Part 2, Domain 3

An internal auditor used regression analysis to evaluate the relationship between utility costs and machine hours. The following information was developed using a computer software program: - Intercept 2,050 - Regression coefficient .825 - Correlation coefficient .800 - Standard error of the estimate 200 - Number of observations 36 What is the expected utility cost if the company's 10 machines will be used 2,400 hours next month? a. $4,050 b. $4,030 c. $3,970 d. $3,930

$4,030 - intercept(2,050) + regression coefficient(.825)*hours used(2,400)

An internal auditor has obtained the following data by selecting a random sample from an inventory population. Sample: # of Items: 200 Audited Value: $220,000 Book Value: $200,000 Population: # of Items: 5,000 Audited Value: Book Value: $5,200,000 The estimate of the population dollar value using ratio estimation would be: a. $4,727,273. b. $5,500,000. c. $5,700,000. d. $5,720,000.

$5,720,000. - Ratio estimation = $220,000/$200,000 = 1.1 and 1.1 ($5,200,000) = $5,720,000. - Difference estimation = $220,000 - $200,000 = $20,000 and $20,000/200 = $100 and $100 (5000) = $500,000 and $500,000 + $5,200,000 = $5,700,000. - Mean per unit = $220,000/200 = $1100 and $1100 (5000) = $5,500,000.

In regression analysis, which of the following correlation coefficients represents the strongest relationships between the independent and dependent variables? a. 1.03 b. -0.02 c. -.89 d. .75

-.89 - This answer is only 0.11 from the maximum value of −1.0. The negative sign indicates the direction relationship (e.g., inverse) between the independent and dependent variables. This choice shows the strongest relationship.

A manufacturing company has the following estimates for a specific customer order to produce 50 toy sets: Wait time 10 hours Inspection time 1 hour Processing time 36 hours Move time 1.5 hours Using these time estimates, what is the non-value-added time? a. 2.5 hours b. 10 hours c. 11 hours d. 12.5 hours

12.5 hours - Wait time, inspection time, and move time are examples of non-value-added time from a customer's viewpoint

Because of the nature of work at a company's plants, radiation safety is important. An audit to test the system of controls over the purchase, distribution, and use of radioactive material is being conducted. The process is well documented, and employees in the safety department are very familiar with the department's procedures. Since the purchasing and facilities departments are involved in the process, the auditor is considering reviewing their radioactive material handling procedures as well. The auditor should: a. Have confidence in the rigorous and detailed safety department procedures, since that department has the main responsibility for radiation safety, and do not use audit time to review other departments. b. Adjust the audit schedule and budget, if needed, and interview the appropriate individuals in purchasing and facilities to ascertain whether additional controls exist that complement those identified within the safety department. c. Test the controls identified within the safety department; if results are unfavorable, consider whether to involve the other departments. d. Defer questions regarding purchasing, facilities, and other departments until audit projects can be scheduled for those departments.

Adjust the audit schedule and budget, if needed, and interview the appropriate individuals in purchasing and facilities to ascertain whether additional controls exist that complement those identified within the safety department. - The risk of having radioactive materials on site that are not accounted for in the facility's inventory is sufficiently serious that all key controls should be identified and evaluated. The auditor is obliged to note that the risk extends beyond the safety department and should request resources to finish this important planning.

Which of the following best describes the major disadvantage of using a questionnaire rather than a flowchart to evaluate internal controls? a. Questionnaires usually take more time to complete and are more cumbersome. b. Responses do not efficiently flag potential internal control weaknesses. c. It is difficult for auditors to develop or obtain questionnaires that are appropriate for most internal control systems. d. Auditors may complete questionnaires without really understanding overall operations of internal control systems.

Auditors may complete questionnaires without really understanding overall operations of internal control systems. - This is the major disadvantage of using questionnaires. Developing or reviewing flowcharts is an extremely effective way to gain an overall understanding of the system and pinpoint control points and the lack of controls.

An internal auditor is assigned to perform an audit of the company's insurance program, including the appropriateness of the approach to minimizing risks to the company. The company self-insures against large casualty losses and health benefits provided for all its employees. The company is a large national firm with over 15,000 employees located in various parts of the country. It uses an outside claims processor to administer its health care program. The company's medical costs have been rising by approximately 8% per year for the past five years, and management is concerned with controlling them. Assume that the auditor's preliminary findings indicate that certain dentists are billing the health care processor for services that were not provided and that this practice is not being detected or prevented by the health care processor. The auditor wishes to present to management an estimate of the amounts involved. The auditor chooses an approach that will sample claims by dentists and will verify whether the claims are appropriate. The best audit sampling approach would be: a. Discovery sampling based on a low to moderate level of fraud expectation. b. Dollar-unit sampling of all dentists to determine if the fraud might exceed a predetermined limit. c. Attribute sampling classifying the existence of a nonvalid claim as a deviation. d. Classical variables estimation of claims submitted by the suspected dentists stratified by dollar amount of services performed.

Classical variables estimation of claims submitted by the suspected dentists stratified by dollar amount of services performed. - This would be the best sampling technique to estimate the potential dollar amount of fraud by the dentists most likely to be making the false claims

An audit manager has just returned from an executive training program and has suggested that the audit department develop a mathematical model to help identify factors that may be causing changes in the cost of production. According to the manager, the model should recognize that the company currently has three separate production (cost) centers. Which of the following approaches would best provide the analysis suggested by the audit manager? a. Develop a classical variables sampling estimate of cost of production per department, with the sample stratified by the dollar value of each product produced. b. Develop a three-year ratio analysis of costs of production compared to costs of raw inventory across the three departments. c. Develop a multiple regression analysis of production costs including such variables as raw material inventory costs, number of employees in the department, and overtime pay. d. Develop a linear regression analysis relating cost of production to cost of goods sold.

Develop a multiple regression analysis of production costs including such variables as raw material inventory costs, number of employees in the department, and overtime pay. - A multiple regression analysis would help the auditor identify which factors appear to be driving the changes in the company's cost structure.

A manufacturing company has been expanding rapidly and is considering adding a new production line. Employees are currently working double shifts and receiving large amounts of overtime pay. Demand for all of the company's products is currently high, but management worries about demand fluctuations with changes in the economy and technological developments by competitors. Management is concerned with such issues as whether it is efficiently using its resources, whether it is expanding too rapidly or not rapidly enough, whether employee morale is decreasing, and whether future expansion should be financed internally or through debt. Management is concerned that employee productivity and morale may be decreasing even though production workers are being paid more overtime wages. Which of the following audit procedures would be least effective in addressing this concern? a. Develop a schedule of employee pay and analyze changes in overtime pay. b. Develop a schedule of production per employee over the past two years stratified by production during standard work shifts and production during overtime periods. c. Take a statistical sample of employees, and interview selected employees regarding their morale, productivity, and views on methods to improve efficiency. d. Obtain "best practices" production data from a comparable industry, and identify areas of differences. Follow up with interviews of production supervisors.

Develop a schedule of employee pay and analyze changes in overtime pay. - This would be the least effective procedure because it only analyzes overtime costs. It does not relate the costs to underlying production data

During a review of a division's operations, an auditor notes that: - Sales revenue has remained the same. - Customer base is unchanged. - Inventory has increased significantly. - Gross margin has increased significantly. Which of the following statements, if true, could explain the change noted in gross margin? I. The company has developed a new manufacturing process that is much more efficient. II. Sales price per unit has increased. III. Inventory is overstated. a. I only b. I and II only c. III only d. I, II, and III

I, II, and III

The internal auditing department has just completed an audit of loan processing and commercial loan account balances for a financial institution. Following are a few excerpts from their working papers indicating potential audit findings: B. Of the 85 loans granted, we noted that four loans should have been reviewed and approved by the loan committee but were not. Company policy states that the committee, prior to funding, must approve all loans. The vice president, however, approved each of the four loans. The matter was discussed with the vice president, who indicated it was a competitive loan situation to a new customer and in the best interests of the financial institution to expedite the loan and establish a firm relationship with a growing customer. The loan committee formally approved all of the other loans. The statistical sample was taken with a 95% confidence level using attribute sampling with a tolerable error limit of 4%. You may assume that the sampling plan was implemented correctly. Regarding item B, which of the following would be correct? I. The sample deviation rate exceeds 4%. II. The auditor should examine the nature of the loans approved by the vice president to see if there is a pattern. III. The audit finding should be included in the auditor's report with a suggestion that the loan committee review the loans. a. II only b. II and III only c. III only d. I, II, and III

I, II, and III

The auditor determines that a major user application is implemented on a spreadsheet. The spreadsheet takes input regarding projected freight deliveries from the mainframe computer and develops an optimal freight-dispatching plan. When first used two years ago, the spreadsheet helped reduce costs dramatically. However, freight costs have been increasing, and no one, other than the developer, has reviewed the spreadsheet. The freight-dispatching algorithm is complicated, but the auditor has researched the area and understands the algorithm and its correct computation. The auditor wishes to gain assurance on whether the spreadsheet has properly implemented the freight-dispatching algorithm. Which of the following audit procedures would accomplish the task? I. Develop an independent spreadsheet and run test data through it and through the user's spreadsheet. Compare the results. II. Use a product to print out the logic of the user spreadsheet. Examine the logic to determine if it has been correctly incorporated into the spreadsheet. III. Develop a set of test data and manually calculate the expected results. Run the test data through the user application. a. II only b. I and III c. I, II, and III d. I only

I, II, and III - All three audit approaches would work. If we were to rank order the effectiveness, it would be I, III, then II. However, if properly implemented, procedure II would work.

While performing analytical procedures related to an audit of a social services agency of a government entity, the auditor noted that there was an unusually large increase in payments to individual recipients who are under the direction of a particular social worker in the agency. The auditor is considering making a recommendation on appropriate controls to address a potential problem of fictitious recipients. The auditor has identified the following control procedures as potential items to include in the recommendation. I. Require that all additions to the recipient file be independently investigated and approved by a supervisor of the social workers. II. Require the use of self-checking digits on the account numbers of all recipients so that any duplicates will be immediately noted by the system. III. Incorporate a code into the computer program to search for duplicate names and addresses. Develop an exception report that will go the section supervisor whenever duplicates are noted. IV. Require social workers to be rotated among recipients. Which of the following control combinations would effectively address the auditor's concerns and improve control over valid recipients? a. I, II, III, and IV b. I, II, and III c. I and IV d. I, III, and IV

I, III, and IV - All three of these responses would be effective in dealing with the audit and control concern identified by the auditor: Item I segregate duties, item III incorporates an important computer check, and item IV rotates duties so that a new worker will find that some recipients are not valid.

Management of a property and casualty insurance company is concerned about the efficiency and effectiveness of the claims processing activities. It has two major concerns: (1) Some claims are being paid that should not be paid or are being paid in amounts in excess of the policy; and (2) many claimants are not being paid on a timely basis. In preparing for an audit of the area, the internal auditor decides to perform a preliminary survey to gather more information about the nature of processing and potential problems. The supervisor has a change of heart and indicates that the amount of fraud was less than $85,000 out of $85 million in claims processed, a clearly immaterial amount in the supervisor's opinion. The supervisor makes an offer to: (1) name all employees involved; (2) describe the circumvention of controls that allowed the fraud to take place; and (3) implement the necessary controls if the auditor would agree to describe the situation as a control procedure breakdown and not report it to management as a fraud. The amounts represent less than 0.1% of the claims processed. Otherwise, the supervisor will not cooperate in the investigation, will order the others involved not to cooperate, and will engage legal counsel. The auditor is already well over time budget and is intrigued by the opportunity to negotiate an end to the investigation and improve the control procedures. Which of the following would represent an appropriate response to the supervisor? I. Indicate the situation is open to negotiation but that more details on the nature of the fraud would be needed and the supervisor would have to sign an agreement as to the compromise reached. II. Indicate that the auditor has no authority to negotiate. III. Indicate that if the supervisor wishes to negotiate, the matter must be first reported as a fraud and the negotiations would have to take place with management. a. I only b. II only c. III only d. II and III only

II and III only - if the supervisor wants to negotiate, the negotiation should be performed with management and the assigned fraud investigation team

Which of the following should be performed prior to designing data mining applications? I. Data extraction II. Data cleansing III. Data analysis IV. Data normalization a. I and III b. II only c. IV only d. II and IV

II and IV - Data cleansing methods purify data or filter inappropriate data, and include log management functions such as log filtering, log correlations, and log analysis. Data normalization methods convert clean data into a standardized format and label them consistently (e.g., data and time stamps). - Data extraction and data analysis are used during data mining applications to retrieve relevant information from data sources to reveal data patterns and trends.

One criticism of the banking industry is that loan committees were not properly carrying out their function of examining proposed loans, determining that proper collateral exists, and assessing the associated risk before approving the loan. In gathering evidence to determine if the loan committee is operating effectively, the auditor should: I. Interview loan officers to see if their individual loan recommendations were followed. II. Reconcile the total amount of loans made plus those rejected with the total amount of loans submitted to the committee for approval. III. Examine individual loans for signatures of the committee members and determine the amount of loans made during each meeting and an approximation of time spent in approving the loans. IV. All of the above.

III - This is the most comprehensive procedure since it provides evidence on approval as well as additional evidence on how conscientiously the process was carried out (i.e., it provides evidence as to whether any meaningful discussion took place during the committee meetings).

The auditor is concerned with the overall valuation of inventory. Rank the following sources of audit evidence from most persuasive to least persuasive in addressing the assertion as to the valuation of inventory. I. Calculate inventory turnover by individual product. II. Assess the net realizability of all inventory items with a turnover ratio of 2.0 or less by interviewing the marketing manager as to the marketability of the product. III. Calculate the net realizable value (NRV) of all inventory products (using audit software to calculate NRV based on the last selling price) and compare NRV with cost. IV. Take a statistical sample of inventory and examine the latest purchase documents (invoices and receiving slips) to calculate inventory cost. a. I, II, III, IV b. I, IV, II, III c. IV, I, III, II d. II, III, IV, I

IV, I, III, II - Item IV. This is the most persuasive because it uses an external source. Inventory should be valued at the lower of cost or market. Thus, it is important to first begin with the establishment of cost. Item I, changes in inventory turnover or a very low level of inventory turnover, indicates potential obsolescence of inventory; the auditor should do more investigation, for example, looking at subsequent sales to determine whether inventory should be written down. Item III, calculation of net realizable value, is a good indication of a lower of cost or market problem. The only difficulty with this procedure is that the auditor needs to make sure that the sales prices used in the calculation are for sufficient amounts to support the conclusion about existing inventory quantities. This evidence is useful, but it is a form of testimonial evidence from an individual who may have a biased, or vested, interest in persuading the auditor that the goods will be sold at their normal prices in the normal course of business. Item II, In addition, the arbitrary cutoff value of 2.0 may not be justified. The cutoff should be based on the nature of the client's inventory.

Internal auditors employ confidence levels in the context of audit sampling. In a given sample plan, the confidence level: a. Is a decision variable that the internal auditor specifies after considering the economic consequences of drawing the wrong conclusion as a result of sampling error. b. Is a characteristic of the audit population and is not under the direct control of the internal auditor. c. Is essentially a measure of the accuracy of the sample results obtained after the sample has been selected and tested. d. Is not normally specified before the sample size is determined. Rather it is computed once the sample has been selected and tested.

Is a decision variable that the internal auditor specifies after considering the economic consequences of drawing the wrong conclusion as a result of sampling error.

An internal auditor uses a number of techniques to select samples. A frequently, and appropriately, used technique is random selection. In which of the following situations would random selection be least justified? The auditor needs to: a. Test sales transactions to determine that they were properly authorized and are supported by shipping documents. b. Confirm accounts receivable and has already selected the 10 largest accounts for confirmation. The remaining accounts are not numbered. The auditor only has a computer listing of the accounts in alphabetical order approximately 250 pages long with 50 account balances on every page. c. Obtain evidence on the proper sales cutoff by sampling items from the monthly sales journal to determine if the items were recorded in the correct time period. d. Test the perpetual inventory records to ensure that the sample covers the largest dollar value items in the account.

Obtain evidence on the proper sales cutoff by sampling items from the monthly sales journal to determine if the items were recorded in the correct time period. - This is the least justified situation to use random selection because the auditor is concerned that the monthly sales journal has been held open to record the next month sales. The auditor should select transactions from the latter part of the month and examine supporting evidence to determine if they were recorded in the proper time period.

Assuming no change in sample standard deviation, how would sample size and achieved precision be affected by a change in confidence level from 95.5% to 99.7%? a. Sample size would be smaller, but achieved precision would be larger. b. Sample size would be larger, but achieved precision would not change. c. Sample size would be smaller, but achieved precision would not change. d. Sample size would be larger, but achieved precision would be smaller.

Sample size would be larger, but achieved precision would not change. - If all others factors remain constant, the sample size will increase to the size required to keep achieved precision constant

An auditor is checking the accuracy of a computer-printed inventory listing to determine whether the total dollar value of inventory is significantly overstated. Because there is no time or resources to check all items in the warehouse, a sample of inventory items must be used. If the sample size were fixed, which one of the following would be the most accurate sampling approach in this case? a. select those items that are most easily inspected b. employ simple random sampling c. sample so that the probability of a given inventory item being selected is proportional to the number of units sold for that item d. sample so that the probability of a given inventory item being selected is proportional to its book value

Samples so that the probability of a given inventory item being selected is proportional to its book value - Since the total dollar value is under study, the probability-in-proportion-to-size (book value) approach is most efficient here.

A company is deciding whether to purchase an automated machine to manufacture one of its products. Expected net cash flows from this decision depend on several factors, interactions among those factors, and the probabilities associated with different levels of those factors. The method that the company should use to evaluate the distribution of net cash flows from this decision and changes in net cash flows resulting from changes in levels of various factors is: a. Simulation and sensitivity analysis. b. Linear programming. c. Correlation analysis. d. Differential analysis.

Simulation and sensitivity analysis - Simulation is a technique used to describe the behavior of a real-world system over time. Most often this technique employs a computer program to perform the simulation computations. Sensitivity analysis examines how outcomes change as the model parameters or variables change. - Differential analysis is a method used for decision making that compares differences in costs and revenues under two or more alternatives.

An audit team has been assigned to review the customer satisfaction measurement system that the industrial products division implemented two years ago. This system consists of the division's customer service office conducting an annual mail survey. A survey is sent to 100 purchasing departments randomly selected from all customers who made purchases in the prior 12 months. The survey is three pages long, and its 30 questions use a mixture of response modes (e.g., some questions are open ended, some multiple choice, and others use a response scale). The customer service office mails the survey in September and tabulates the results for questionnaires returned by October 15. Only one mailing is sent. If the customer does not return the questionnaire, no follow-up is conducted. When the survey was last conducted, 45 of the questionnaires were not returned. One of the steps of the audit program is to review the quality of the questionnaire's design. Which of the following is a common error made in designing multiple-choice questions in a survey questionnaire? a. Unipolar rather than bipolar labels are used for the response categories. b. The alternative response categories for the questions are not mutually exclusive. c. Likert scaling is used instead of semantic differential scaling. d. The question itself uses terms that are very familiar to the respondent

The alternative response categories for the questions are not mutually exclusive. - Overlapping categories frequently cause respondent difficulty.

Which of the following factors would most likely preclude the auditor from using monetary unit sampling? a. The auditor expects to find a limited number of understatements of individual account balances. b. The auditor expects to find that a large percentage of items sampled have misstatements. c. Individual accounts are not assigned a number but are listed only alphabetically. d. The auditor expects to find more errors in the larger dollar value items than in the smaller dollar value items.

The auditor expects to find that a large percentage of items sampled have misstatements. - Monetary unit sampling is not as effective in calculating an upper error estimate when a very large number of errors are expected.

Management of a property and casualty insurance company is concerned about the efficiency and effectiveness of the claims processing activities. It has two major concerns: (1) Some claims are being paid that should not be paid or are being paid in amounts in excess of the policy; and (2) many claimants are not being paid on a timely basis. In preparing for an audit of the area, the internal auditor decides to perform a preliminary survey to gather more information about the nature of processing and potential problems. After informing management, the auditor is directed to go ahead with a fraud investigation. The auditor has identified the parties most likely to have been involved in the fraud, if indeed one is taking place. The auditor sends each potential participant a personal electronic mail message indicating the nature of the investigation and urges the individual to come forward and explain the nature of the fraud. The auditor states that this is strictly an audit investigation and legal authorities are not involved. A major problem with this particular communication is: a. The medium. A paper-based document, such as a letter, should have been used instead of electronic mail message. b. The medium. Personal interviews should have been used instead of electronic mail. c. The nature of the communication. The auditor should have sent a questionnaire to each employee rather than seeking an open-ended response. d. The nature of the message. The auditor should have detailed the specific allegations against each employee and allowed them the opportunity to respond. The message, as written, is too general.

The medium. Personal interviews should have been used instead of electronic mail. - The nature of the communication is highly sensitive and personal. A more personal form of communication, such as the direct interview, should have been used to elicit the response from the auditees.

An auditor applied dollar-unit sampling to select a sample of costs charged by a contractor. The sample design and results were: Contract costs charged $10,000,000 Number of invoices in population 2,000 Tolerable error 1% Confidence level 95% Reliability factor 3.0 Sampling interval $33,333 Sample size 300 Expected error None Detected error None Which of the following is true about this sample? a. The probability of selecting any particular invoice is 15% (300/2000). b. There is a 1% chance that the contract invoices contain significant errors. c. The sampling risk is acceptable if errors do not exceed $33,333. d. There is a 95% chance that the costs are not overstated more than $100,000 (1% of $10,000,000).

There is a 95% chance that the costs are not overstated more than $100,000 (1% of $10,000,000)

The auditor wishes to test controls over computer program changes. The specific objective to be addressed in the following audit step is that only authorized changes have been made to computer programs (i.e., there are no unauthorized program changes). The organization uses an automated program library system, and the auditor obtains copies of the table of contents of the program library system at various periods of time. The table of contents indicates the date a change was last made to the program, the version number of the program, and the length of the program. Which of the following audit procedures would best address the stated objective? a. Use generalized audit software to randomly select a sample of current applications. Trace those selected to program change authorization forms. b. Take a sample of all program change requests. Trace the requests to proper authorization and to changes in the program library. c. Use generalized audit software to compare the table of contents of the program library currently with an auditor copy made previously. Compare and identify differences. Select a sample of the differences for further investigation. d. Obtain a list of programming projects implemented by the data processing manager during the last six months. Take a sample from the list and trace to program change authorization forms.

Use generalized audit software to compare the table of contents of the program library currently with an auditor copy made previously. Compare and identify differences. Select a sample of the differences for further investigation. - Since the auditor is looking for unauthorized changes, the auditor must first identify all changes that have taken place. The auditor then investigates the changes to see if they had been authorized.

While performing analytical procedures related to an audit of a social services agency of a government entity, the auditor noted that there was an unusually large increase in payments to individual recipients who are under the direction of a particular social worker in the agency. Which of the following audit procedures would be the best procedure to investigate this observation? a. Use generalized audit software to sort payments to recipients by social worker. Then sort the payments by common addresses and names. b. Implement an integrated test facility and monitor transactions throughout the year to identify unusual items. c. Implement the snapshot approach and tag transactions that are related to the social worker identified with the unusually large increases. d. Use generalized audit software to take a random sample of recipients, and investigate by sending confirmations to each recipient to determine if proper payments had been received.

Use generalized audit software to sort payments to recipients by social worker. Then sort the payments by common addresses and names. - This would be the best procedure because it would be an efficient manner to determine if any easily seen fraudulent pattern was associated with the payments under the control of the social worker.

Documents provide evidence that is of differing degrees of persuasiveness. If the audit objective is to gain evidence that payment actually has been made for a specific invoice from a vendor, which of the following documents would generally provide the most persuasive evidence? a. an entry in the audit's cash disbursements journal supported by a voucher package containing the vendor's invoice b. a canceled check, made out to the vendor and referenced to the invoice, included in a cutoff bank statement that the auditor received directly from the bank c. an accounts payable subsidiary ledger that shows payment of the invoice d. a vendor's original invoice stamped "PAID" and referenced to a check number

a canceled check, made out to the vendor and referenced to the invoice, included in a cutoff bank statement that the auditor received directly from the bank

During the audit of inventories, an internal auditor specified a precision of 5% instead of 4% contained in the preliminary audit program. What would be the impact of the change in precision? a. a decrease in population standard deviation b. an increase in population standard deviation c. a decrease in required sample size d. an increase in required sample size

a decrease in required sample size

Internal auditors employ the concept of precision in audit sampling contexts. In this context, precision is: a. a characteristic of the population at hand and is not under the direct control of the auditor. b. a measure of the accuracy with which one has generated sample estimates. Desired precision must be established before the sample is obtained and evaluated. c. evaluated independently of reliability in a given sample. d. important for evaluating variables samples, but not attributes samples.

a measure of the accuracy with which one has generated sample estimates. Desired precision must be established before the sample is obtained and evaluated.

Difference estimation sampling would be appropriate to use to project the dollar error in a population if: a. subsidiary ledger book balances for some individual inventory items are unknown b. virtually no differences between the individual book values and the audited values exist c. a number of nonproportional differences between book values and audited values exist d. observed differences between book values and audited values are proportional to book values

a number of non proportional differences between book values and audited values exist

Difference estimation sampling would be appropriate to use to project the dollar error in a population if: a. subsidiary ledger book balances for some individual inventory items are unknown. b. virtually no differences between the individual book values and the audited values exist. c. a number of nonproportional differences between book values and audited values exist. d. observed differences between book values and audited values are proportional to book values.

a number of nonproportional differences between book values and audited values exist.

Which of the following forms of evidence represents the most competent evidence that a receivable actually exists? a. A positive confirmation. b. A sales invoice. c. A receiving report. d. A bill of lading.

a postitive confirmation - A confirmation from a customer is the most reliable evidence that a receivable exists.

In selecting a sample of items for variables testing, an auditor must consider the desired precision, the standard deviation, and the: a. recorded dollar value of the population b. acceptable risk level c. expected occurrence rate d. sampling interval

acceptable risk level

Which of the following must be known to evaluate the results of an attribute sample? a. estimated dollar value of the population b. standard deviation of the sample values c. actual size of the sample selected d. finite population correction factor

actual size of the sample selected - Actual size of the sample selected

An auditor would rely primarily on which type of evidential matter when evaluating the collectibility of accounts receivable? a. positive confirmation b. negative confirmation c. aged accounts receivable listing d. management's representations

aged accounts receivable listing - This is the best evidential matter for an auditor to utilize. It reflects how long the accounts receivable are outstanding and puts overdue accounts in perspective. This is the primary document to work from in utilizing other audit procedures, such as discussions with management and review of confirmation replies.

An audit of the quality control department is being planned. Which of the following would be least likely to be used in the preparation of a preliminary survey questionnaire? a. an analysis of quality control documents b. the permanent audit file c. prior audit report d. management's charter for the quality control department

an analysis of quality control documents - Such analysis is a part of fieldwork, which comes after the preliminary survey

An auditor is testing on a company's large, normally distributed accounts receivable file. The objectives of the audit are to test end-of-period dollar balances and accounts receivable posting exception (error) rates. To test the accounts receivable file to compute an estimated dollar total, the auditor could use any one of the following sampling techniques except: a. difference or ration estimation b. unstratified mean-per-unit estimation c. probability proportional to size d. attribute

attribute - attribute sampling does not involve dollar-balance estimation

Management answered "yes" to every question when filling out an internal control questionnaire and stated that all listed requirements and control activities were part of its procedures. An internal auditor retrieved this questionnaire from management during the preliminary survey visit but did not review the responses with management while on site. The auditor's supervisor should be critical of the above procedure based on the fact that: a. audit information must be corroborated in some way b. internal control questionnaires cannot be relied on c. the auditors were not present while the questionnaire was being filled out d. the questionnaire was not designed to address accounting operations and controls

audit information must be corroborated in some way - Self‐audit questionnaires provide indirect evidence, which must be confirmed.

An internal auditor planning an attribute sample from a large number of invoices must estimate the tolerable error. Which factor below is the most important for the auditor to consider? a. audit objective b. population size c. desired confidence level d. population variance

audit objective - tolerable error is the specified precision or the maximum sampling error that will still permit the results to be useful. Since the precision is under the control of the auditor, the audit objective is the most important factor to be considered

Which of the following is an essential factor in evaluating the sufficiency of evidence? The evidence must: a. be well documented and cross‐referenced in the working papers b. be based on references that are considered reliable c. bear a direct relationship to the finding and include all of the elements of a finding d. be convincing enough for a prudent person to reach the same decision

be convincing enough for a prudent person to reach the same decision

Which of the following is referred to as primary evidence? a. direct evidence b. best evidence c. circumstantial evidence d. hearsay evidence

best evidence - Best evidence is the primary evidence since it is the most natural and satisfactory proof of the fact under investigation

An internal auditor wishes to determine whether the finished goods perpetual inventory records are being properly updated for completed production. To accomplish this, the auditor traces inventory quantity and cost records from production reports to perpetual inventory records, using an appropriate sample size based on a 95% confidence level, estimated error rate of 4%, and desired precision of 2%. If the error rate in the sample is, as expected, 4%, and 2,000 production reports were posted to perpetual inventory records during the year, the auditor can be 95% sure that the number incorrectly posted was: a. at least 100 b. at least 80 c. between 60 and 140 d. between 40 and 120

between 40 and 120 - there is a 95% probability that the number of errors is between 2% (4%-2%) and 6% (4%+2%) of the population of 2,000 items.

Which of the following can be used to create a data classification? a. cluster analysis b. discriminant analysis c. canonical analysis d. link analysis

cluster analysis - Cluster analysis can be used to create a data classification. It involves clustering together things that go together by using single or multiple dimensions. It involves coding things and identifying patterns in data.

In a regional survey of suburban households to obtain data on television viewing habits, a statistical sample of suburban areas is first selected. Within the chosen areas, statistical samples of whole blocks are selected, and within the selected blocks, random samples of households are selected. This type of sample selection can best be described as: a. attributes sampling b. stratified sampling c. cluster sampling d. interval sampling

cluster sampling - Cluster sampling samples groups of items rather than individual items and is most appropriate when each aggregate sampling group is representative of the entire population.

Evidence that is both the best available and reliable is: a. sufficient b. competent c. relevant d. useful

competent

Which of the following evidence cannot be contradicted? a. corroborative evidence b. conclusive evidence c. hearsay evidence d. circumstantial evidence

conclusive evidence

A company provides valves, pipes and specialty items to chemical plants in a large metropolitan area. Stock reorder decisions are based on quarterly sales reports and must be approved by the vice president of sales. The company has a highly motivated and well-paid sales force. Often a good salesperson can earn more in commissions than from base salary. Salespeople use portable computers to enter orders while in the field. As sales orders are entered, all out-of-stock conditions are noted. Restocking orders are created whenever inventory levels fall below reorder points. The products handled by the company are subject to rapid obsolescence and have little scrap value once obsolescence is reached. The annual inventory is performed by an inventory service using professional counters. All count information is given to the company for entry and balancing. Over the past several years, the company has experienced unusually large write-offs as a result of its annual physical inventory. In order to identify the amount of obsolete inventory that may exist in an organization, the internal auditor probably would collect evidence using all of the following procedures except: a. confirmation b. scanning b. recomputation d. analytical review

confirmation - Confirmation is used to verify the physical existence of an item. Obsolete inventory represents a question of value, not physical existence. - Scanning is an excellent means of noting unusual relationships, such as very old items with no activity

An internal auditing department has a project under way to determine whether it can go to electronic working papers. Decision criteria will be based primarily on the requirements of internal auditing standards and on the experience of other audit departments. The feasibility study should recognize that internal auditing standards specify that for the design and content of working papers in the form of media other than paper: a. conversion to paper should occur no later than the time of final review b. consideration should be given to generating backup copies of working papers c. the media selected should determine working paper design and content d. working paper retention should be solely a function of the media used

consideration should be given to generating backup copies of working papers - the standards specify that for working papers in media other than paper, consideration should be given to generating backup copies. - the nature of the audit, and not the media, determines working paper design and content

To identify lost or incomplete sales accounting record updates using the computer, the most appropriate approach is: a. test data b. parallel simulation c. controlled reprocessing d. integrated test facility

controlled reprocessing - Allows update inputs to be inexpensively reprocessed and compared to original update results

To be sufficient, audit evidence should be: a. well documented and cross-referenced in the workpapers. b. based on references that are considered reliable. c. directly related to the finding and include all of the elements of a finding. d. convincing enough for a prudent, informed person to reach the same conclusion as the auditor.

convincing enough for a prudent, informed person to reach the same conclusion as the auditor - Sufficient evidence is factual, adequate, and convincing so that a prudent, informed person would reach the same conclusions as the auditor.

During interviews with the inventory management personnel, the auditor learned that salespersons often order inventory for stock without receiving the approval of the vice president of sales. Also, detail testing showed that there are no written approvals on purchase orders for replacement parts. The detail testing is a good example of a(n): a. indirect evidence b. circumstantial evidence c. corroborative evidence d. subjective evidence

corroborative evidence - Corroboration occurs whenever evidence collected from two separate sources confirm each other. Here sources include interviews and detail testing.

When audit conclusions are challenged, the auditor's factual rebuttal is best facilitated by: a. summaries in the audit program b. pro forma working papers c. cross-referencing of the working papers d. explicit procedures in the audit program

cross-referencing of the working papers - Aids the factual rebuttal of challenges by clearly identifying source and location of facts

An internal auditing department developed the formula TC (total audit cost) = a + bX + cX2, where X was internal audit resources. The director wanted to minimize TC with respect to X. The appropriate technique to use is: a. linear programming. b. least squares. c. differential calculus. d. integral calculus.

differential calculus - The primary business application of differential calculus is to identify maximum (profit) or minimum (costs)

In the audit of a health insurance claims processing department, a sample is taken to test for the presence of fictitious payees, although none is suspected. The most appropriate sampling plan would be: a. attributes sampling b. discovery sampling c. variables sampling d. stop-and-go sampling

discovery sampling - Discovery sampling is appropriate when a near-zero error rate is expected and the characteristic under scrutiny is critical

after partially completing an internal control review of the accounts payable department, the auditor suspects that some type of fraud has occurred. To ascertain whether the fraud is present, the best sampling approach would be to use: a. simple random sampling to select a sample of vouchers processed by the department during the past year b. probability-proportional-to-size sampling to select a sample of vouchers processed by the department during the past year c. discovery sampling to select a sample of vouchers processed by the department during the past year d. judgmental sampling to select a sample of vouchers processed by clerks identified by the department manager as acting suspiciously

discovery sampling to select a sample of vouchers processed by the department during the past year

The internal auditor for a construction contractor finds material costs increasing as a percentage of billings and suspects that materials billed to the company are being delivered to another contractor. What type of evidence would best enable the auditor to determine whether erroneous billings occurred? a. documentary b. physical examination c. confirmation d. analytical review

documentary - By matching invoices received from vendors with receiving documents prepared by company personnel, the nonreceipt of items billed to the company can be detected. Also, the invoices received may well note the delivery made to an address other than the company's storage area or a construction site.

Which of the following is one purpose of an embedded audit module? a. enable continuous monitoring of transaction processing b. identify program code that may have been inserted for unauthorized process c. verify the correctness of account balances on a master file d. review the contents of a specific portion of computer memory

enable continuous monitoring of transaction processing

Generalized audit software can be used to: a. examine the existence and consistency of data maintained on files b. perform concurrent auditing of data files c. verify processing logic of operating systems software d. access complex data structures without using hot language extensions

examine the existence and consistency of data maintained on files - the software compares two files for data consistency

When an internal auditor encounters active opposition, as when auditees remain unconvinced of the auditor's reasonably presented point of view, the most effective way to gain consensus is to: a. refer the matter to the audit's superior b. wait to reason with audits late in the dat when they may be more reasonable c. rely on logic and explain the auditor's point again d. find a point of agreement by letting audits explain their position again

find a point of agreement by letting audits explain their position again - agreeing on some point can be an opening wedge to more productive discussions - a closed mind does not accept logic; an open mind does

The purchase price of a newly acquired subsidiary depends on the subsidiary's profitability during the first year following its acquisition. The former owners of the subsidiary will continue to manage the company. In conducting an audit of the subsidiary, auditors should pay special attention to the: a. fixed asset capitalization procedures. b. payroll disbursement procedures. c. bank account reconciliation procedures. d. vendor invoice approval procedures.

fixed asset capitalization procedures - management may have the tendency to overstate revenue and understate expenses

Which one of the following statements about sampling is true? a. a larger sample is always more representative of the underlying population than a smaller sample b. for very large populations, the absolute size of a sample has more impact on the precision of its results than does its size relative to its population c. for a given sample size, a simple random sample always produces the most representative sample d. the limitations of an incomplete sample frame can almost always be overcome by careful sampling techniques

for very large populations, the absolute size of a sample has more impact on the precision of its results than does its size relative to its population - When the size of the population is very large, the effect on precision of the finite population correction factor is very limited

The book value of a 3,000-item inventory is $3,000,000. An auditor specifies a maximum tolerable error of $60,000 and a 95% confidence level (reliability factor = 3.0). Assuming that no individual item in the population exceeds the monetary value of the interval, the expected sample size for monetary-unit sampling would be: a. less than 70. b. from 70 to 140. c. from 141 to 160. d. greater than 160.

from 141 to 160 = 3.0 * (3,000,000/60,000) = 150

Cross-examination of a witness is used in what type of evidence? a. opinion evidence b. hearsay evidence c. best evidence d. circumstantial evidence

hearsay evidence

A sample from a population of over 10,000 bills of lading is needed to estimate an error rate. Since a sample size of 250 will satisfy precision and confidence level needs, a sampling interval of 40 is chosen. For ease of implementation, the auditor randomly selects a number between 1 and 40, and then selects each succeeding fortieth item. Which of the following is true? a. the sample lacks randomness and will not be correct b. interval sampling is not an acceptable statistical method c. if the population lacks bias, the sample is statistically valid d. interval sampling eliminates the use of auditor judgment

if the population lacks bias, the sample is statistically valid

A potential problem associated with failing to record goods upon their receipt is: a. improperly reporting stockouts. b. accepting canceled orders. c. accepting unordered merchandise. d. accepting duplicate shipments.

improperly reporting stockouts

An internal auditor suspects that the invoices from a small number of vendors contain serious errors and therefore limits the sample to only those vendors. A major disadvantage of selecting such a directed sample of items to examine is the: a. difficulty in obtaining sample items. b. inability to quantify the sampling error related to the total population of vendor invoices. c. absence of a normal distribution. d. tendency to sample a greater number of units

inability to quantify the sampling error related to the total population of vendor invoices - Sampling error cannot be quantified if judgmental sampling is used. This makes the auditor's conclusions difficult to defend.

An internal audit manager is reviewing the audit working papers prepared by the staff. Which of the following review comments is true? a. each working paper should include the actual and the budgeted time related to such audit work b. including copies of all the forms and directives of the auditee department constitutes "unnecessary" overdocumentation c. conclusions need not be documented in the working papers when the audit objectives are achieved d. each working paper should include a statement regarding the auditees' cooperation during the conduct of the audit

including copies of all the forms and directives of the auditee department constitutes "unnecessary" overdocumentation

During the grand opening of a new retail outlet, operating problems periodically interrupted the communications link between the store's computer and the systems controller at corporate headquarters. A subsequent reconciliation between physical inventory levels and expected inventory levels based on sales actually reported to headquarters disclosed significant disparities. A reconciliation between these computer-related sales and manually maintained sales records indicated sales data may be erroneous. An audit of questionable sales data is now underway. To identify lost or incomplete sales accounting record updates using the computer, the most appropriate approach is: a. test data. b. parallel simulation. c. controlled reprocessing. d. integrated test facility.

integrated test facility

The most appropriate methodology for drawing a sample from 3,000 time cards to check for signatures would be: a. interval sampling b. cluster sampling c. stratified sampling d. variables sampling

interval sampling

The auditor is performing a test to determine whether the gas and electric appliance company should move its service center from one location to another. The service center houses the service trucks that are used to drive to the customers' locations to service their appliances. The auditor wants to determine the reduction in average miles driven as a result of moving to the other location. Which of the following statistical sampling methods would be most appropriate for this test? a. attribute sampling b. discovery sampling c. probability proportional to size (dollar-unit) sampling d. mean-per-unit sampling

mean-per-unit sampling - This is the only statistical sampling method designed to estimate a variable for which there are no available individual book values making up the value of a population

An audit of environmental controls, including regulatory compliance, has been concluded. Possible corrective actions are being discussed at a closing conference. The environmental manager states that funds are not available in this year's budget to make necessary changes and repairs to the hazardous‐waste storage yard. The deficiencies prevent management from complying with controls established to manage waste safely and to comply with regulations. The auditor should: a. insist that the changes and repairs be made, regardless of any apparent budget constraints b. agree that corrective action may be postponed until funds can be provided in the following year's budget c. accept temporary, but clearly incomplete, corrective action in order to improve the situation d. involve senior management in the decision

involve senior management in the decision - Complete and timely corrective action is needed, but funds appear not to be available. This situation poses a significant risk to the company, and senior management must participate in the decision. It is unlikely that senior management will choose to accept the risk of noncompliance for an extended period of time; funds may be available from another source not accessible to the environmental manager.

Monetary-unit sampling is most useful when the internal auditor: a. is testing the accounts payable balance b. cannot cumulatively arrange the population items c. expects to find several material errors in the sample d. is concerned with overstatements

is concerned with overstatements - Overstated items have a greater change of being included in the sample. Additionally, samples under this procedure include more of the "higher-dollar" accounts because of the way the sample is conducted. Errors in these accounts are more likely to result in material misstatements and are thus more critical to the internal auditor.

In advance of a preliminary survey, an audit director sends a memorandum and questionnaire to the supervisors of the department to be audited. What is the most likely result of that procedure? a. It creates apprehension about the audit. b. It involves the auditee's supervisory personnel in the audit. c. It is an uneconomical approach to obtaining information. d. It is useful only for audits of distant locations

it involves the auditee's supervisory personnel in the audit - this helps involve the supervisors of the auditee's department and encourages a more collegial approach to the audit

An audit team has been assigned to review the customer satisfaction measurement system that the industrial products division implemented two years ago. This system consists of the division's customer service office conducting an annual mail survey. A survey is sent to 100 purchasing departments randomly selected from all customers who made purchases in the prior 12 months. The survey is three pages long, and its 30 questions use a mixture of response modes (e.g., some questions are open ended, some multiple choice, and others use a response scale). The customer service office mails the survey in September and tabulates the results for questionnaires returned by October 15. Only one mailing is sent. If the customer does not return the questionnaire, no follow-up is conducted. When the survey was last conducted, 45 of the questionnaires were not returned. Several of the audit team members are concerned about the low response rate, the poor quality of the questionnaire design, and the potentially biased wording of some of the questions. They suggest that the customer service office might want to supplement the survey with some unobtrusive data collection, such as observing customer interactions in the office or collecting audiotapes of phone conversations with customers. Which of the following is not a potential advantage of unobtrusive data collection compared to surveys or interviews? a. interactions with customers can be observed as they occur in their natural setting b. it is easier to make precise measurements of the variables under study c. unexpected or unusual events are more likely to be observed d. people are less likely to alter their behavior because they are being studied

it is easier to make precise measurements of the variables under study - lack of experimental control and measurement precision is the chief weaknesses of unobtrusive measures

Observation is considered a reliable audit procedure but one that is limited in usefulness. However, it is used in a number of different audit situations. Which of the following statements is true regarding observation as an audit technique? a. It is the most effective audit methodology to utilize in filling out internal control questionnaires b. It is the most persuasive methodology to learn how transactions are really processed during the period under audit. c. It is rarely sufficient to satisfy any audit assertion other than existence. d. It is the most persuasive audit technique for determining if fraud has occurred.

it is rarely sufficient to satisfy any audit assertion other than existence - Observation is good in verifying existence but has limited value in addressing other assertions. - Observation provides information on how transactions are handled at one particular point in time, not how they are processed throughout the period under audit investigation.

An auditor is planning to use monetary-unit sampling for testing the dollar value of a large accounts receivable population. The advantages of using monetary-unit sampling include all of the following except: a. it is an efficient model for establishing that a low error rate population is not materially misstated b. it does not require the normal distribution approximation required by variable sampling c. it can be applied to a group of accounts, since the sampling units are homogenous d. it results in a smaller sample size than that required when using classical sampling, as errors increase

it results in a smaller sample size than that required when using classical sampling, as errors increase - Monetary unit sampling would result in a larger sample size, and this is not an advantage

Nonsampling risk is based on which of the following? a. judgment b. precision c. confidence interval d. confidence level

judgment - Nonsampling risk occurs even if the entire population is tested. It is due to errors in auditor judgment, such as use of inappropriate audit procedures and not recognizing errors during sampling. Nonsampling risk can be controlled with better audit planning and supervision.

The internal auditor for an insurance company is conducting an audit of claims processing and wants to assess the average length of time that it takes to process automobile claims to determine whether processing is being completed within standards set by company policy. The auditor plans to take a sample of claims made during the year and perform the needed analysis. The most appropriate sampling method would be: a. mean-per-unit variables sampling. b. probability proportion to size. c. attribute sampling. d. discovery sampling.

mean-per-unit variables sampling

In determining cost behavior in business, the cost function is often expressed as Y = a + bX. Which one of the following cost estimation methods should not be used in estimating fixed and variable costs for the equation? a. Graphic method b. Simple regression c. High and low point method d. Multiple regression

multiple regression - multiple regression is a technique used for cost estimation purposes when there are two or more independent variables. In the cost function y=a+bx, there is only one independent variable "x"

An internal auditor is assigned to perform an audit of the company's insurance program, including the appropriateness of the approach to minimizing risks to the company. The company self-insures against large casualty losses and health benefits provided for all its employees. The company is a large national firm with over 15,000 employees located in various parts of the country. It uses an outside claims processor to administer its health care program. The company's medical costs have been rising by approximately 8% per year for the past five years, and management is concerned with controlling them. Which of the following analytical review procedures would provide the most insight into the reasonableness of the increase in health care costs? a. develop a comparison of the costs incurred with similar costs incurred by other companies b. obtain the government index of health care costs for the comparable period of time, and compare the rate of increase with that of the cost per employee incurred by the company c. obtain a bid from another health care administrator to provide the same administrative services as the current health care administrator d. develop a comparison of overall health insurance costs incurred by the company with similar costs incurred by companies in the same industry

obtain the government index of health care costs for the comparable period of time, and compare the rate of increase with that of the cost per employee incurred by the company

Which of the following cannot be used to dispute a written instrument? a. oral evidence b. documentary evidence c. circumstantial evidence d. corroborative evidence

oral evidence

The time between when an order is placed and when it is received by the customer is defined as: a. arrival time b. order cycle time c. shipping time d. order time

order cycle time

Which of the following techniques could be used to estimate the standard deviation for a sampling plan? a. difference estimation b. pilot sample c. regression d. discovery sampling

pilot sample - Auditors use a pilot sample to estimate the standard deviation in a population. This enables auditors to estimate the confidence interval that would be achieved by the sample and therefore helps them decide how large of a sample to select.

In evaluating an attribute sample, the range within which the estimate of the population characteristic is expected to fall is called: a. confidence level b. precision c. upper error limit d. expected error rate

precision

Which of the following activities does not constitute audit supervision? a. preparing a preliminary audit program b. providing appropriate instructions to the auditors c. reviewing audit work papers d. seeing that audit objectives are achieved

preparing a preliminary audit program - This is a planning task

Which of the following tests can help the auditor evaluate the adequacy of the company's allowance for doubtful accounts? a. reconciling the accounts receivable subsidiary ledgers with the control account b. preparing an aging analysis c. reviewing authorization of credit terms d. tracing a sample of credit memos to the accounts receivable subsidiary ledger

preparing an aging analysis - The aging analysis yields an estimate of the total bad debts, based on the age of the unpaid account balances. This helps the auditor evaluate the adequacy of the company's credit policies and collection efforts

A production process delivers value through all of the following items except: a. product selling b. product quality c. cost reduction d. schedule flexibility

product selling - product selling is outside the production process because selling comes after completing the production process

The auditor wishes to sample the perpetual inventory records to develop an estimate of the dollar amount of misstatement, if any, in the account balance. The account balance is made up of a large number of small‐value items and a small number of large‐value items. The auditor has decided to audit all items over $50,000 plus a random selection of others. This audit decision is made because the auditor expects to find a large amount of errors in the perpetual inventory records but is not sure that it will be enough to justify taking a complete physical inventory. The auditor expects the errors to vary directly with the value recorded in the perpetual records. The most efficient sampling procedure to accomplish the auditor's objectives would be: a. dollar-unit sampling b. ratio estimation c. attribute sampling d. stratified mean-per-unit sampling

ratio estimation - Ratio estimation is the most efficient sampling methodology because the auditor expects a large number of errors and expects the errors to vary directly with the size of the account balance on the perpetual record

During an audit of a smaller division, the auditor notes the following regarding the purchasing function: There are three purchasing agents. Agent 1 is responsible for ordering all large component parts, Agent 2 is responsible for electric motors, and Agent 3 is responsible for smaller parts, such as fasteners. There are separate accounts payable and receiving departments. In order to hold vendors more responsible, all invoices are sent to the purchasing agent placing the order. The purchasing agent matches the vendor invoice, receiving slip, and purchase order. If all match, the purchasing agent sends the documents forward to the accounts payable department. The purchasing agent investigates differences. Only the accounts payable department has the ability to authorize an item for payment. All recorded receipts are immediately recorded into a perpetual inventory record by the department to which the goods are transferred after receipt. The auditor interviewed both management and the purchasing agents. Both groups were very satisfied with the current system because it helped maintain vendor accountability and provided sufficient segregation of duties since only the accounts payable department can authorize an item for payment. Which of the following audit procedures would be most effective in determining whether material fraud was taking place? a. take a random sample of cash disbursements and trace to approved purchase orders and receiving slips b. reconcile the perpetual inventory to the general ledger and investigate any differences c. take a random sample of purchase orders. Trace each purchase order to a receiving slip, vendor invoice, and approval by the accounts payable department d. perform an analytical review of inventory by product line to determine whether a particular product line has increased. Inquire of the purchasing agent as to the reason for the inventory increase

reconcile the perpetual inventory to the general ledger and investigate any differences - a fraud would result in an overstatement of inventory in the ledger, but the perpetual inventory would reflect actual purchases

An internal auditing department has a project under way to determine whether it can go to electronic working papers. Decision criteria will be based primarily on the requirements of internal auditing standards and on the experience of other audit departments. Which of the following long-term effects associated with electronic working papers is most likely to occur after conversion from manual working papers? a. significant training needs for auditors b. reductions in the average time to complete audits c. more comprehensive working papers d. working papers must be printed

reductions in the average time to complete audits - Reductions in the average time to complete an audit have been shown - IIA Standard 2330 requires comprehensive working papers, and the use of computers should not affect their completeness.

The manager of the assembly department of a manufacturing company would like to estimate the fixed and variable components of the department's cost. To do so, the manager has collected information on total cost and output for the past 24 months. To estimate the fixed and variable components of total cost, the manager should use which of the following? a. regression analysis b. game theory c. sensitivity analysis d. queuing theory

regression analysis - Regression analysis is a statistical technique for measuring the relationship between variables. It estimates the component of the dependent variable that varies with changes in the independent variable and the component that does not vary (fixed) with changes in the independent variable. Regression analysis separates the total cost into fixed cost and variable cost components.

The IIA Standards require the director of internal auditing to establish and maintain a quality assurance program to evaluate the operations of the internal audit department. Which of the following relates most directly to the objective of maintaining high quality in all audits? a. required supervisory review of all audit programs, working papers, and draft audit reports b. required coordination with external auditors c. required compliance with the Code of Ethics of the Institute of Internal Auditors d. required educational standards for all members of the professional audit staff

required supervisory review of all audit programs, working papers, and draft audit reports - the purpose of supervisory review is to assure quality

Working papers are the property of the auditor. Good control of working papers: a. precludes showing working papers to auditees b. requires retention of working papers for at least three years c. requires that only the auditor who created the working paper change electronic working papers d. prevents surrender to a summons issued by a governmental agency

requires that only the auditor who created the working paper change electronic working papers

Which of the following connects employees to their job duties? a. risk and control matrix b. responsibility assignment matrix c. pivot table d. contingency table

responsibility assignment matrix - A responsibility assignment matrix or RACI diagram connects employees to their assigned jobs, duties, tasks, activities, or projects so they can complete them. "RACI" stands for responsible, accountable, consulted, and informed.

A working paper is complete when it: a. complies with the auditing department's format requirements b. contains all of the elements of a finding c. is clear, concise, and accurate d. satisfies the audit objective for which it is developed

satisfies the audit objective for which it is developed

Generalized audit software is designed to allow auditors to: a. monitor the execution of application programs b. process test data against master files that contain real and fictitious entities c. select sample data from files and check computations d. insert special audit routines into regular application programs

select sample data from files and check computations

If all other sample size planning factors were exactly the same in attributes sampling, changing the confidence level from 95% to 90% and changing the desired precision from 2% to 5% would result in a revised sample size that would be: a. larger b. smaller c. unchanged d. indeterminate

smaller - a lower confidence level and a less rigorous precision allows a smaller sample with other factors constant

The IIA Standards require that, in most cases, an internal auditing department have documented policies and procedures to ensure the consistency and quality of audit work. The exception to this requirement is directly related to: a. departmentalization b. division of labor c. span of control d. authority

span of control - With a small audit department, substantial direct supervision can be provided by the CAE

In a variable sampling application, if the achieved dollar precision range of the statistical sample at a given confidence level is greater than the desired dollar precision range, this is an indication that the: a. occurrence rate was smaller than expected b. occurrence rate was larger than expected c. standard deviation was less than expected d. standard deviation was greater than expected

standard deviation was greater than expected

Audit assurance level is not the same as: a. statistical confidence level b. auditor's judgement level c. auditor's confidence level d. quantitative measurement level

statistical confidence level - the audit assurance level is a combination of an auditor's judgment level, auditor's confidence level, and a quantitative measurement of an auditor's confidence level. The statistical confidence level is related to an individual sample, not to an auditor

A statistical sampling technique that will minimize sample size whenever a low rate of noncompliance is expected is called: a. ratio-estimation sampling b. difference-estimation sampling c. stratified mean-per-unit sampling d. stop-or-go sampling

stop-or-go sampling - The stop‐or‐go sampling technique will yield a smaller sample size if the error rate is low. It is also the only technique listed that is applicable to estimates of rate of compliance (attributes sampling).

An auditor wishes to sample 200 sales receipts from a population of 5,000 receipts issued during the last year. The receipts have preprinted serial numbers and are arranged in chronological (and thus serial number) order. The auditor randomly chooses a receipt from the first 25 receipts and then selects every twenty‐fifth receipt thereafter. The sampling procedure described here is called: a. systematic random sampling b. dollar-unit sampling c. judgmental interval sampling d. variables sampling

systematic random sampling (interval sampling) - Every nth element is selected from the sample, with the starting point among the first n elements determine at random

An internal auditor plans to use an analytical review to verify the correctness of various operating expenses in a division. The use of an analytical review as a verification technique would not be a preferred approach if: a. the auditor notes strong indicators of a specific fraud involving this account b. the company has a relatively stable operations that have not changed much over the past year c. the auditor would like to identify large, unusual, or nonrecurring transactions during the year d. the operating expenses vary in relation to other operating expenses but not in relation to revenue

the auditor notes strong indicators of a specific fraud involving this account

An internal auditing department implemented an integrated test facility (ITF) to test its payroll processing. The auditing department identified the key controls and processing steps built into the computer program and developed test data based on the key controls and processing steps in order to test them. The department submitted test transactions throughout the year. Assuming that the auditors did not find any differences in their test results, the auditors can conclude that: a. The system is properly capturing the hours worked by employees during the year, and the hours have been properly submitted to payroll and processed correctly. b. All employees were correctly paid during the year, and their pay was correctly computed. c. The computer application and its control procedures were processing payroll transactions correctly during the past year. d. All of the above.

the computer application and its control procedures were processing payroll transactions correctly during the past year - The auditor's inference can be only to the operation of computerized controls and the correctness of computer processing during the year because the ITF tests only the computerized portion of the application, not that all data have been entered correctly.

If an auditor is sampling to test compliance with a particular company policy, which of the following factors should not affect the allowable level of sampling risk? a. the experience and knowledge of the auditor b. the adverse consequences of noncompliance c. the acceptable level of risk of making an incorrect audit conclusion d. the cost of performing auditing procedures on sample selections

the experience and knowledge of the auditor - The allowable level of sampling risk is the risk an auditor is willing to take that a conclusion based on the sample may be incorrect. The auditor's experience and knowledge should have no bearing on that decision; however, the auditor's experience and knowledge may affect his or her decision to use statistical or nonstatistical sampling and may be a factor in assessing nonsampling risks.

Of the following, audit evidence is best described as: a. The records of preliminary planning and surveys, the audit program, and the results of fieldwork. b. The information documented by the auditors and obtained through observing conditions, interviewing people, and examining records. c. An intermediate fact, or group of facts, from which the auditor can infer the fairness of an assertion being audited. d. Detailed documentation for systems that do not achieve desired objectives, actions that were taken improperly, and actions that should have been taken but were not.

the information documented by the auditors and obtained through observing conditions, interviewing people, and examining records - This definition properly implies the inclusion of physical, testimonial, documentary, and analytical evidence per the IIA Standards.

Auditors use a variety of indexing and cross-referencing methods in their audit working papers. An internal auditing manager might devise a working paper indexing method tailored to a specific organization's needs. A government audit agency would devise a method for all organizations under the agency's jurisdiction. Which of the following best explains the reason for this difference in working paper index methods between the two? a. the internal auditing manager devises a method that simplifies the review process within a particular organization, but the government audit agency devises one uniform method to simplify the review process of the vastly different organizations to be audited b. the method of the internal auditing manager is prescribed by the IIA Standards, but the method of the government audit agency is required by the regulatory agency c. the method of the internal auditing manager is prescribed by the IIA Standards, but law requires the method of the government audit agency d. the internal auditing manager devises that method specified by the organization's audit committee, but the government audit agency devises one uniform method that is required by law

the internal auditing manager devises a method that simplifies the review process within a particular organization, but the government audit agency devises one uniform method to simplify the review process of the vastly different organizations to be audited - Since there are many differences between organizations (e.g., type, size, location, etc.), the internal auditing manager devises the working paper index method that best suits the organization. A government audit agency, however, audits many different organizations that come under the agency. Therefore, the government audit agency devises one uniform indexing method that is compatible with all of the organizations that it audits so that the review process can be simplified

In evaluating the validity of different types of audit evidence, which one of the following conclusions is incorrect? a. recompilation, although highly valid, is limited in usefulness due to its limited scope b. the validity of documentary evidence is independent of the effectiveness of the control system in which it was created c. internally created documentary evidence is considered less valid than externally created documentary evidence d. the validity of confirmations varies directly with the independence of the party receiving the confirmation

the validity of documentary evidence is independent of the effectiveness of the control system in which it was created

An auditor wishes to determine the extent to which invalid data could be contained in a human resources computer system. Examples would be an invalid job classification, age in excess of retirement age, or an invalid ethnic classification. The best approach to determine the extent of the potential problem would be to: a. submit test data to test the effectiveness of edit controls over the input of data b. review and test access controls to ensure that access is limited to authorized individuals c. use generalized audit software to develop a detailed report of all data outside specified parameters d. use generalized audit software to select a sample of employees. Use the sample to determine the validity of data items and project the result to the population as a whole

use generalized audit software to develop a detailed report of all data outside specified parameters - This is both the most effective and the most efficient procedure as it provides a comprehensive analysis of the extent that obviously incorrect data is included in the database.

A bank internal auditor wishes to determine whether all loans are backed by sufficient collateral, properly aged as to current payments, and properly categorized as current or noncurrent. The best audit procedure to accomplish this objective would be to: a. use generalized audit software to read the total loan file, age the file by last payment due, and take a statistical sample stratified by the current and aged population b. examine each loan selected for proper collateralization and aging. Take a block sample of all loans in excess of a specified dollar limit and determine if they are current and properly categorized. For each loan approved, verify aging and categorization c. take a discovery sample of all loan applications to determine whether each application contains a statement of collateral d. take a sample of payments made on the loan portfolio and trace them to loans to see that the payments are properly applied. For each loan identified, examine the loan application to determine that the loan has proper collateralization

use generalized audit software to read the total loan file, age the file by last payment due, and take a statistical sample stratified by the current and aged population - this is the best procedure because it takes a sample from the total loan file and tests to determine that the loan is properly categorized as well as properly collateralized

An internal auditor wishes to estimate the number of units in a certain class of inventory without counting each one. Which of the following sample plans would be appropriate? a. attributes b. discovery c. stop or go d. variables

variables - Variables sampling is used for substantive testing. It allows the verification of values whose range lies between positive and negative infinity

In order to estimate the value of 2,500 accounts receivable outstanding, the best sampling method would be: a. variables estimation b. stop-and-go sampling c. cluster sampling d attributes estimation

variables estimation - Variables sampling method is good for estimating the dollar value

Working papers provide the documentary support for the internal auditor's report. Which of the following is not a good practice for working papers? a. working papers should be sufficient to support the internal auditors' report without additional verbal elaboration by the internal auditor b. working papers should be kept secure at all times to prevent accidental loss or unauthorized access c. working papers should be organized chronologically, that is, with the papers prepared earliest at the front of the file d. internal auditors within a given organization should develop standardized methods for organization and documentation

working papers should be organized chronologically, that is, with the papers prepared earliest at the front of the file