Exam 2 Audit

d. 1/02 1/02 12/31 1/02

Overstated

e. Discovery sampling is particularly effective when:

The auditors are looking for critical deviations that are not expected to be frequent in number.

CPAs use positive accounts receivable confirmation requests more frequently than negative accounts receivable confirmation requests.

True

d. Adjustment of perpetual inventory records to physical counts.

Corrective

b. 1/04 12/31 1/02 12/31

unaffected

5. Management compares actual performance with budgets and forecasts.

Control activities // performance reviews

4. No checks are made payable to cash.

Disagree

7. All cash receipts received through the mail are restrictively endorsed when received.

Disagree

3. Determine that proper receivable disclosures are presented.

Read the financial statements (including notes) for completeness

The assertion most directly related to the question of ownership of an asset.

Rights and obligation

To verify that all sales that have been shipped to customers have been recorded, a test of transactions should be completed on a representative sample drawn from:

The shipping clerk's file of duplicate copies of bills of lading.

The client had a significant amount of damaged goods that were presented at cost.

Valuation or allocation

The term __________ refers to the process of determining that transactions are reflected in the proper accounting period.

cutoff

Tests of balances and transactions designed to detect material misstatements are called __________.

substantive procedures (tests)

b. Deviation rate

2. A defined rate of departure from prescribed controls. Also referred to as occurrence rate or exception rate.

a. The auditors wish to test the operating effectiveness of a control, and expect a 2 percent deviation rate in the population.

Attributes sampling

c. Internal audits of payroll.

Detective

b. Supervisory approval of time cards.

Preventive

Which of the following is the best argument against the use of negative accounts receivable confirmation requests?

The inference drawn from receiving no reply may not be correct.

Discovery sampling is equivalent to an attributes sampling plan with a very low deviation rate.

True

The auditors must assess the risk of material misstatement of financial statements due to the two types of fraud, fraudulent financial reporting and __________.

misappropriation of assets

k. The auditors have sampled 25 accounts from a population of 500 accounts receivable. The sample items have a mean book value of $206 and a mean audited value of $208. The book value in the population is $101,000. What is the estimated audited value of the population using the mean-per-unit method?

$104,000. The estimated total audited value of the population using the mean-per-unit method is calculated as $208 (mean audited value in sample) × 500 accounts = $104,000.

5. Which of the following is most likely to increase days' sales in accounts receivable at the end of the year for Anthony Company?

A larger percentage of sales occurred during the last month of the year, as compared to the prior year.

If the objective of a test of details is to detect overstatements of sales, the auditor should trace transactions from the

Accounting records to the source documents.

g. Management review of budget/actual information.

Detective

The basic purpose of internal control is to prevent fraud that occurs when employees collude.

False

b. An entity's ongoing monitoring activities often include:

Management review of weekly performance reports.

e. Dual signatures for checks.

Preventive

l. When the auditors are performing a first-time internal control audit in accordance with the Sarbanes-Oxley Act and PCAOB standards, they should:

Test controls for all significant accounts.

1. Under COSO, the control environment, risk assessment, the accounting information and communication system, control activities and monitoring are referred to as the ____________ of internal control.

components

Auditors should have an understanding of the various terms that relate to their consideration of internal control of an organization. For each term presented below, select the category that most clearly defines or includes the term. The categories may be selected once, more than once, or not at all. 3. Controls over operating effectiveness

test of controls

5. The authorized check signers reconcile bank accounts.

Agree

e. Controls over financial reporting are often classified as preventative, detective, or corrective. Which of the following is an example of a detective control?

Preparing bank reconciliations.

c. Segregation of duties over purchasing.

Preventive

1. Further audit procedures

Substantive procedures and tests of controls

A successor auditor should attempt communication with a predecessor auditor:

prior to accepting the engagement.

g. Risk of incorrect acceptance

13. The risk that sample results will indicate that a population is not materially misstated when, in fact, it is materially misstated.

i. Tolerable deviation rate

9. The maximum population rate of deviations from a prescribed control that the auditors will accept without modifying the planned assessment of control risk.

c. Which of the following should not normally be included in the engagement letter for an audit?

A listing of the client's branch offices selected for testing.

Which of the following topics is not normally included in an engagement letter?

A schedule of individual audit team member billing rates.

What type of error is the CPA most likely to discover when he/she examines all shipping reports dated in January of 20X1, shipped FOB shipping point, which were recorded in December of 20X0 as credit sales?

Accounts receivable are overstated at December 31, 20X0.

Because municipalities have received increased federal and state funding for environmental purposes, TWD returned to profitability for the first year following three years with losses.

Decrease

g. The primary objective of tests of details of transactions performed as substantive procedures is to:

Detect material misstatements in the financial statements.

Anderson embezzled $20,000 from her company's account in Bank X. At year-end, she hid the shortage by making a deposit on December 31 in Bank X, drawn on Bank Y. She has not recorded the transaction on the books. This is an example of:

Kiting.

c. A primary objective of procedures performed to obtain an understanding of internal control is to provide the auditors with:`

Knowledge necessary to determine the nature, timing, and extent of further audit procedures.

b. Which of the following is least likely to be a test of controls?

Observation of confirmations.

In audits of both public and nonpublic companies significant deficiencies and material weaknesses noted by the auditors must be communicated to management in writing.

True

The authenticity and accuracy of an account receivable may be tested by __________ with the debtor, or by vouching entries in the account to supporting documents.

confirmation

The purpose of tests of controls is to provide reasonable assurance that the:

controls are operating effectively.

Audit risk at the account balance level consists of three components: (1) __________, (2) control risk and (3) detection risk.

inherent risk

1. Voided checks are torn up and destroyed.

Agree

g. Which of the following sampling techniques is typically used for tests of controls?

Attribute sampling.

a. Annual physical inventory.

Detective

1. Adding and subtracting the __________ to and from the projected misstatement creates an interval within which the true value of the population is likely to lie.

allowance for sampling risk

f. Risk of assessing control risk too low

10. The possibility that the assessed level of control risk based on the sample is less than the true operating effectiveness of the controls.

e. Reliability

8. The complement of the risk of incorrect acceptance.

a. In planning and performing an audit, auditors are concerned about risk factors for two distinct types of fraud: fraudulent financial reporting and misappropriation of assets. Which of the following is a risk factor for misappropriation of assets?

An unreliable accounting system.

j. Which of the following is not ordinarily a procedure for documenting an auditor's understanding of internal control for planning purposes?

Confirmation.

a. Which of the following would be least likely to be considered an objective of internal control?

Detecting management fraud.

A dual purpose test simultaneously:

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

The accounting department has experienced a high rate of turnover of key personnel.

Increase

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?

$5

The auditors should insist that a representative of the client be present during the physical examination of securities in order to:

Acknowledge the receipt of securities returned.

i. The auditors wish to use the most general form of statistical sampling for tests of controls.

Attributes sampling

3. A control established to remedy misstatements that are discovered

Corrective control

6. All cash receipts (checks) received through the mail are prelisted by the two individuals who open the mail.

Disagree

i. Which of the following is not an advantage of establishing an enterprise risk management system within an organization?

Eliminates all risks.

Confirmation requests should contain a "business reply" envelope addressed to the auditors at the client's address.

Fasle

Which of the following is correct concerning "window dressing" for cash?

It may increase but not falsify cash position.

f. Which of the following symbols indicate that a file has been consulted?

Looks like a tub arrow going to a triangle to the side

c. 1/03 12/31 1/02 1/02

Understated

The client recorded year-end sales in the subsequent year.

cutoff

4. The term __________ refers to the process of dividing a population into relatively homogeneous subgroups.

stratification

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:

$1,900

Using ratio estimation, an auditor has taken a sample of 150 from a population's 50,000 items; that population has a book value of $250,000. She found that in her sample the average audited value was $4.50, while the average book value was $5.20. What is the estimated total audited value of the population?

$216,346.

Using mean-per-unit estimation, an auditor has taken a sample of 150 from a population's 50,000 items; that population has a book value of $250,000. She found that in her sample the average audited value was $4.50, while the average book value was $5.20. What is the estimated total audited value of the population?

$225,000.

Which of the following would indicate the need to use positive accounts receivable confirmation requests?

A large number of accounts receivable are in dispute.

4. The existence of which of the following is most likely to increase audit risk in an audit client?

A new CFO is redesigning Anthony's accounting policies and procedures.

c. Which of the following statistical sampling techniques is least desirable for use by the auditors?

Block selection.

2. Material weakness

Creates a reasonable possibility a material misstatement will not be detected

During 20X1, litigation filed against TWD from an action 10 years ago that alleged that TWD discharged pollutants into state waterways was dropped by the state. Loss contingency disclosures that TWD included in prior years' financial statements are being removed from the 20X1 financial statements.

Decrease

2. Separate sequences of prenumbered checks are used for each bank account.

Disagree

b. In assessing sampling risk, the risk of incorrect rejection and the risk of assessing control risk too high relate to the:

Efficiency of the audit.

c. A primary objective of procedures performed to obtain an understanding of internal control is to provide the auditors with:

Knowledge necessary to determine the nature, timing, and extent of further audit procedures.

f. The auditors wish to perform substantive procedures but do not have book values of items.

Mean per unit sampling

c. The auditors wish to estimate the value of accounts receivable by confirmation; the auditors expect a very low deviation rate in recorded amounts.

Monetary unit sampling

j. The auditors wish to perform substantive procedures using the form of sampling based on attributes sampling theory that uses sample selection based on size of book value—that is, an account with a $500 book value will be twice as likely to be selected as an account with $250 book value).

Monetary unit sampling

4. A deficiency in internal control that is less severe than a material weakness, but more severe than a significant deficiency

N/A

The auditors' failure to recognize a misstatement in an amount or a deviation in an internal control data processing procedure is described as a:

Nonsampling error.

2. Determine that accounts receivable are valued at their net realizable value.

Review and assess an aging schedule of accounts receivable.

An important statistic to consider when using a statistical sampling audit plan is the population variability. The population variability is measured by the

Standard deviation.

If the projected misstatement in a nonstatistical sampling is $8,000, while the tolerable misstatement is $9,000, what would an auditor likely conclude?

The risk is high that the account is materially misstated.

A documented audit plan is required on all audits.

True

Listed below are four interbank cash transfers, indicated by the letters a, b, c and d, of a client for late December 20X1, and early January 20X2. Your answer choice for the next two questions should be selected from this list. For each of transfers a through d indicate whether cash is understated, unaffected, or overstated by the transfer. a. 1/02 12/30 12/31 12/30

Unaffected

2. A procedure in which an auditor follows a transaction from origination through the company's processes, including information systems, until it is reflected in the company's financial records

Walk-through

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:

$1,300

e. At the completion of the audit, the auditors are least likely to know:

Actual control risk.

The Sarbanes-Oxley Act of 2002 requires that the audit committee:

Be directly responsible for the appointment, compensation, and oversight of the work of the CPA firm.

Which of the following procedures in the cash disbursements cycle should not be performed by the accounts payable department?

Canceling supporting documentation after payment.

b. Monthly reconciliation of bank accounts.

Detective

h. Internal audits of payroll.

Detective

Which of the following has made it difficult to engage in kiting in recent years?

Electronic processing of checks.

In directional testing, vouching from ledgers to source documents most directly addresses this assertion.

Existence and occurrence

3. Inherent risk

Likelihood of misstatement assuming no controls

The following statement applies to unrestricted random sampling without replacement. Indicate whether this statement is true or false. a. When sampling from the population of accounts receivable for certain objectives, the auditor might sample only active accounts with balances.

True

Signed checks should be returned to the cash disbursements clerk for mailing.

false

Statistical sampling can be used to test all control activities.

false

One or more _________ in internal control result in an adverse opinion on internal control.

material weaknesses

Performing certain audit procedures at an interim date, rather than at the balance sheet date, results in additional __________ that must be controlled by the auditors.

risk

Auditors are required by professional standards to communicate __________ and material weaknesses to the audit committee.

significant deficiencies

Audit procedures that are focused on the effectiveness of internal control are called __________.

tests of controls

Auditors must communicate internal control significant deficiencies to:

the audit committee.

8. When a disbursement is made based on paper supporting documents, those supporting documents are canceled by the individual who signs the check.

disagree

Assertions are __________ that are set forth in the financial statements.

representations of management

An engagement letter represents a written contract between the auditors and the client.

true

The auditors of a service organization, known as service auditors, may review the controls at the organization and issue a report that may be relied upon by __________.

user auditors

2. If the variability of a population increases, as measured by the standard deviation, the required sample size for the population will __________.

increase

Required information [The following information applies to the questions displayed below.] The 2,000 accounts receivable of ABC Company have a total book value of $40,000. Bob Rotter, CPA, has selected and audited a sample of 100 accounts with a total book value of $1,950. The audited value of the 100 accounts in the sample is $1,875. Using the ratio estimation technique, Rotter's estimate (to the nearest dollar) of year-end accounts receivable balance would be:

$38,462

l. The auditors have sampled 100 accounts from a population of 500 accounts receivable. The sample items have a mean book value of $197 and a mean audited value of $201. The book value in the population is $97,000. What is the estimated total audited value of the population using the difference method?

$99,000. When calculating the estimated audited value of the population using the difference method the average misstatement is first calculated as $201 − $197 = $4. The projected misstatement is then calculated by multiplying the average misstatement times the number of accounts in the population, or $4 × 500 = $2,000. Because the average misstatement is an understatement, the projected misstatement of $2,000 is added to the population book value of $97,000 to calculate the estimated audited value of $99,000.

Listed below are controls that have been developed by the management of Cirus Manufacturing Co. 1. The human resources department investigates the educational background of prospective employees

1. Control environment. // commitment to attract, develop and retain competent employees.

1. A control that functions together with another control to achieve the same control objective

Complementary control

The assertion most directly related to the "did it all get included".

Completeness

d. Tracing from source documents to journals most directly tests:

Completeness (understatements).

Auditors should have an understanding of the various terms that relate to their consideration of internal control of an organization. For each term presented below, select the category that most clearly defines or includes the term. The categories may be selected once, more than once, or not at all. 4. Monitoring

Component of internal control

Auditors should have an understanding of the various terms that relate to their consideration of internal control of an organization. For each term presented below, select the category that most clearly defines or includes the term. The categories may be selected once, more than once, or not at all. 5. Accounting information system

Component of internal control

h. The risk that the auditors will conclude, based on substantive procedures, that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is referred to as

Detection risk.

The client failed to describe in the financial statements significant debt restrictions.

Presentation and disclosure

. The auditors wish to estimate the dollar value of 1,000 inventory items that have been priced by the client; they expect a relatively constant percentage of misstatement (misstatement / book value) in various items.

Ratio estimation sampling

l. Which of the following is most likely to be an overall response to fraud risks identified in an audit?

Use less predictable audit procedures.

5. Detection risk may be separated into two risks, one relating to __________ and the other is the allowable risk of tests of details.

analytical procedures

The __________ of SEC registrants selects the company's audit firm.

audit committee

3. The purchasing department manager and assistant manager are the authorized check signers.

Agree

Inquiries about the substantial increase in revenue TWD recorded in the fourth quarter of 20X1 disclosed a new operating policy. TWD guaranteed to several municipalities that it would refund the federal and state funding paid to TWD if any municipality fails a federal or state site clean-up inspection in 20X2.

Increase

h. Which of the following is accurate regarding tolerable misstatement?

Tolerable misstatement is directly related to materiality.

Analytical procedures are used by auditors to gain evidence about the adequacy of the allowance for uncollectible accounts.

True

The following statement applies to unrestricted random sampling without replacement. Indicate whether this statement is true or false. e. A 100 percent sample would have to be taken to eliminate sampling risk.

True

The following statement applies to unrestricted random sampling without replacement. Indicate whether this statement is true or false. g. The standard deviation is a measure of the variability of items in a population.

True

a. Allowance for sampling risk

6. Also referred to as precision, a measure of the difference between a sample estimate (projection) and the tolerable rate of deviation or tolerable misstatement at a specified sampling risk.

3. Management has prepared and distributed an organizational chart.

Control environment // effective structure, reporting lines, and authority and responsibility

The auditors' count of the client's cash should be coordinated to coincide with the:

Count of investment securities.

j. Which of the following best describes what is meant by the term "fraud risk factor"?

Factors often observed in circumstances where frauds have occurred.

b. Which of the following is least likely to be a test of controls?:

How controls were originated.

During 20X1, TWD sold one-half of its controlling interest in United Equipment Leasing (UEL) Co. TWD retained significant influence over UEL.

Increase

b. The audit committee of a company must be made up of:

Members of the board of directors who are not officers or employees.

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?

Net income is overstated.

4.Management periodically evaluates the threats to preparing reliable financial statements.

Risk assessment // leave blank

The following statement applies to unrestricted random sampling without replacement. Indicate whether this statement is true or false. d. It is likely that five different random samples from the same population could produce five different estimates of the true population mean.

True

Required information [The following information applies to the questions displayed below.] The 2,000 accounts receivable of ABC Company have a total book value of $40,000. Bob Rotter, CPA, has selected and audited a sample of 100 accounts with a total book value of $1,950. The audited value of the 100 accounts in the sample is $1,875. Using the mean-per-unit estimation technique, Rotter's estimate (to the nearest dollar) of year-end accounts receivable balance would be:

$37,500

Required information [The following information applies to the questions displayed below.] The 2,000 accounts receivable of ABC Company have a total book value of $40,000. Bob Rotter, CPA, has selected and audited a sample of 100 accounts with a total book value of $1,950. The audited value of the 100 accounts in the sample is $1,875. Using the difference estimation technique, Rotter's estimate (to the nearest dollar) of year-end accounts receivable balance would be:

$38,500

h. Sampling risk

14. The risk that the auditors' conclusion based on a sample might be different from the conclusion they would reach if the test were applied to the entire population.

The auditors use a bank cutoff statement to compare:

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

2. Management has developed and distributed a code of conduct.

Control environment /// integrity and ethical values

Material accounts receivable from related parties should be stated separately from other receivables.

True

Which of the following manipulations would understate receivables on the financial statements?

Closing the sales journal prior to year-end.

The following statement applies to unrestricted random sampling without replacement. Indicate whether this statement is true or false. b. To be random, every item in the population must have an equal chance of being selected for inclusion in the sample.

True

The following statement applies to unrestricted random sampling without replacement. Indicate whether this statement is true or false. c. In general, all items in excess of a material misstatement need to be examined and sampling of them is inappropriate.

True

The following statement applies to unrestricted random sampling without replacement. Indicate whether this statement is true or false. i. Unrestricted random sampling with replacement may result in a larger sample size than unrestricted random sampling without replacement.

True

The following statement applies to unrestricted random sampling without replacement. Indicate whether this statement is true or false. f. The effect of the inclusion by chance of a very large or very small item in a random sample can be lessened by increasing the size of the sample.

True

d. Projected misstatement

7. An estimate of the most likely amount of monetary misstatement in a population.

An auditor who uses a transaction cycle approach to assessing control risk most likely would test control activities related to transactions involving the sale of goods to customers with the:

Collection of receivables.

You are performing an audit of Systex Corporation and evaluating various controls. Classify the following controls as being primarily preventive, detective, or corrective. a. Management review of budget/actual information.

Detective

Which of the following is not a control over cash disbursements?

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

e. Which of the following should the auditors obtain from the predecessor auditors before accepting an audit engagement?

Facts that might bear on the integrity of management.

The following statement applies to unrestricted random sampling without replacement. Indicate whether this statement is true or false. h. The larger the standard deviation of a population, the smaller the required sample size.

False

The following statement applies to unrestricted random sampling without replacement. Indicate whether this statement is true or false. j. Unrestricted random sampling normally results in a smaller sample size than does stratified sampling.

False

In your review of ABC Company's financials, you note that Receivables have increased approximately 200% from the previous year, while Cash has declined. Further investigation reveals that 70% of ABC's receivables were booked within 7 days of the end of the quarter. If financial statement fraud is involved, which type is most likely?

Fictitious revenues.

Your client performed the physical count of inventory as of November 30, one month prior to year-end. Subsequently, your client closed the sales journal on 12/29/XX, two days before year-end, and reported those two days' credit sales in January of the next year. Assuming the client uses a perpetual inventory system, which of the following is most likely to be overstated relating to the year XX financial statements?

Inventory.

f. The auditors are using unstratified mean-per-unit sampling to audit accounts receivable as they did in the prior year. Which of the following changes in characteristics or specifications would result in a larger required sample size this year than that required in the prior year?

Larger variance in the dollar value of accounts.

Flemco has made a series of transfers between bank accounts near year-end, some through inter-bank wired transfers and some through checks. You have audited the wired transfers and agree that they have been properly stated and now have the following schedule of transfers between cash accounts made using checks. You may assume that dates per bank are correct, and that dates per books are the dates the transactions were recorded in the books. Bank accounts Date disbursed per: Date deposited per: Check number From To Amount Books Bank Books Bank 4040 1st Nat. Suburban $112,000 12/31 1/5 1/3 1/3 3270 Valley Midburg 62,500 12/31 1/3 12/31 12/31 4041 1st Nat. Capital 121,000 1/2 1/4 12/31 1/3 3271 Valley Suburban 16,500 1/3 1/5 1/3 12/30 0700 Midburg Suburban 15,800 12/30 1/5 12/30 1/3 Analyze each of the above transfers and determine whether you believe each causes total cash to most likely be correct, overstated, or understated as of year-end.

Question Check As a result of the transfer, total Cash at December 31 appears to be 1. 4040 Understated 2. 3270 Correct 3. 4041 Overstated 4. 3271 Overstated 5. 0700 Correct

g. The auditors are performing substantive procedures and expect the size of any misstatements to be directly related to account book value (e.g., accounts with large book values have large dollar misstatements, small will have small dollar misstatements).

Ratio estimation sampling

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?

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

f. As one step in testing sales transactions, a CPA traces a random sample of sales journal entries to debits in the accounts receivable subsidiary ledger. This test provides evidence as to whether:

Recorded sales have been properly posted to customer accounts.

Required information [The following information applies to the questions displayed below] Rachel Robertson wishes to use mean-per-unit sampling to evaluate the reasonableness of the book value of the accounts receivable of Smith, Inc. Smith has 9,600 receivable accounts with a total book value of $1,545,000. Robertson estimates the population's standard deviation to be equal to $22. After examining the overall audit plan, the auditors believe that the account's tolerable misstatement is $58,000, and that a risk of incorrect rejection of 1 percent and a risk of incorrect acceptance of 5 percent are appropriate. Use Figure 9.8.

Sample size 237 accounts see excel spreadsheet'

Auditors should have an understanding of the various terms that relate to their consideration of internal control of an organization. For each term presented below, select the category that most clearly defines or includes the term. The categories may be selected once, more than once, or not at all. 1. Less severe than a material weakness

Significant deficiency

Auditors are required to specifically assess the risk of material misstatement of the financial statements due to fraud on every audit.

True

In performing an audit, the auditors are concerned with those controls that prevent or detect financial statement misstatements.

True

a. The auditors are concerned about source documents that reflect valid transactions that have not been recorded in the journals. Which procedure would be most effective?

(1) Trace from source documents to journals.

d. The auditors' primary objective in selecting a sample of items from an audit population is to obtain:

A representative sample.

a. Which of the following is an element of sampling risk?

Concluding that no material misstatement exists in a materially misstated population based on taking a sample that includes no misstatement.

f. Adjustment of perpetual inventory records to physical counts.

Corrective

d. The auditors wish to test for the existence of a critical deviation in internal control.

Discovery sampling

Internal auditors should preferably report to the chief accounting officer of the company.

Flase

a. Tests of controls do not address:

How controls were originated.

TWD's Board of Directors is controlled by Janice Mead, the majority stockholder, who also acts as the chief executive officer.

Increase

4. Tests of controls

Inquire, inspect, observe, reperform

i. Which of the following elements underlies the application of generally accepted auditing standards, particularly the standards of fieldwork and reporting?

Materiality and audit risk.

5. Significant deficiency

Merits attention, less than a material weakness

d. Supervisory approval of time cards.

Preventive

Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom?

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

3. Tests of controls typically use __________ plans.

attributes sampling

An auditor's flowchart of a client's internal control is a diagrammatic representation that depicts the auditors':

understanding of the system.

c. Discovery sampling

4. A sampling plan for locating at least 1 deviation, providing that the deviation occurs in the population with a specified frequency.

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:

Attributes sampling.

g. When a CPA decides that the work performed by internal auditors may have an effect on the nature, timing, and extent of the CPA's procedures, the CPA should consider the competence and objectivity of the internal auditors. Relative to objectivity, the CPA should:

Consider the organizational level to which the internal auditors report the results of their work.

h. The auditors will not use mean per unit sampling, but wish to use the variables method most likely to result in the smallest sample when error size is independent of book value.

Difference estimation sampling

h. Effective internal control in a small company that has an insufficient number of employees to permit proper separation of responsibilities can be improved by:

Direct participation by the owner in key record-keeping and control activities of the business.

e. The auditors expect no misstatements in testing a control.

Discovery sampling

Auditors should have an understanding of the various terms that relate to their consideration of internal control of an organization. For each term presented below, select the category that most clearly defines or includes the term. The categories may be selected once, more than once, or not at all. 2. Questionnaire

Documentation

k. To have an adequate basis to issue a management report on internal control under Section 404(a) of the Sarbanes-Oxley Act, management must do all of the following, except:

Establish internal control with no material weakness.

Assume the following general flow of documents in an accounting system. Reply to the following question: Source Documents ---> Journals ---> Ledgers e. Vouching from journals (or ledgers) to source documents most directly tests:

Existence (overstatements).

Analytical procedures are optional procedures that may be useful to the auditors during the risk assessment stage of the audit.

False

Establishing and maintaining internal control is a responsibility of the stockholders of the company.

False

A form of insurance in which an insurance company agrees to reimburse an employer for losses attributable to employee theft is referred to as ____________.

Fidelity bonds

During 20X1, TWD changed its method of preparing its financial statements from the cash basis to generally accepted accounting principles.

Increase

The internal auditor reports to the controller and the controller reports to Janice Mead.

Increase

5. A deficiency in internal control such that there is a reasonable possibility that a material misstatement will not be prevented or detected on a timely basis

Material weakness in internal control

j. An auditor needs to estimate the average highway weight of tractor-trailer trucks using a state's highway system. Which estimation method is most appropriate?

Mean-per-unit.

c. Tests of controls ordinarily are designed to provide evidence of:

Operating effectiveness.

1-3. The auditor determines that both of the following objectives will be part of the audit of Anthony Company. For each of the following audit objectives, select the substantive test that would most likely provide support for the objective. A substantive test may be used once, more than once, or not at all. 1. Verify existence of accounts receivable.

Perform tests of subsequent cash receipts after the balance sheet date.

Which of the following is least likely to be used as an alternate procedure for handling nonreplies to accounts receivable confirmation requests?

Physically examine items sold.

The assertion most directly related to the question of ownership of an asset.

Rights and obligations

d. Which portion of an audit is least likely to be completed before the balance sheet date?

Substantive procedures.

d. An auditor may compensate for a weakness in internal control by increasing the extent of:

Substantive tests of details.

k. Three conditions generally are present when fraud occurs. Select the one below that is not one of those conditions.

Supervisory position.

i. In which of the following circumstances is it least likely that tests of controls will be performed?

The expected deviation rate exceeds the tolerable deviation rate.

d. The preliminary assessments of control risk are often referred to as:

The planned assessed level of control risk.

6. The sequence of procedures applied by the client in processing a particular type of recurring transaction

Transaction cycle