable audit risk should increase.
D
In an audit area that has a higher level of inherent risk, it would be prudent to A. increase the amount of evidence B. Assign more experienced staff C. Review collected evidence more thoroughly D. Any/all of the above
D
In which of the following circumstances would the use of the negative form of accounts receivable confirmation most likely be justified? A. A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers. B. A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances. C. A small number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers. D. A small number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.
D
In which of the following situations would an auditor issue an unqualified opinion (assume all items are material)? A. The client has omitted required footnote disclosures. B. The auditor is not independent of the client. C. The auditor is unable to gather sufficient evidence in support of assets reported by a consolidated subsidiary. D. The client failed to make a large debt payment after the end of its fiscal period.
D
In which of the following situations would an auditor ordinarily choose between a qualified or an adverse opinion? A. The auditor did not observe the entity's physical inventory and is unable to become satisfied by other auditing procedures. B. There has been a change in accounting principles that has a material effect on the comparability of the entity's financial statements. C. The auditor is unable to apply necessary procedures concerning an investor's share of an investee's earnings recognized on the equity method. D. None of the above.
D
The Sarbanes-Oxley Act of 2002 requires managements of large public companies to include a report on internal control in the entity's annual report. It also requires auditors to attest to the effectiveness of large public companies' ICFR. Which of the following statements concerning these requirements is false? A. The auditor should evaluate whether internal controls are effective preventing or detecting and correcting material misstatements in management's assertions in the financial statements. B. Management's report should state its responsibility for establishing and maintaining an adequate internal control system. C. Management should identify material weaknesses in its report. D. The auditor should provide recommendations for improving internal control in the attestation report.
D
What possible error or fraud could result when the disbursement function is not segregated from the accounts payable function? A. Theft of goods B. Overpayment for goods C. Recording purchases to the wrong vendor's accounts payable account D. Theft of cash E. All of the above
D
Which of the following are qualitative factors that may affect the evaluation of audit findings? A. Whether the misstatement involves the concealment of an unlawful transaction. B. Whether the misstatement masks a change in earnings or trends. C. Whether intentional misstatements are part of actions to "manage" earnings D. All of the above
D
Which of the following is an inherent risk factor that should affect the auditor's assessment of the revenue process? A. Whether or not the client effectively segregates the credit and billing functions B. The quality of the client's computer systems used to record and track revenue transactions C. Processes used by the client to authorize sales transactions D. Answer Misstatements detected in prior audits
D
Which of the following procedures most likely would not be an internal control procedure designed to reduce the risk of errors in the billing process? A. Comparing control totals for shipping documents with corresponding totals for sales invoices. B. Using computer programmed controls on the pricing and mathematical accuracy of sales invoices. C. Matching shipping documents with approved sales orders before invoice preparation. D. Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger.
D
Which of the following procedures would provide the most reliable audit evidence? A. Inquiries of the client's internal audit staff held in private. B. Inspection of pre-numbered client purchase orders filed in the vouchers payable department. C. Analytical procedures performed by the client and reviewed by the auditor. D. Auditor inspection of bank statements obtained directly from the client's financial institution.
D
Which of the following risks can be controlled by the auditor? A. Engagement risk B. Inherent risk C. Control risk D. Detection risk
D
Which of the following situations would require adjustment to or disclosure in the financial statements? A. A merger discussion. B. The application for a patent on a new production process. C. Discussions with a customer that could lead to a 40 percent increase in the client's sales if agreement is successful. D. The bankruptcy of a customer who regularly purchased 30 percent of the company's output.
D
Which of the following statements is true regarding the audit of a private entity? A. GAAS requires auditors to perform tests of controls on each audit. B. If an auditor plans to take a substantive approach for testing an assertion for a given account then the requirement to understand internal controls related to that assertion does not apply. C. If the client's controls are not operating effectively, the auditor is more likely to test them. D. Auditors must test controls for assertions where planned control risk is significantly below the maximum (i.e. significantly below 100%) and where they plan to rely on the controls to reduce substantive testing. E. None of the above is true.
D
Which of the following will eliminate sampling risk? A. Double the sample size. B. Use a nonstatistical sampling method. C. Use classical variable sampling with larger tolerable error D. Test all the items in the population.
D
Why does demand for auditing exist in a free-market economy, even if it were not required by regulation?
Due to the nature of the agency relationship, natural conflict of interest, and information asymmetry between an absentee owner and manager
When is qualified opinion issued with respect to the effectiveness of ICFR? A. A material weakness is discovered by the auditor. B. A significant deficiency is discovered by the auditor. C. The evidence suggests that management should make minor improvements to internal control D. The scope of the auditor's work is limited. E. Never; AS5 does not allow for a qualified opinion relating to the audit of ICFR.
E
Which of the following are examples of evidence types that are commonly used to test controls? A. Inquiry and reperformance B. Inspection of documents and tangible assets C. Observation of procedures and inspection of documents D. Analytical procedures and recalculation E. Both A and C above are correct F. All of the above are correct
E
Which balance-related assertion for Accounts Payable would most likely be misstated if, in December, a company recorded a payable to a vendor for inventory that was shipped in the next fiscal year (e.g., January)?
Existence
T/F Assume you are planning an audit and you determine that, because your client has recently gone from having publicly traded stock to a private entity owned by one individual, you can tolerate a higher level of audit risk for the client than you originally anticipated. Thus, you must adjust the audit plan to obtain a higher amount of reasonable assurance from the audit evidence.
False
T/F Auditing is different from most other accounting courses because learning auditing largely involves memorizing technical formulas and rules.
False
Following are five of the phases in the financial statement audit process. Select the item (a-d) that places the phases in the proper order. I. Consider and audit internal control II. Evaluate results and issue the audit report III. Client acceptance/continuance IV. Audit business processes and related accounts V. Plan the audit
III, V, I, IV, II
In the audit of financial statements, an auditor's primary consideration regarding an internal control policy or procedure is whether the policy or procedure
Increases the likelihood that management's assertions are fairly stated.
A dual-purpose test
Is both a substantive test of transactions and a test of controls.
As a result of tests of controls, an auditor unknowingly assessed control risk too low and thus mistakenly decreased substantive testing. This assessment most likely occurred because the true deviation rate in the population was
More than the deviation rate in the auditor's sample.
Which of the following statements is correct concerning the concept of materiality?
No formal requirements exist for determining materiality—it is a matter of professional judgment.
The fraud committed by Bernie Madoff is most accurately described as
Ponzi scheme
Which of the following is not a principle of professional conduct as defined by the Code of Professional Conduct? Integrity Due Care Reporting Scope and nature of services
Reporting
When an auditor determines that inventory stored in the warehouse is not on consignment, which assertion is being tested?
Rights and obligations
Engagement risk is:
The auditor's risk of loss from events arising in connection with financial statements audited and reported upon.
Sampling risk is
The risk that the sample drawn does not represent the population.
What kind of report would you issue? - The auditor determines that there is an inappropriate departure from GAAP.
adverse or qualified due to GAAP
An auditor, using the same degree of due care as other members of the profession, fails to create an adequate allowance for bad debts. This occurrence is an example of:
an error in judgement
What audit test is this: Compare this year's gross margin percentage with the industry average gross margin percentage.
analytical procedure
What audit test is this: Inquire of Billing Department personnel about whether they account for all pre-numbered sales invoice numbers.
analytical procedure
Which of the following are ordinarily designed to detect possible material dollar errors in the financial statements? Tests of controls. Analytical review procedures. Computer controls. Post-audit review of audit documents.
analytical review procedures
The risk that a material misstatement occurs, goes undetected by the client's internal control structure, and is not detected by the auditor, who unknowingly issues a "clean" audit report is known as:
audit risk
When searching for unrecorded liabilities at year-end, an auditor most likely would examine:
cash disbursements after year-end
Which of the following is a change that does not affect consistency of the financial statements? Change in accounting principle. Change in accounting estimate. Change in reporting entity. Correction of a misstatement in previously issued financial statements.
change in accounting estimate
A client you are auditing does not have any record of inventory held on consignment by others. Inquiring of management regarding potential inventory held on consignment by others tests the audit assertion of:
completeness
An auditor selected items for test counts while observing a client's physical inventory. The auditor then traced the test counts to the client's inventory listing. This procedure most likely obtained evidence concerning management's assertion of
completeness
Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management's assertion of
completeness
If an auditor selects and counts inventory by starting in the warehouse and then comparing the items counted to the client's inventory listing, this procedure will test which of the following assertions for inventory:
completeness
What management assertion is addressed by this task: Review client copies of vendors' account statements to ensure that all purchases were recorded in the purchases journal.
completeness
Which assertion is evaluated by conducting a search for unrecorded liabilities?
completeness
Your audit client is under intense pressure to meet an earnings target. Which assertion for purchases are you most concerned with?
completeness
In auditing accounts payable, an auditor's procedures most likely would focus primarily on management's assertion of
completeness of the balance
Which of the following is typically NOT included in the sales cycle? Sales returns Cost of goods sold Allowance for uncollectible accounts None of the above
cost of goods sold
Tests designed to detect purchases made before the end of the year that have been recorded in the subsequent year most likely would provide assurance about management's assertion of:
cutoff
What ratio will best evaluate the potential risk in this situation: You are concerned that the client's allowance for doubtful accounts is understated due to sales to customers who are experiencing financial difficulties.
days outstanding in accounts receivable
In a sampling application, the standard deviation represents a measure of the
degree of data variability
The audit risk model is used primarily for the purpose of
determining the audit plan
What kind of report would you issue? - The auditor determines that they are not independent of the client
disclaimer
What kind of report would you issue? - The auditor does not collect sufficient, appropriate evidence.
disclaimer or qualified due to scope
A Type II subsequent event usually requires:
disclosure in the footnotes
What type of evidence is required by this task: Review client copies of vendors' account statements to ensure that all purchases were recorded in the purchases journal.
documentation
Determining tolerable misstatement is necessary because:
evidence is accumulated by financial statement segments during the course of the audit.
In auditing a client you notice that the client's gross profit percentage is much greater than last year. Assuming ending inventory is the problem, not sales, which audit assertion is most likely violated?
existence
The testing of accounts receivable through the use of confirmations tests primarily which assertion?
existence
Which audit assertion has to do with ensuring that all recorded sales were real sales to real customers?
existence or occurence
T/F An engagement partner for an audit client could directly own shares of stock in the client if the amount was clearly immaterial to the partner.
false
T/F Audit Risk and Engagement Risk are two terms that refer to the exact same concept.
false
T/F Every material contingent liability must be recorded.
false
T/F In a typical company, the Profit Margin will be greater than the Gross Profit Percentage.
false
T/F Tests of controls are concerned with evaluating whether controls are sufficiently effective to justify reducing control risk further from the planned level and increasing reliance on substantive tests.
false
T/F Tests of controls are required on any audit of a private company where the auditor believes the controls are either inappropriately designed or the implementation of the control is ineffective.
false
T/F The inventory management process has little or no overlap with the revenue and purchasing processes
false
T/F The responsibility to assess the entity's ability to continue as a going concern rests solely with the auditor.
false
What ratio will best evaluate the potential risk: You are concerned that year-end sales were recorded before inventory was shipped and that perhaps the inventory account was credited in the following year.
gross profit percentage
In 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. The situation illustrates the risk of
incorrect rejection
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. The situation illustrates the risk of Incorrect rejection. Incorrect acceptance. Assessing control risk too high. Assessing control risk too low.
incorrect rejection
If planned detection risk is reduced, the quality and/or quantity of evidence the auditor accumulates should
increase
An auditor is concerned with completing various phases of the examination after the balance sheet date. This "subsequent period" involving formal audit procedures extends to the date of the:
issuance of the financial statements
In applying a non-statistical approach to attribute sampling, reducing the planned assessed level of control risk generally results in a
larger sample size for tests of controls
For certain controls, such as segregation of duties, documentary evidence may not exist. An auditor would most likely test the procedures by Reperformance and corroboration. Observation and inquiry. Inspection and vouching. Confirmation and recomputation.
observation and inquiry
When dealing with the revenue process, which assertion is likely to be most scrutinized by the auditors?
occurence
Failure to record inventory related transactions in the proper period can affect all of the following accounts except: Sales Receivables Cost of goods sold Prepaid expenses
prepaid expenses
An auditor may compensate for a high level of control risk by increasing the
quality or quantity of audit evidence
Statistical sampling provides a technique for Exactly defining materiality. Greatly reducing the amount of substantive testing. Eliminating judgment in audit tests. Quantifying sampling risk.
quantifying sampling risk
For the purpose of determining proper inventory cutoff, the auditor will look at a sample of which of the following for a few days before and after year-end?
receiving documents
Which of the following best describes the existence assertion for inventory? Purchase requisitions are initiated by authorized personnel Recorded inventory is on hand Inventory is properly accumulated from journals and ledgers All inventory is recorded
recorded inventory is on hand
To which of management's assertions is the audit objective of ownership related?
rights and obligations
The audit of year-end physical inventories should include steps to verify that the client's purchases and sales cutoffs were adequate. The audit steps should be designed to detect whether merchandise included in the physical count at year-end was not recorded as a
sale in the current period
If auditors conducting attributes sampling found that the client deviated from a prescribed control in nine of the first 10 items examined, the auditor is most likely to Increase sample size. Increase the computed upper deviation rate. Decrease the tolerable deviation rate. Stop the test and increase control risk.
stop the test and increase control risk
What type of audit procedure is the following: "Compare payables turnover to previous years' data"?
substantive analytical procedure
What audit test is this: Request a bank confirmation for the client's cash balance on deposit at the bank.
substantive test of account balance
What audit test is this: Select a sample of sales invoices. For each invoice, compare items and quantities billed to a corresponding customer purchase order and shipping document noting any differences. Recalculate amount billed based on approved price list.
substantive test of transaction
Analytical procedures may be classified as being primarily which of the following? Tests of controls. Substantive tests. Tests of ratios. Detailed tests of balances.
substantive tests
What audit test is this: Examine a randomly selected sample of purchase orders fro indication of approval by an appropriate supervisor.
test of control
What ratio will best evaluate the potential risk: You are evaluating the need to issue a going concern opinion and want to assess the feasibility of management's plan to get an additional long-term line of credit from the bank.
times interest earned
T/F A properly designed and functioning internal audit department is often used to "monitor" the operating effectiveness of internal control.
true
T/F Analytical procedures can be used to address overall reasonableness of transactions or account balances.
true
T/F Assume you are planning an audit and you determine that materiality (i.e. the size of misstatement that is expected to affect a financial statement user's decision) for a client is lower than you originally anticipated. Thus, you must adjust the audit plan to increase the quality and/or quantity of audit evidence.
true
T/F In planning the audit of Internal Control over Financial Reporting, the auditor uses the same materiality considerations that are used in planning the audit of the financial statements.
true
T/F It is management's responsibility to ensure that the company's financial statements are prepared in accordance with GAAP. It is the auditor's responsibility to provide reasonable assurance that the financial statements are free of material misstatement.
true
T/F Management override of internal control is one of the limitations of an entity's internal control system.
true
T/F Only public accounting firms that are registered with the Public Company Accounting Oversight Board will be able to participate in the preparation or issuance of an audit report for a public company under Sarbanes-Oxley.
true
T/F Substantive tests of transactions emphasize the verification of dollar amounts of transactions recorded in the journals and then posted in the general ledger.
true
T/F Tests of details of balances emphasize testing the detail amounts that make up the ending balances in the general ledger.
true
T/F True or False? Auditors must gain an understanding of the internal controls for all material financial statement assertions. In addition, whenever an auditor's understanding suggests that an internal control is likely to be effective at preventing or detecting and correcting material misstatements, the auditor must also perform tests of the operating effectiveness of the controls (i.e., take a reliance strategy), regardless of how efficient this approach is.
true
T/F Using the Assurance Bucket analogy from the text, riskier assertions for an account would have larger buckets than the buckets for assertions with less risk.
true
You are the auditor for Zimbelmeister, Inc. During the audit, you identified a significant deficiency in the effectiveness of internal controls. Assuming this is the only deficiency identified, what opinion should you give with respect to the effectiveness of internal controls?
unqualified
You decide not to rely on controls in the financial statement audit after performing an audit of internal control over financial reporting for Burtonio's Pasta, Inc., in which you find a material weakness. Burtonio's is a public company. You find no material misstatements in the audit of Burtonio's, Inc.'s financial statements, and the audit scope is not limited. What opinion should you give on the financial statements?
unqualified
What kind of report would you issue? - the client appropriately changed their inventory valuation from LIFO to FIFO
unqualified with explanatory paragraph
What kind of report would you issue? - The subsidiary of the client was audited by another accounting firm and the primary auditor does not wish to take responsibility for their work
unqualified with modified wording
An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management's assertions about
valuation
