E) Chpts 9 & 10

114. A company's decision to use the fair value option for valuation of marketable securities is most likely to affect which of the following assertions the most? A. Completeness. B. Existence. C. Fairness. D. Presentation and Disclosure.

D. Presentation and Disclosure.

43. Which of the following statements is correct concerning the use of nonstatistical sampling for substantive tests? A. Its use is generally acceptable only for populations with an immaterial book value. B. It requires the use of structured sample size selection techniques to be acceptable. C. It may be especially useful in circumstances in which the combination of inherent and control risk is at the maximum level. D. Results will be projected to the population.

D. Results will be projected to the population.

37. The 4,000 accounts receivable of GHI Company have a total book value of $60,000. Bob Smith, CPA, has selected and audited a sample of 100 accounts with a total book value of $1,600. Using the mean-per-unit estimation technique, Smith has properly estimated a projected misstatement of a $8,000 overstatement for the entire population. The audited value of Smith's sample is: A. $1,300 B. $1,400 C. $1,600 D. $1,800

A. $1,300

5. Using difference estimation, an auditor has taken a sample of 200 from a population's 40,000 items; that population has a book value of $200,000. She found that in her sample the average audited value was $4.20, while the average book value was $5.20. What is the estimated total audited value of the population? A. $160,000. B. $161,538. C. $168,000. D. $200,000.

A. $160,000.

33. Using the mean-per-unit estimation technique, Rotter's estimate (to the nearest dollar) of year-end accounts receivable balance would be: A. $37,500 B. $38,462 C. $38,500 D. $41,600

A. $37,500

36. The 3,000 accounts receivable of DEF Company have a total book value of $60,000. Bob Smith, CPA, has selected and audited a sample of 100 accounts with a total book value of $2,100. Using the difference estimation technique, Smith has properly estimated a projected misstatement of a $9,000 overstatement for the entire population. The estimated total audited value of the population is: A. $51,000 B. $58,000 C. $60,000 D. $69,000

A. $51,000

83. Which of the following controls would be most likely to reduce the risk of diversion of customer receipts by a company's employees? A. A bank lockbox system. B. Approval of all disbursements by an individual independent of cash receipts. C. Monthly bank cutoff statements. D. Prenumbered remittance advices.

A. A bank lockbox system.

63. Which of the following best illustrates the concept of sampling risk? A. A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest. B. An auditor may select audit procedures that are not appropriate to achieve the specific objective. C. An auditor may fail to recognize deviations in the documents examined for the chosen sample. D. The documents related to the chosen sample may not be available for inspection.

A. A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest.

85. By preparing a four-column bank reconciliation ("proof of cash") for the last month of the year, an auditor will generally be able to detect: A. An unrecorded check written at the beginning of the month which was cashed during the period covered by the reconciliation. B. A cash sale which was not recorded on the books and was stolen by a bookkeeper. C. An embezzlement of unrecorded cash receipts on receivables before they had been deposited into the bank. D. A credit sale which has been recorded twice in the sales journal.

A. An unrecorded check written at the beginning of the month which was cashed during the period covered by the reconciliation.

70. By preparing a four-column bank reconciliation ("proof of cash") at year-end, an auditor will generally be able to detect: A. An unrecorded deposit made at the bank at the end of the month. B. A second payment of an account payable which had already been paid in full two months earlier. C. An embezzlement of cash receipts not recorded in the cash receipts journal before they had been deposited into the bank. D. A receivable collected that had previously been written off as uncollectible.

A. An unrecorded deposit made at the bank at the end of the month.

27. The auditors expect a population deviation rate of billing errors of two percent, and have established a tolerable rate of five percent. The sampling approach most likely to be used is: A. Attributes sampling. B. Stratified sequential sampling. C. Discovery sampling. D. None, as sampling does not seem appropriate in this situation.

A. Attributes sampling.

18. When performing tests of controls over authorization of cash receipts, which of the following sampling methods would be most appropriate? A. Attributes. B. Ratio. C. Stratified. D. Variables.

A. Attributes.

91. Which of the following is the best audit procedure for the detection of lapping? A. Comparison of postings of cash receipts to accounts with the details of cash deposits. B. Confirmation of the cash balance. C. Reconciliation of the cash account balances. D. Preparing a proof of cash.

A. Comparison of postings of cash receipts to accounts with the details of cash deposits.

58. In assessing sampling risk, the risk of incorrect rejection and the risk of assessing control risk too high relate to the: A. Efficiency of the audit. B. Effectiveness of the audit. C. Selection of the sample. D. Audit quality controls.

A. Efficiency of the audit.

24. When the auditors have chosen to test a control, what relationship will the tolerable rate normally have when compared to the expected rate of deviations in the sample? A. Exceed. B. Equal. C. Be less than. D. Indefinite.

A. Exceed.

26. When using sampling for tests of controls, which of the following audit consequences may follow? A. If sample results indicate that the control is operating effectively, but in fact it is not, control risk will be assessed too low. B. If sample results indicate that the control is operating effectively, but in fact it is not, control risk will be assessed too high. C. If sample results indicate that the control is not operating effectively, but in fact it is operating effectively, the audit is likely to be faulty because of reduced substantive tests. D. If sample results indicate that the control is not operating effectively, but in fact it is operating effectively, control risk will be assessed too low.

A. If sample results indicate that the control is operating effectively, but in fact it is not, control risk will be assessed too low.

12, If all other factors specified in an attributes sampling plan remain constant, decreasing the tolerable rate and decreasing the risk of assessing control risk too low would have what effect on sample size? A. Increase. B. Remain the same. C. Decrease. D. Indeterminate, depends upon exact change being made.

A. Increase.

13. If all other factors specified in an attributes sampling plan remain constant, decreasing the tolerable rate and increasing the estimated population deviation rate would have what effect on sample size? A. Increase. B. Remain the same. C. Decrease. D. Indeterminate, depends upon exact change being made.

A. Increase.

14. An increase in the tolerable misstatement has what effect on the planned allowance for sampling risk? A. Increases. B. Decreases. C. No effect. D. Indeterminate.

A. Increases.

57. An advantage of using statistical sampling techniques is that such techniques: A. Mathematically measure risk. B. Eliminate the need for judgmental decisions. C. Define the values of allowance for sampling risk and tolerable misstatement required to provide audit satisfaction. D. Have been established in the courts to be superior to judgmental sampling.

A. Mathematically measure risk.

89. Which of the following is not a universal rule for achieving internal control over cash? A. Separate recordkeeping from accounting for cash to the extent possible. B. Deposit each day's cash receipts intact. C. Separate cash handling from recordkeeping. D. Have monthly bank reconciliations prepared by employees not responsible for the issuance of checks.

A. Separate recordkeeping from accounting for cash to the extent possible.

20. Which of the following is generally not true about statistical sampling as compared to nonstatistical sampling? A. Statistical samples are more representative of the population. B. Statistical sample plans involve additional costs of evaluation. C. Statistical sampling allows a more objective evaluation of sample results. D. Statistical sampling may assist the auditors in designing more efficient samples.

A. Statistical samples are more representative of the population.

76. An auditor may obtain information on the December 31 month-end balance per bank in which of the following? A. Stnd Cnfrm - Yes; Jan 1-10 - Yes B. Stnd Cnfrm - Yes; Jan 1-10 - No C. Stnd Cnfrm - No; Jan 1-10 - Yes D. Stnd Cnfrm - No; Jan 1-10 - No

A. Stnd Cnfrm - Yes; Jan 1-10 - Yes

41. The auditors have audited a sample with a standard deviation of audited values larger than they had originally estimated. In this situation, to maintain the risk of incorrect acceptance at its predetermined level without increasing the size of the sample, which of the following statements is correct? A. The adjusted allowance for sampling risk will be smaller than had been planned. B. The adjusted allowance for sampling risk will be larger than had been planned. C. The risk of incorrect rejection will necessarily decrease. D. The size of the population must be decreased.

A. The adjusted allowance for sampling risk will be smaller than had been planned.

48. Which of the following statements is correct about the sample size in statistical sampling when testing internal controls? A. The auditor should consider the tolerable rate of deviation from the controls being tested in determining sample size. B. As the likely rate of deviation decreases, the auditor should increase the planned sample size. C. The allowable risk of assessing control risk too low has no effect on the planned sample size. D. Of all the factors to be considered, the population size has the greatest effect on the sample size.

A. The auditor should consider the tolerable rate of deviation from the controls being tested in determining sample size.

56. Which of the following statements is correct concerning statistical sampling in tests of controls? A. The population size has little effect on determining sample size except for very small populations. B. The expected population deviation rate has little or no effect on determining sample size except for very small populations. C. As the population size doubles, the sample size also should double. D. For a given tolerable rate, a larger sample size should be selected as the expected population deviation rate decreases.

A. The population size has little effect on determining sample size except for very small populations.

44. Which of the following situations will result in the auditors concluding that the risk of material misstatement is too high when using nonstatistical sampling for substantive tests? A. The projected misstatement exceeds the tolerable misstatement. B. The allowance for sampling risk exceeds the projected misstatement. C. The risk of incorrect acceptance exceeds the risk of incorrect rejection. D. The tolerable misstatement exceeds the sample net misstatement.

A. The projected misstatement exceeds the tolerable misstatement.

30. Which of the following types of risk is of critical importance to auditors in performing tests of controls? A. The risk of assessing control risk too low. B. The risk of assessing control risk too high. C. The risk of incorrect acceptance. D. The risk of incorrect rejection.

A. The risk of assessing control risk too low.

16. In performing a test of a control last year the auditors specified a tolerable deviation rate of X percent. This year the auditors have specified a tolerable rate of less than X percent. Assuming that all other factors remain the same, which of the following is true regarding the relationship between this year's sample size compared to last year's sample size? A. This year's sample is larger than last year's sample. B. This year's sample is smaller than last year's sample. C. This year's sample is equal to last year's sample. D. This year's sample is indeterminate in relation to last year's sample.

A. This year's sample is larger than last year's sample.

92. Which of the following manipulations of cash transactions would overstate the cash balance on the financial statements? A. Understatement of outstanding checks. B. Overstatement of outstanding checks. C. Understatement of deposits in transit. D. Overstatement of bank services charges.

A. Understatement of outstanding checks.

3. Using the mean-per-unit estimation technique, the estimated total audited value of the population is: A. $100,000. B. $120,000. C. $140,000. D. $144,000.

B. $120,000.

6. Using ratio estimation, an auditor has taken a sample of 200 from a population's 40,000 items; that population has a book value of $200,000. She found that in her sample the average audited value was $4.20, while the average book value was $5.20. What is the estimated total audited value of the population? A. $160,000. B. $161,538. C. $168,000. D. $200,000.

B. $161,538.

10. What is the estimated total audited value using mean-per-unit sampling? A. $19,000. B. $19,600. C. $20,000 D. $20,632.

B. $19,600.

34. Using the ratio estimation technique, Rotter's estimate (to the nearest dollar) of year-end accounts receivable balance would be: A. $37,500 B. $38,462 C. $38,500 D. $41,600

B. $38,462

4. Using the mean-per-unit estimation method an auditor has properly calculated the estimated total audited value of a population as $200,000. Her sample included 200 of the population's 40,000 items. She found that, in her sample the average audited value was $1 less than the average book value. What was the average audited value in the sample? A. $4. B. $5. C. $6. D. $10.

B. $5.

68. Use of the ratio estimation sampling technique to estimate dollar amounts is inappropriate when: A. The total book value is known and corresponds to the sum of all the individual book values. B. A book value for each sample item is unknown. C. There are some observed differences between audited values and book values. D. The audited values are nearly proportional to the book value.

B. A book value for each sample item is unknown.

74. By preparing a four-column bank reconciliation ("proof of cash") at year-end, an auditor will generally not be able to detect: A. An unrecorded deposit made at the bank at the end of the month. B. A second payment of an account payable which had already been paid in full two months earlier. C. An unrecorded check cashed during that month. D. A bank charge during the month not recorded on the books.

B. A second payment of an account payable which had already been paid in full two months earlier.

80. The auditors use a bank cutoff statement to compare: A. Deposits in transit on the year-end cash general ledger account to deposits in the cash receipts journal. B. Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation. C. Deposits listed on the cutoff statement to disbursements in the cash disbursements journal. D. Checks dated subsequent to year-end to the outstanding checks listed on the year-end bank statement.

B. Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation.

71. Kiting would least likely be detected by: A. Analyzing details of large cash deposits around year-end. B. Comparing customer remittance advices with recorded disbursements in the cash disbursements journal. C. Preparing a four-column bank reconciliation for all major cash accounts. D. Preparing a schedule of interbank transfers by using the client's records and bank statements around year-end.

B. Comparing customer remittance advices with recorded disbursements in the cash disbursements journal.

81. A practical and effective audit procedure for the detection of lapping is: A. Preparing an interbank transfer schedule. B. Comparing recorded cash receipts in detail against items making up the bank deposit as shown on duplicate deposit slips validated by the bank. C. Tracing recorded cash receipts to postings in customers' ledger cards. D. Preparing a proof of cash.

B. Comparing recorded cash receipts in detail against items making up the bank deposit as shown on duplicate deposit slips validated by the bank.

77. An auditor may obtain information on the December 31 month-end balance per bank in which of the following? A. Dec Stmnt - Yes; Sched Bnk Trans - Yes B. Dec Stmnt - Yes; Sched Bnk Trans - No C. Dec Stmnt - No; Sched Bnk Trans- Yes D. Dec Stmnt - No; Sched Bnk Trans - No

B. Dec Stmnt - Yes; Sched Bnk Trans - No

23. Changing from a sampling plan using random selection with replacement to random selection without replacement has what effect on the required sample size? A. Increases. B. Decreases. C. No effect. D. An indeterminate effect.

B. Decreases.

25. Increases in the planned allowance for sampling risk have what effect on required sample size? A. Increases. B. Decreases. C. No effect. D. Indeterminate.

B. Decreases.

32. What effect does obtaining a sample with a standard deviation larger than that estimated during planning have on the adjusted allowance for sampling risk? A. Increases. B. Decreases. C. No effect. D. Indeterminate.

B. Decreases.

9. A dual purpose test simultaneously: A. Addresses two different accounts. B. Functions as a substantive test and as a test of controls. C. Functions as an analytical procedure and a substantive test. D. Substantiates an ending balance and the transactions making up the balance.

B. Functions as a substantive test and as a test of controls.

60. While performing a substantive test of details during an audit, the auditor determined that the sample results supported the conclusion that the recorded account balance was materially misstated. It was, in fact, not materially misstated. This situation illustrates the risk of: A. Incorrect acceptance. B. Incorrect rejection. C. Assessing control risk too high. D. Assessing control risk too low.

B. Incorrect rejection.

87. Jones embezzled $10,000 from his company's account in Bank A. At year-end, he hid the shortage by making a deposit on December 31 in Bank A, drawn on Bank B. He has not recorded the transaction on the books. This is an example of: A. Lapping. B. Kiting. C. Effective cash management. D. Related party transactions.

B. Kiting.

59. When performing a test of a control over cash disbursements, a CPA may use a systematic sampling technique with a start at any randomly selected item. The biggest disadvantage of this type of sampling is that the items in the population: A. Must be recorded in a systematic pattern before the sample can be drawn. B. May occur in a systematic pattern and destroy the sample randomness. C. May systematically occur more than once in the sample. D. Must be systematically replaced in the population after sampling.

B. May occur in a systematic pattern and destroy the sample randomness.

42. In the past, the auditors have found that the book value of a receivable account has been related to the amount the account is misstated (i.e., large accounts have large misstatements and small accounts have small misstatements). Which of the following techniques is most likely to be efficient? A. Mean-per-unit estimation. B. Ratio estimation. C. Difference estimation. D. Sequential sampling estimation.

B. Ratio estimation.

75. Which procedure is an auditor most likely to use to detect a check outstanding at year-end that was not recorded as outstanding on the year-end bank reconciliation? A. Prepare a bank transfer schedule using the client's cash receipts and cash disbursements journal. B. Receive a cutoff statement directly from the client's bank. C. Prepare a four column bank reconciliation using the year-end bank statement. D. Confirm the year-end balance using the standard form to confirm account balance information with financial institutions.

B. Receive a cutoff statement directly from the client's bank.

86. In October, three months before year-end, the bookkeeper erroneously recorded the receipt of a one year bank loan with a debit to cash and a credit to miscellaneous revenue. The most effective method for detecting this type of error is: A. Foot the cash receipts journal for October. B. Send a bank confirmation as of year-end. C. Prepare a bank reconciliation as of year-end. D. Prepare a bank transfer schedule as of year-end.

B. Send a bank confirmation as of year-end.

19. Which of the following statistical sampling techniques involves taking samples in a series of stages? A. Systematic sampling. B. Sequential sampling. C. Continuous sampling. D. Multiple location sampling.

B. Sequential sampling.

66. An important statistic to consider when using a statistical sampling audit plan is the population variability. The population variability is measured by the: A. Sample mean. B. Standard deviation. C. Standard error of the sample mean. D. Estimated population total minus the actual population total.

B. Standard deviation.

38. Which of the following is a correct statement with respect to evaluating results when using nonstatistical sampling for substantive tests? A. When the projected misstatement exceeds the tolerable misstatement, the auditor should conclude that the population is not misstated. B. The closer the projected misstatement is to the tolerable misstatement, the higher the risk of material misstatement. C. When the projected misstatement is equal to zero, the auditors may conclude with certainty that no misstatements exist in the account. D. When the projected misstatement percentage exceeds the risk of incorrect acceptance the auditors will generally conclude that the population is materially misstated.

B. The closer the projected misstatement is to the tolerable misstatement, the higher the risk of material misstatement.

22. When the auditors have decided to use statistical rather than nonstatistical sampling, a disadvantage is that: A. Designing efficient samples is more difficult. B. The costs of training staff may be higher. C. Sampling without replacement must be used. D. Objectively evaluating results is impossible.

B. The costs of training staff may be higher.

96. The Standard Form to Confirm Account Balances with Financial Institutions includes information on all of the following except: A. Date due of a direct liability. B. The principal amount paid on a direct liability. C. Description of collateral for a direct liability. D. The interest rate of a direct liability.

B. The principal amount paid on a direct liability.

84. Which of the following is not a control that generally is established over cash receipts? A. To prevent abstraction of cash, a control listing of cash receipts should be prepared by mailroom personnel. B. To insure accurate posting, the accounts receivable clerk should post the customers' receipts from customers' checks. C. To insure accuracy of the accounts receivable records, the records should be reconciled monthly to the accounts receivable controlling account. D. To prevent theft of cash, receipts should be deposited daily.

B. To insure accurate posting, the accounts receivable clerk should post the customers' receipts from customers' checks.

61. An auditor plans to examine a sample of 20 checks for counter signatures as prescribed by the client's control procedures. One of the checks in the chosen sample of 20 cannot be found. The auditor should consider the reasons for this limitation and: A. Evaluate the results as if the sample size had been 19. B. Treat the missing check as a deviation for the purpose of evaluating the sample. C. Treat the missing check in the same manner as the majority of the other 19 checks, i.e., countersigned or not. D. Choose another check to replace the missing check in the sample.

B. Treat the missing check as a deviation for the purpose of evaluating the sample.

1. Using the difference estimation technique, estimated total audited value of the population is: A. $100,000. B. $120,000. C. $140,000. D. $144,000.

C. $140,000.

7. Using mean-per-unit estimation, an auditor has taken a sample of 200 from a population's 40,000 items; that population has a book value of $200,000. She found that in her sample the average audited value was $4.20, while the average book value was $5.20. What is the estimated total audited value of the population? A. $160,000. B. $161,538. C. $168,000. D. $200,000.

C. $168,000.

40. Assume a mean-per-unit estimation variables sampling application with a tolerable misstatement of $70,000 and a book value of $700,000. After performing the sampling plan, the auditors calculated an adjusted allowance for sampling risk of $45,000 and a point estimate of the population's total audited value to be $640,000. The projected misstatement based on this sample is: A. $5,000 B. $45,000 C. $60,000 D. $70,000

C. $60,000

54. Which of the following factors does an auditor need to consider in planning a particular audit sample for a test of control? A. Number of items in the population. B. Total dollar amount of the items to be sampled. C. Acceptable level of risk of assessing control risk too low. D. Tolerable misstatement.

C. Acceptable level of risk of assessing control risk too low.

29. Which of the following may be used to reduce the risk of nonsampling errors? A. Increasing the size of audit samples. B. Stratifying audit samples. C. Adequately planning audit samples. D. Using statistical sampling techniques.

C. Adequately planning audit samples.

49. To determine sample size in an attribute sampling application, what must be specified? A. Population mean, expected error rate, allowance for sampling risk. B. Allowance for sampling risk, risk of assessing control risk too low, standard deviation. C. Allowance for sampling risk, risk of assessing control risk too low, expected deviation rate. D. Population mean, standard deviation, allowance for sampling risk.

C. Allowance for sampling risk, risk of assessing control risk too low, expected deviation rate.

64. Which of the following statistical selection techniques is least desirable for use by an auditor? A. Systematic selection. B. Stratified selection. C. Block selection. D. Sequential selection.

C. Block selection.

88. Jones embezzled $10,000 from his company's account in Bank A. At year-end, he hid the shortage by making a deposit on December 31 in Bank A, drawn on Bank B. He has not recorded the transaction on the books. Which of the following is most likely to be effective in detecting this fraud? A. Bank confirmation. B. Bank transfer schedule prepared using only the cash receipts and cash disbursements journals. C. Comparison of bank cutoff statement to the cash receipts and disbursements records. D. Receivable confirmation.

C. Comparison of bank cutoff statement to the cash receipts and disbursements records.

79. Which of the following statements is not correct? A. Cash is important to the audit process because of its vulnerability to misappropriation, despite the fact that the balance at the balance sheet date may be immaterial. B. Payroll cash account balances kept on an imprest basis are more easily controlled than others not so kept. C. Confirmation of cash should only be performed as of the balance statement date because the auditor expresses an opinion as of that date. D. Reviewing interbank transfers is important to the auditor because of the possibility that the client may be engaged in kiting.

C. Confirmation of cash should only be performed as of the balance statement date because the auditor expresses an opinion as of that date.

53. If all other factors specified in an attributes sampling plan remain constant, changing the specified tolerable rate from 6% to 10%, and changing the specified risk of assessing control risk too low from 3% to 7% would cause the required sample size to: A. Increase. B. Remain the same. C. Decrease. D. Change by 4%.

C. Decrease.

55. When using a statistical sampling plan, the auditors would probably require a smaller sample if the: A. Population increases. B. Desired allowance for sampling risk decreases. C. Desired risk of incorrect acceptance increases. D. Expected deviation rate increases.

C. Desired risk of incorrect acceptance increases.

90. Which of the following is not a control over cash disbursements? A. Disbursements should be made by check. B. A check protecting machine should be used. C. Documents supporting the payment of a disbursement should be canceled by the person preparing the check to prevent reuse. D. Voided checks should be defaced and filed with paid checks.

C. Documents supporting the payment of a disbursement should be canceled by the person preparing the check to prevent reuse.

47. Statistical sampling generally may be applied to test internal control when the client's internal control procedures: A. Depend primarily on appropriate segregation of duties. B. Are carefully reduced to writing and are included in client accounting manuals. C. Leave an audit trail in the form of evidence of compliance. D. Enable the detection of material fraud in the accounting records.

C. Leave an audit trail in the form of evidence of compliance.

21. When using statistical sampling, which of the following need not be known to evaluate the results of an attributes sample? A. Sample size. B. Risk of assessing control risk too low. C. Number of deviations in the population. D. Number of deviations found in the sample.

C. Number of deviations in the population.

15. Which of the following is not generally used for selecting samples? A. Random number tables. B. Random number generators. C. Physical representation numbers. D. Systematic selection.

C. Physical representation numbers.

52. An auditor wishes to estimate inventory shrinkage by weighing a sample of inventory items. From experience, the auditor knows that a few specific items are subject to unusually large amounts of shrinkage. In using statistical sampling, the auditor's best course of action is to: A. Eliminate any of the items known to be subject to unusually large amounts of shrinkage. B. Increase the sample size to lessen the effect of the items subject to unusually large amounts of shrinkage. C. Stratify the inventory population so that items subject to unusually large amounts of shrinkage are reviewed separately. D. Continue to draw new samples until a sample is drawn which includes none of the items known to be subject to large amounts of shrinkage.

C. Stratify the inventory population so that items subject to unusually large amounts of shrinkage are reviewed separately.

8. If the projected misstatement in a nonstatistical sampling is $8,000, while the tolerable misstatement is $9,000, what would an auditor likely conclude? A. Since the projected misstatement is less than the tolerable misstatement, the account is not misstated. B. Since the projected misstatement is less than the tolerable misstatement, the account is misstated. C. The risk is high that the account is materially misstated. D. The analysis has been improperly performed since the projected misstatement is unequal to the tolerable misstatement.

C. The risk is high that the account is materially misstated.

45. During the final planning of the accounts receivable plan a CPA specified a tolerable misstatement of $30,000, instead of the $20,000 contained in the preliminary audit plan. What would be the impact of this change? A. A decrease in population standard deviation. B. An increase in sample standard deviation. C. An increase in required sample size. D. A decrease in the required sample size.

D. A decrease in the required sample size.

97. The auditors should insist that a representative of the client be present during the physical examination of securities in order to: A. Lend authority of the auditor's directives. B. Detect forged securities. C. Coordinate the return of all securities to proper locations. D. Acknowledge the receipt of securities returned.

D. Acknowledge the receipt of securities returned.

67. In variables estimation sampling, the sample standard deviation is used to calculate the: A. Point estimate of central tendency. B. Tainting of the sample interval. C. Risk of incorrect acceptance. D. Adjusted allowance for sampling risk.

D. Adjusted allowance for sampling risk.

39. Assume a mean-per-unit estimation variables sampling application with a tolerable misstatement of $70,000 and a book value of $700,000. After performing the sampling plan, the auditors calculated an adjusted allowance for sampling risk of $45,000 and a point estimate of the population's total audited value to be $650,000. Based on these results, the auditor would: A. Because the tolerable misstatement exceeds the adjusted allowance for sampling risk, conclude that the population does not contain a material misstatement. B. Because the total audited value ± tolerable misstatement includes the book value, conclude that the population does not contain a material misstatement. C. Because the tolerable misstatement exceeds the adjusted allowance for sampling risk, conclude that there is too great a risk that the account balance is materially misstated. D. Because the total audited value ± adjusted allowance for sampling risk does not include the book value, conclude that there is too great a risk that the account balance is materially misstated.

D. Because the total audited value ± adjusted allowance for sampling risk does not include the book value, conclude that there is too great a risk that the account balance is materially misstated.

95. In a manufacturing company which one of the following audit procedures would give the least assurance of the existence of the assets in the general ledger balance of investment in stocks and bonds at the audit date? A. Confirmation from the broker. B. Inspection of year-end brokers' statements. C. Vouching all changes during the year to brokers' advises and statements. D. Examination of paid checks issued in payment of securities purchased.

D. Examination of paid checks issued in payment of securities purchased.

46. Which of the following is an advantage of systematic selection over random number selection? A. It provides a stronger basis for statistical conclusions. B. It enables the auditor to use the more efficient "sampling with replacement" tables. C. There may be correlation between the location of items in the population, the feature of sampling interest, and the sampling interval. D. It does not require establishment of correspondence between random numbers and items in the population.

D. It does not require establishment of correspondence between random numbers and items in the population.

78. Which of the following is correct concerning "window dressing" for cash? A. A segregation of duties within the cash function effectively eliminates its occurrence. B. It generally involves manipulation of inventory. C. It is illegal, and an audit is designed to provide reasonable assurance of its detection. D. Many forms of it require no action by the auditors.

D. Many forms of it require no action by the auditors.

72. Your client left the cash receipts journal open after year-end for an extra day and included January 1 cash receipts in the 12/31/XX totals. All of those cash receipts were due to cash sales. Assuming the client uses a periodic inventory system with a 12/31/XX count of the physical inventory, which of the following is most likely to be true relating to the year XX financial statements? A. Sales are understated. B. Accounts receivable are understated. C. Inventory is overstated. D. Net income is overstated.

D. Net income is overstated.

28. The auditors expect a population deviation rate of billing errors of eight percent, and have established a tolerable rate of five percent. The sampling approach most likely to be used is: A. Attributes sampling. B. Stratified random sampling. C. Variables sampling. D. None, as sampling does not seem appropriate in this situation.

D. None, as sampling does not seem appropriate in this situation.

31. The auditors' failure to recognize a misstatement in an amount or a deviation in an internal control data processing procedure is described as a: A. Statistical error. B. Sampling misstatement. C. Standard error of the mean. D. Nonsampling error.

D. Nonsampling error.

51. In testing accounts receivable, an auditor sends out positive confirmation requests to 100 randomly selected customers. A customer returns the confirmation indicating that the balance is correct when, in fact, the balance is overstated. This is an example of: A. Projected misstatement. B. Sampling error. C. Standard error. D. Nonsampling error.

D. Nonsampling error.

94. Internal control over marketable securities is enhanced when: A. Securities are held by the cashier. B. Securities are registered in the name of the custodian. C. Detailed records of securities are maintained by the custodian of the securities. D. Securities are held under joint control of two or more officials.

D. Securities are held under joint control of two or more officials.

93. Which of the following is not confirmed on the standard confirmation form used for cash balances at financial institutions? A. Cash checking account balances. B. Cash savings account balances. C. Loans payable. D. Securities held for the client by the financial institution.

D. Securities held for the client by the financial institution.

73. An internal control questionnaire indicates that an approved receiving report is required to accompany every check request for payment of merchandise. Which of the following procedures provides the best evidence on operating effectiveness? A. Select and examine receiving reports and test whether the related canceled checks are dated no earlier than the receiving reports. B. Select and examine receiving reports and test whether the related canceled checks are dated no later than the receiving reports. C. Select and examine canceled checks and test whether the related receiving reports are dated no earlier than the checks. D. Select and examine canceled checks and test whether the related receiving reports are dated no later than the checks.

D. Select and examine canceled checks and test whether the related receiving reports are dated no later than the checks.

17. The auditor using nonstatistical attributes sampling, but who nevertheless has chosen the sample in conformity with random selection procedures: A. Need not consider the risk of assessing control risk too low. B. Has committed a nonsampling error. C. Will have to use discovery sampling techniques to evaluate the results. D. Should compare the deviation rate of the sample to the tolerable rate.

D. Should compare the deviation rate of the sample to the tolerable rate.

65. Various factors influence the sample size for a substantive test of details of an account balance. All other factors being equal, which of the following would lead to a larger sample size? A. Lower assessment of control risk. B. Greater reliance on analytical procedures C. Smaller expected frequency of misstatements. D. Smaller measure of tolerable misstatement.

D. Smaller measure of tolerable misstatement.

69. An auditor's analytical procedures have revealed that the accounts receivable of a client have doubled since the end of the prior year. However, the allowance for doubtful accounts, as a percentage of accounts receivable remained about the same. Which of the following client explanations most likely would satisfy the auditor? A. Credit standards were liberalized in the current year. B. Twice as many accounts receivable were written off in the prior year as compared to this year. C. A greater percentage of accounts were currently listed in the "more than 90 days overdue" category than in the prior year. D. The client opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.

D. The client opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.

50. The tolerable deviation rate in sampling for tests of controls is: A. Used to determine the probability of the auditor's conclusion based upon reliance factors. B. The probability that the financial statements are not materially in error. C. A measure of the reliability of substantive tests. D. The rate the auditor will tolerate without modifying the planned assessment of control risk.

D. The rate the auditor will tolerate without modifying the planned assessment of control risk.

82. Which of the following is not a control that generally is established over cash transactions? A. Separating cash handling from recordkeeping. B. Centralizing the receipt of cash. C. Depositing each day's receipts intact. D. Obtaining a receipt for every disbursement.

D. Obtaining a receipt for every disbursement.

111. The Parmalat fraud case involved: A. A fraudulent cash confirmation. B. Kiting of funds between banks in India and banks in Pakistan. C. A bank reconciliation performed by the client that systematically understated cash. D. Major unrecorded disbursements for equipment.

A. A fraudulent cash confirmation.

112. Banks may process electronic "substitute checks" in place of customer written hard copy checks due to the: A. Check Clearing for the 21st Century Act. B. Public Company Accounting Oversight Board's Standard No. 2. C. Foreign Corrupt Practices Act. D. Sarbanes-Oxley Act.

A. Check Clearing for the 21st Century Act.

113. When a client engages in transactions involving derivatives, the auditor should: A. Develop an understanding of the economic substance of each derivative. B. Confirm with the client's broker whether the derivatives are for trading purposes. C. Notify the audit committee about the risks involved in derivative transactions. D. Add an explanatory paragraph to the auditor's report describing the risks associated with each derivative.

A. Develop an understanding of the economic substance of each derivative.

108. For purposes of an audit of financial statements, electronic confirmation of cash balances: A. Is acceptable when properly controlled. B. Is acceptable, but only when combined with a non-electronic approach. C. Is only acceptable for immaterial accounts. D. Is not acceptable.

A. Is acceptable when properly controlled.

107. Which of the following cash transfers is most likely to result in a misstatement of cash at December 31, 20X7? A. B. C. D.

B

110. Which of the following procedures in the cash disbursements cycle should not be performed by the accounts payable department? A. Comparing the vendor's invoice with the receiving report. B. Canceling supporting documentation after payment. C. Verifying the mathematical accuracy of the vendor's invoice. D. Preparing the check for signature by an authorized person.

B. Canceling supporting documentation after payment.

104. On receiving the bank cutoff statement, the auditor should trace: A. Deposits in transit on the year-end bank reconciliation to deposits in the cash receipts journal. B. Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation. C. Deposits listed on the cutoff statement to deposits in the cash receipts journal. D. Checks dated subsequent to year-end to the outstanding checks listed on the year-end bank reconciliation.

B. Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation.

116. Which of the following is correct relating to kiting? A. It is ordinarily used to understate cash. B. It is more difficult to accomplish in an electronic environment as contrasted to a non-electronic environment. C. It is a lapping approach performed using receivable accounts. D. It is seldom, if ever, used.

B. It is more difficult to accomplish in an electronic environment as contrasted to a non-electronic environment.

106. Contact with banks for the purpose of opening company bank accounts should normally be the responsibility of the corporate: A. Board of Directors. B. Treasurer. C. Controller. D. Executive Committee.

B. Treasurer.

115. An auditor compares annual revenues and expenses with similar amounts from the prior year and investigates all changes exceeding 10%. This procedure most likely could indicate that: A. Fourth quarter payroll taxes were properly accrued and recorded, but were not paid until early in the subsequent year. B. Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities. C. The annual provision for uncollectible accounts expense was inadequate because of worsening economic conditions. D. Notice of an increase in property tax rates was received by management, but was not recorded until early in the subsequent year.

B. Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities.

62. There are many kinds of statistical estimates that an auditor may find useful, but basically every statistical estimate in auditing is of either a quantity or of an error rate. The statistical terms that roughly correspond to "quantities" and "occurrence rate," respectively, are: A. Attributes and variable. B. Variables and attributes. C. Constants and attributes. D. Constants and variables.

B. Variables and attributes.

35. The 3,000 accounts receivable of DEF Company have a total book value of $60,000. Bob Smith, CPA, has selected and audited a sample of 100 accounts with a total book value of $2,100. Using the difference estimation technique, Smith has properly estimated a projected misstatement of an overstatement of $6,000 for the entire population. The audited value of Smith's sample is: A. $1,700 B. $1,800 C. $1,900 D. $2,300

C. $1,900

98. The auditors' count of the client's cash should be coordinated to coincide with the: A. Consideration of the internal controls with respect to cash. B. Close of business on the balance sheet date. C. Count of investment securities. D. Count of inventories.

C. Count of investment securities.

101. Which of the following is one of the better auditing techniques that might be used by an auditor to detect kiting? A. Review composition of authenticated deposit slips. B. Review subsequent bank statements and canceled checks received directly from the banks. C. Prepare a schedule of bank transfers. D. Prepare year-end bank reconciliations.

C. Prepare a schedule of bank transfers.

102. Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom? A. The cashier prepares the daily deposit. B. The cashier makes the daily deposit at a local bank. C. The cashier posts the receipts to the accounts receivable subsidiary ledger. D. The cashier endorses the checks.

C. The cashier posts the receipts to the accounts receivable subsidiary ledger.

103. As one of the year-end audit procedures, the auditor instructed the client's personnel to prepare a confirmation request for a bank account that had been closed during the year. After the client's treasurer has signed the request, it was mailed by the assistant treasurer. What is the major flaw in this audit procedure? A. The confirmation request was signed by the treasurer. B. Sending the request was meaningless because the account was closed before the year-end. C. The request was mailed by the assistant treasurer. D. The CPA did not sign the confirmation request before it was mailed.

C. The request was mailed by the assistant treasurer.

2. Using the ratio estimation technique, the estimated total audited value of the population is: A. $100,000. B. $120,000. C. $140,000. D. $144,000.

D. $144,000.

11. What is the estimated total audited value using difference estimation sampling? A. $19,387. B. $19,400. C. $19,600. D. $20,600.

D. $20,600.

100. Jones was engaged to audit the financial statements of Gamma Corporation for the year ended June 30, 200X. Having completed an examination of the investment securities, which of the following is the best method of verifying the accuracy of recorded dividend income? A. Tracing recorded dividend income to cash receipts records and validated deposit slips. B. Utilizing analytical techniques and statistical sampling. C. Comparing recorded dividends with amounts appearing on federal information form 1099s. D. Comparing recorded dividends with a standard financial reporting service's record of dividends.

D. Comparing recorded dividends with a standard financial reporting service's record of dividends.

105. To gather evidence regarding the balance per bank in a bank reconciliation, an auditor could examine all of the following except: A. Cutoff bank statement. B. Year-end bank statement. C. Bank confirmation. D. General ledger.

D. General ledger.

99. The auditors compare information on canceled checks with information contained in the cash disbursement journal. The objective of this test is to determine that: A. Recorded cash disbursement transactions are properly authorized. B. Proper cash purchase discounts have been recorded. C. Cash disbursements are for goods and services actually received. D. No discrepancies exist between the data on the checks and the data in the journal.

D. No discrepancies exist between the data on the checks and the data in the journal.

109. Properly designed internal control will permit the same employee to: A. Receive and deposit checks, and also approve write-offs of customer accounts. B. Approve vouchers for payment, and also receive and deposit cash. C. Reconcile the bank statements, and also receive and deposit cash. D. Sign checks, and also cancel supporting documents.

D. Sign checks, and also cancel supporting documents.