Exam 2
An account has a balance of $1.5 million. Individually significant items total $325,000. Tolerable misstatement is $40,000 and expected misstatement is $10,000. Given this information, and a confidence factor is 1.2, the nonstatistical sample size should be
((Balance of Account - Significant items)/(tolerable misstatement - expected misstatement) X confidence factor) 47
True or false: Auditors need to understand how management considers risks because many types of risk can impact financial reporting objectives. True false question. True False
True
The selection and evaluation of less than 100% of the items in a population that is expected to be representative of the population to provide a reasonable basis for a conclusion is the definition of
audit sampling
The work performed by internal auditors, entity personnel, and third parties hired by management or the audit committee ______ be used by the auditor.
can
The auditor ______ need to test all controls. Multiple choice question. does not does
does not
When audit risk is low and the risk of material misstatement is high, substantive tests should be performed ______. Multiple choice question. mostly at interim dates throughout the year mostly at year-end consistently thought the year at interim dates and at year end
mostly at year-end
An effective system of internal controls allows management to focus on _____ while maintaining compliance with relevant laws and minimizing surprises. Multiple select question: operations compensation maximization stock price fluctuations financial performance goals
operations financial performance goals
To compute sample size and evaluate the sample results, statistical sampling uses the laws of
probability
A major premise of AS 2201 is that ____________ assessment underlies the entire audit of ICFR
risk
Auditing standards indicate that the sample size for statistical sampling should be _________ that of nonstatistical sampling. Multiple choice question. less than different than similar to greater than
similar to
When using probability-proportional-to-size sample selection, the probability that a customer with a zero balance will be selected using systematic selection of monetary values is ______. Multiple choice question. zero low certain high
zero
Management's assessment of the entity's ICFR must be based on ______. Multiple choice question. the PCAOB framework a recognized control framework prior year's deficiencies a framework consistent with industry peers
A recognized control framework
Data capture, data validation, processing, output and errors controls are all categories of ___________ controls.
Application
True or false: As with attribute sampling, population size does not influence sampling computations when testing monetary account balances. True false question. True False
False
What should be used when it is necessary to show the movement of a document or report back to a previous function? Multiple choice question. Communication link Off-line storage Off-page connector On-page connector
On-page connector
The mean misstatement per sampling item is calculated by dividing the known audit differences in the sample by the ______. Multiple choice question. confidence coefficient estimated standard deviation of audit differences tolerable misstatement sample size
Sample Size
True or false: The COSO definition of ICFR includes reasonable assurance regarding the safeguarding of assets. True false question. True False
True
To identify significant accounts and disclosures and their relevant assertions, the auditor assesses risk factors including ______. Multiple select question. account size and composition susceptibility to misstatement nature of the disclosure range of values target earnings per share
account size and composition susceptibility to misstatement nature of the disclosure
The presence of a material weakness in ICFR at the end of the period necessitates a(n) ______ assessment by management and a(n) ______ opinion by the auditor. Multiple choice question. adverse, adverse adverse, qualified qualified, qualified qualified, adverse
adverse, adverse
If a small number of large transactions make up a large percentage of an account, auditors will typically test ______. Multiple choice question. the two largest transactions all the transactions all the transactions greater than a particular dollar amount all the transactions less than a particular dollar amount
all the transactions greater than a particular dollar amount
Management asserts that ICFR is effective ______. Multiple choice question. as of the end of the fiscal year from the prior year's audit through the current one throughout the period as of the report date of the audit
as of the end of the fiscal year
Estimating the portion of a population that possesses a specified characteristic is the basis of ______ sampling.
attribute
Nonstatistical sample sizes are determined by ______. Multiple select question. audit firm policy formulas or tables applying professional judgment
audit firm policy applying professional judgment
IDEA refers to the ___________ ____________ as the most likely error.
basic precision
If identified controls are operating effectively, control risk may be set ______. Multiple choice question. at the maximum at the minimum below the maximum
below the maximum
If the auditor fails to obtain written representations from management, the auditor ______ opinion of ICFR. Multiple choice question. cannot issue an unqualified must issue an adverse must disclaim an
cannot issue an unqualified
When an employee who receives cash receipts from customers conspires with another employee who records those receipts in the customers' records to steal cash from the entity, this is known as ______. Multiple choice question. management override collusion segregation of duties human error
collusion
Distribution theory allows auditors to quantify sampling risk and form a ______. Multiple choice question. sampling risk boundary confidence interval sampling confidence
confidence interval
The amount of reliance to be placed on audit tests and the consequences of a decision error must be considered in determining ______. Multiple choice question. confidence level expected error whether statistical or nonstatistical sampling should be used tolerable error
confidence level
Test data can be used to check ______. Multiple select question. data validation controls arithmetic calculations error detection routines the exclusion of transactions in records, files and reports
data validation controls arithmetic calculations error detection routines
Once key controls have been identified, the auditor starts with evaluating their _____________ effectiveness, which may also provide some evidence about ___________ effectiveness.
design; operating
Common methods for projecting the amount of misstatement found in a nonstatistical sample are ______. Multiple select question. error calculation constant projection difference projection ratio projection
difference projection ratio projection
If the auditor believes that additional management information in its report of ICFR contains a material misstatement of fact the auditor should immediately ______. Multiple choice question. notify the audit committee in writing consult his or her legal counsel discuss the matter with management
discuss the matter with management
The integrity and ethical values of management personnel heavily influence the ______ of an entity's internal controls. Multiple choice question. sufficiency accuracy effectiveness efficiency
effectiveness
The auditor has a responsibility to report on any changes in internal control that might affect financial reporting between the ______ and the date of the auditor's report. Multiple choice question. date of audit testing beginning of the reporting period end of the reporting period date of the audit of ICFR
end of the reporting period
Because they can have a pervasive effect on the entity's ability to meet the COSO control criteria, the auditor must test the effectiveness of ___________ - ____________ controls
entity-level
The approach followed by management in choosing which locations to include in its assessment of internal control is a function of ______. Multiple select question. entity-level controls the number and size of existing locations when the locations were previously assessed financial reporting risks at the locations
entity-level controls financial reporting risks at the locations
In assessing financial reporting risks, management must evaluate whether there are controls in place to address ______. Multiple select question. other pervasive elements of ICFR planned controls internal audit department management entity-level controls
entity-level controls other pervasive elements of ICFR
Large public companies are required to engage a(n) ____________ auditor to express an opinion as to the effectiveness of their systems of internal control over financial reporting.
external
One disadvantage of classical variables sampling is that the projection of misstatements and related confidence limits may be unreliable if ______ misstatements are detected in the sample. Multiple choice question. no few many
few
From the auditor's perspective, a(n) _______________ is a diagrammatic representation of the entity's accounting system.
flowchart
Controls that relate to the overall information processing environment, have a pervasive effect on the entity's computer operation and are sometimes referred to as supervisory, management or information technology controls are called IT ______________ controls.
general
The auditor may decide to follow a substantive strategy for some or all assertions because ______. Multiple select question. implemented controls are assessed as ineffective testing the operating effectiveness of the controls would be inefficient tests of controls have been used to assess control risk implemented controls do not pertain to the assertion under consideration
implemented controls are assessed as ineffective testing the operating effectiveness of the controls would be inefficient implemented controls do not pertain to the assertion under consideration
When deciding on the extent of testing, the auditor should consider the ______. Multiple select question. timing of the audit other audit evidence importance of the control frequency of operation nature of the control
importance of the control frequency of operation nature of the control
If the auditor determines that elements of management's annual report on ICFR are incomplete or improperly presented, the auditor should ______. Multiple choice question. issue an adverse opinion modify management's report so that it is complete and correct include an explanatory paragraph in the audit report disclaim an opinion
include an explanatory paragraph in the audit report
In testing an internal control, the risk that the sample supports a conclusion that the control is not operating effectively when, in truth, the control is operating effectively is the risk of ______. Multiple select question. overreliance incorrect rejection assessing control risk too high incorrect acceptance
incorrect rejection assessing control risk too high
Symbols used in flowcharts are divided into ______ symbols. Multiple select question: error correction input/output data flow and storage processing
input/output data flow and storage processing
The phrase "All material respects" means that the entity's ICFR ______. Multiple choice question. does not have any significant deficiencies has prevented and/or detected all material errors is free of any material weakness
is free of any material weakness
Random or systematic sample selection ______. Multiple choice question. is required for statistical sampling and may be used for nonstatistical sampling is required for both statistical and nonstatistical sampling should not be used for nonstatiscal sampling is required for nonstatistical sampling and may be used for statistical sampling
is required for statistical sampling and may be used for nonstatistical sampling
The smaller the difference between tolerable error and expected error, the ______ the sample size needed. Multiple choice question. smaller larger
larger
The severity of a control deficiency depends on ______. Multiple choice question. likelihood & number of misstatements number of misstatements & magnitude likelihood & magnitude
likelihood & magnitude
Account balances sampled by auditors typically have ______ error rates. Multiple choice question. zero high low
low
AS 2201 specifies that the "size and complexity of the company, its business processes and business units, ______ affect(s) the way in which the company achieves many of its control objectives." Multiple choice question. should not always may
may
Management's documentation of ICFR ______. Multiple choice question. must be in machine readable format must be in hard copy form must be in electronic form may exist in any form
may exist in any form
Unrestricted random sampling without replacement means ______. Multiple choice question. items may be selected for a sample multiple times once an item is selected, it cannot be selected a second time a starting number is selected first and then every nth item is selected
once an item is selected, it cannot be selected a second time
If a misstatement is detected by substantive procedures, the auditor should consider whether the control deficiency might affect the ______________ on the audit of ICFR.
opinion
MUS can be used to test the assertion that no material misstatements exist in an account balance _____. Multiple choice question. or class of transactions only or class of transactions or disclosure component of the financial statements only or disclosure component of the financial statements only
or class of transactions or disclosure component of the financial statements
In conducting a statistical sample for a test of controls, auditing standards require the auditor to properly ______ the sampling application. Multiple choice question. plan, perform, and evaluate plan, evaluate, and document perform, evaluate and document
plan, perform, and evaluate
An internal control questionnaire ______. Multiple select question. provides a systematic means to investigate internal control is one of many types of questionnaires used by auditors contains questions about the five internal control components is generally used for entities with a relatively simplistic internal control structure
provides a systematic means to investigate internal control is one of many types of questionnaires used by auditors contains questions about the five internal control components
A material weakness is a deficiency or combination of deficiencies in ICFR such that there is a(n) ______ possibility that a material financial statement misstatement will not be prevented or detected on a timely basis.
reasonable
Audit evidence supporting effective internal control must be obtained at the level of ______. Multiple choice question. substantial completion reasonable assurance absolute assurance risk-based assurance
reasonable assurance
When an entity has a material weakness, it should take steps to correct it, which is referred to as
remediation
A control issue does not rise to the level of control deficiency if the likelihood is ______. Multiple choice question. remote likely reasonably possible probable
remote
When using MUS, the selection of zero or negative balances ______. Multiple choice question. requires the use of a probability-proportional to-size selection procedure Reason: Such items will not be selected using this procedure. requires special design consideration will increase the likelihood of overstating the sampling risk is not appropriate and should be avoided
requires special design consideration
To obtain an understanding of the entity's internal controls which helps identify key controls, recognize types of potential misstatements and design test of controls and substantive procedures, auditors use _________ ___________ procedures.
risk assessment
The number of deviations found in the sample divided by the number of items in the sample is the ______ rate. Multiple choice question. attribute sampling expected deviation sample deviation true population deviation
sample deviation
A deficiency or combination of deficiencies in ICFR that is less severe than a material weakness yet important enough to merit attention is a ______ deficiency. Multiple choice question. remote possible reasonable significant
significant
Prior to the issuance of the auditor's report on ICFR, the auditor must communicate in writing to both management and the audit committee identified ______. Multiple select question. compensating controls significant deficiencies control deficiencies material weaknesses
significant deficiencies material weakness
Advantages of MUS include ______. Multiple select question. zero or negative balances will not be selected for the sample smaller sample size than classical variable sampling when few misstatements expected automatically stratified sample no requirement to make assumptions about the distribution of misstatements
smaller sample size than classical variable sampling when few misstatements expected automatically stratified sample no requirement to make assumptions about the distribution of misstatements
Section 404 of the Sarbanes-Oxley Act requires management to report on ______. Multiple choice question. the effectiveness of internal control over financial reporting the effectiveness of the audit the effectiveness of financial reporting to stockholders gaps in internal control
the effectiveness of internal control over financial reporting
If a control deficiency is a material weakness, management must disclose it in its assessment of the effectiveness of ICFR, including ______. Multiple select question. the nature of the material weakness(es) its impact on the entity's financial reporting and its ICFR management's current plans, if any, for remediating the weakness the cost of management's current plans for remediating the weakness
the nature of the material weakness(es) its impact on the entity's financial reporting and its ICFR management's current plans, if any, for remediating the weakness
After auditing the effectiveness of an entity's internal control, an auditor issues a(n) __________ opinion if the entity's internal control is designed and operating effectively in all material respects.
unqualified
The auditor traces a transaction from origination through the entity's processes and information system until it is reflected in the entity's financial reports when performing a(n)
walkthrough
When an entity's computer system is not compatible with the auditor's GAS, the auditor should ______. Multiple choice question. rely on the entity's computer software write custom audit software not use software to conduct testing
write a custom audit software
