Which of the following statements is true regarding attributes sampling?
A. Once the population reaches a certain size, population size has a limited impact on
sample size.
B. Auditors should use attributes sampling to evaluate controls, regardless of the degree
of reliance being placed upon the controls.
C. When determining the appropriate sample size, the audit team will specifically
control its exposure to both the risk of overreliance and the risk of underreliance.
D. Tests of controls should only be applied to transactions occurring at the end of the
year under audit because the audit team wants to reach a conclusion about control risk
at year end.
For each of the tests of controls for sales and receivables, indicate the assertion that is
supported by placing the correct letter in the blank.
Under which of the following circumstances would a disclaimer of opinion on the
entity’s financial statements not be appropriate?
A. The financial statements fail to contain adequate disclosure of related-party
transactions.
B. The entity refuses to permit its attorney to furnish information requested in an
attorney letter.
C. The auditors are engaged after the date of the financial statements and are unable to
observe physical inventories or apply alternative procedures to verify their balances.
D. The auditors are unable to determine the amounts associated with illegal acts
committed by the entity’s management.
Which of the following is a definition of control risk?
A. The risk that a material misstatement will not be prevented or detected on a timely
basis by the client’s internal controls
B. The risk that the auditor will not detect a material misstatement
C. The risk that the auditor’s assessment of internal controls will be at less than the
maximum level
D. The susceptibility of material misstatement assuming there are no related internal
control policies or procedures
Which of the following statements include in the advertising of a CPA firm is
permissible according to Rule 502, Advertising and Other Forms of Solicitation.
A. “Bob Bullet, CEO of A-One Corp., states that we are the best auditors his company
has ever used.”
B. “We provide the best audit coverage of any firm in the state.”
C. “We audit the five largest manufacturing companies in the state.”
D. “We have several tax partners that work closely with Judges and IRS attorneys on
high-profile legal issues.”
An audit team is auditing sales transactions. One step is to vouch a sample of debit
entries from the accounts receivable subsidiary ledger back to the supporting sales
invoices. The purpose of this audit procedure is to establish that
A. sales invoices represent bona fide sales.
B. all sales have been recorded.
C. all sales invoices have been properly posted to customer accounts.
D. entries in the accounts receivable subsidiary ledger were properly invoiced.
An audit plan of substantive procedures for cash would not include
A. request a cutoff bank statement be mailed to the client.
B. request client to prepare bank reconciliations.
C. prepare a schedule of interbank transfers for a period of ten business days before and
after year-end date.
D. obtain a written client representation concerning compensating balance agreements.
Which of the following is required for a CPA firm to designate itself as “Members of
the American Institute of Certified Public Accountants” on its letterhead?
A. All owners must be members.
B. The owners whose names appear in the firm name must be members.
C. At least one of the owners must be a member.
D. The firm must be a dues-paying member.
Which of the following is NOT a key element of the definition of ethics?
A. Reflective choice
B. Moral principles
C. Definitive conclusions
D. Consequences of decisions
Which of the following approaches is most suitable for auditing the finance and
investment cycle?
A. Perform extensive tests of controls and limit substantive procedures to analytical
procedures.
B. Ignore internal controls and perform extensive substantive procedures.
C. Gain an understanding of internal controls and perform extensive substantive
procedures.
D. Ignore internal controls and limit substantive procedures to analytical procedures.
Which of the following represents a major difference in the use of monetary unit
sampling (MUS) and classical variables sampling?
A. MUS is more effective in controlling the auditors’ exposure to sampling risk than
classical variables sampling.
B. MUS considers both the expected misstatement and tolerable misstatement in the
determination of sample size, while classical variables sampling only considers the
expected misstatement.
C. MUS defines the sampling unit as a dollar of an account balance while classical
variables sampling defines the sampling unit as a component of an account balance.
D. MUS is a nonstatistical sampling method while classical variables sampling is a
statistical sampling method.
In the study of internal control, the auditor uses sampling to compare the ____ to the
_____.
A. error; overall materiality level
B. sampling risk; precision
C. deviation rate; tolerable rate of deviation
D. precision interval; upper limit on misstatement
Which of the following most likely would be detected by an auditor’s review of a
client’s sales cutoff?
A. Shipments lacking sales invoices and shipping documents.
B. Excessive write-offs of accounts receivable.
C. Unrecorded sales at year-end.
D. Lapping of year-end accounts receivable.
An auditor’s special report on financial statements prepared in conformity with the cash
basis of accounting should include a separate explanatory paragraph before the opinion
paragraph that
A. justifies the reasons for departing from generally accepted principles.
B. states whether the financial statements are fairly presented in conformity with a
special purpose framework.
C. refers to the note to the financial statements that describes the special purpose
framework.
D. explains how the results of operations differ from financial statements prepared in
conformity with generally accepted accounting principles.
Which of the following appropriately describes the effect of sample size on sampling
risk?
A. Selecting a smaller sample decreases sampling risk.
B. Selecting a larger sample increases sampling risk.
C. Selecting a smaller sample increases sampling risk.
D. The size of a sample is unrelated to sampling risk.
Proper separation of duties reduces the opportunities to allow persons to be in positions
to both
A. journalize entries and prepare financial statements.
B. record cash receipts and cash disbursements.
C. establish internal controls and authorize transactions.
D. perpetrate a fraud and then conceal it in the books.
Experience has shown that the many large fraudulent transactions can be found in
A. systematic processing of large volumes of day-to-day ordinary transactions.
B. payroll fraudsters’ mistakes in using unissued Social Security numbers.
C. petty cash embezzlements.
D. non-routine, nonsystematic journal entries.
An auditor noted that client sales had increased 10 percent for the year. At the same
time, cost of goods sold as a percentage of sales had decreased from 45 percent to 40
percent and year-end accounts receivable had increased by 8 percent. The auditor
interviewed the sales manager who stated that the increase in sales without a
corresponding increase in cost of goods sold was due to a price increase enacted by the
company during the year. How would the auditor best test the sales manager’s
representation?
A. Perform additional inquiries with sales personnel.
B. Obtain copies of all price lists in use during the year and vouch the prices to sales
invoices.
C. Send confirmations asking customers about unit prices paid for product.
D. Vouch vender invoices to payments made after year-end.
Which of the following statements is generally correct about the sample size in
statistical sampling when testing internal controls?
A. As the population size doubles, the sample size should increase by about 67%.
B. The sample size is inversely proportional to the expected population deviation rate.
C. There is no relationship between the tolerable rate of deviation and the sample size.
D. When evaluation very large populations, the population size has little or no effect on
the sample size.
Hamell Corporation is making a presentation to a prospective investor. The presentation
includes a projection showing that the company’s sales will be between $25,000,000
and $27,000,000 within the next three years. Hamell believes the information will be
better received if its CPA provides an attestation report on the projection. In order to
provide such a report the CPA must do all of the following EXCEPT
A. obtain knowledge about the client’s business.
B. evaluate the assumptions used in preparing the projection.
C. confirm expected sales with customers.
D. identify key factors affecting the information.
While performing an audit of accounts payable, Clayton, CPA, is using variables
sampling to determine the audited value of the account based on selected purchase
orders. Which of the following options is most likely to reduce the necessary sample
size?
A. A decrease in the level of tolerable misstatement
B. An increase in the expected level of misstatement
C. An increase in the variability of the size of accounts payable transactions
D. An increase in the necessary risk of incorrect acceptance
Which of the following is not an advantage of statistical sampling?
A. Statistical sampling provides auditors with a sufficient sample size that controls
exposure to sampling risk.
B. Statistical sampling uses selection methods that expose all items in the population to
selection.
C. Statistical sampling evaluates the sample evidence in such a manner that controls
exposure to sampling risk.
D. Statistical sampling deploys audit procedures that all auditors to more effectively
evaluate evidence.
Which of the following components of the upper limit on misstatements is based on the
possibility that the sampling interval contains a greater degree of misstatement than the
item examined by the auditor?
A. Basic allowance for sampling risk
B. Incremental allowance for sampling risk
C. Projected misstatement
D. Risk of incorrect acceptance
Auditors are evaluating an account with a recorded balance of $500,000 using
mean-per-unit estimation. This account is comprised of 1,000 individual components.
The auditors sampled 100 items and determined a total audited value of $52,500. Using
a risk of incorrect acceptance of 10%, the auditors determined a precision of $40,000. If
the tolerable misstatement is $50,000, which of the following is not true?
A. The estimated recorded value of this account is $525,000.
B. A 90% probability exists that the true population value falls between $460,000 and
$540,000.
C. The auditors would conclude that the account balance is fairly stated.
D. The probability that the auditors will incorrectly accept a materially misstated
account balance is 10%.
Which of the following audit procedures would not likely be performed for audits of
investments?
A. Read board of directors’ minutes for authorization of investment strategies.
B. Confirm investments with registrar.
C. Confirm investments with broker or trustee.
D. Compare valuation to published market prices.
Which of the following is not a valid reason for an auditor deciding not to send
accounts receivable confirmations?
A. The balance is immaterial.
B. Confirmations would be ineffective.
C. The client requests alternative procedures be performed instead.
D. Other procedures provide sufficient competent evidence.
Which of the following types of audit evidence provides the least assurance of
reliability?
A. Receivable confirmations received from the client’s customers.
B. Prenumbered receiving reports completed by the client’s employees.
C. Prior months’ bank statements obtained from the client.
D. Municipal property tax bills prepared in the client’s name.
Which of the following personnel department procedures reduces the risk of payroll
fraud and represents an appropriate responsibility for the department?
A. Distributing paychecks.
B. Authorizing overtime hours.
C. Authorizing the addition or deletion of employees from the payroll.
D. Collecting and retaining unclaimed paychecks.
The Standards for the Professional Practice of Internal Audit of the Institute of Internal
Auditors (IIA) is classified in three major categories. Which of the following is not one
of these categories?
A. Attribute standards.
B. Performance standards.
C. Governance standards.
D. Implementation standards.
Which of the following internal audits is generally not a type of government audit?
A. Review of compliance with policies, plans, procedures, laws, and regulations.
B. Review of the economy and efficiency in the use of resources.
C. Review of the means of safeguarding assets.
D. Review of the results of programs.
Which of the following is not true with respect to the risk of incorrect acceptance?
A. This risk provides the auditor with an efficiency loss.
B. This risk results in the auditor making an incorrect conclusion about the client’s
account balance or class of transactions.
C. This risk occurs when the sample results suggest that the account balance is fairly
stated.
D. This risk is controlled by the auditor in determining sample size under monetary unit
sampling (MUS).
An auditor who wished to test for the existence or occurrence of inventory would most
likely select a sample of inventory items from the perpetual records and
A. trace additions to the general ledger.
B. vouch additions to receiving reports.
C. vouch additions to sales invoices.
D. trace receipts to receiving reports.
Can an auditor place complete reliance on internal control to the exclusion of other
audit procedures?Explain your answer using the audit risk model.
For each of the internal contro1 questions for notes payable, indicate by letter the
related ASB transaction assertion. Answers may be used more than once.
(Appendix) In each of the following situations, indicate whether Walters, CPA is using
unrestricted random (UR), systematic random (SR), haphazard (H), or block (B)
selection.
____ 1. Walters created a list of all sales invoices to verify that they were supported by
the appropriate shipping documents. Invoice number 15 was selected first for
examination, followed by the invoices numbered 30, 45, 60, 75, 90, and so on until 40
invoices had been selected.
____ 2. To test the occurrence assertion regarding sales invoices, Walters randomly
selected invoices from the database storage disk for examination.
____ 3. To ensure proper authorization of payroll functions, Walters selected all
transactions during the last 5 days of each pay period to be included in the sample.
____ 4. Sales invoices are commonly stored in a filing cabinet during the 30-day return
period before being input in the company’s database. To ensure the 30-day return period
was not exceeded, Walters decided to pull a few invoices from each drawer until the
desired sample size was collected for examination.
____ 5. T&T Company’s purchase orders are already pre-numbered and listed in
numerical order within the company’s database. As a result, Walters was able to use one
of the firm’s computer programs to identify random numbers and match each number
with a corresponding purchase order to test the accuracy assertion.
____ 6. Using a random number table, Walters identified a series of 50 numbers and
located the corresponding employee identification number to select time cards for
examination.
____ 7. Walters used a computer listing of T&T’s credit memos, which totaled 2,400
items, to select 4 random starting points for examination. The remaining memos were
identified for testing by selecting every 24th item until the sample size reached 100
memos.
Below are descriptions of how key parameters are determined in an attributes sampling
plan. Match each description of a situation with the related term. Each parameter is
associated with only one description.
1. Expected population deviation rate. A. Determined judgmentally by the
auditor based on the acceptable level of control risk.
2. Sample size. B. Estimated based on prior audits or a
pilot sample of controls.
3. Population size. C. Determined after reviewing physical
representation, such as number of sales invoices processed
during the year.
4. Sample rate of deviation. D. Determined based on tolerable rate of
deviation, expected population deviation rate, and the risk
of overreliance.
5. Allowance for sampling risk. E. Calculated by dividing the number of
deviations by the sample size.
6. Tolerable rate of deviation. F. Determined based on the sample size,
number of deviations noted, and risk of overreliance.
7. Upper limit rate of deviation. G. Calculated by subtracting the sample
rate of deviation from the upper limit rate of deviation.
When performing procedures in a search of unrecorded liabilities, auditors can utilize
various sources of evidence/information (e.g., documents, files, management and
clerical personnel).
After checks are signed for vendor invoices, why should vouchers be marked PAID or
otherwise mutilated?
The _____________________________________ inspects the goods received for
_____________________________ and _____________________________ and then
puts them in the hands of other responsible persons.
Tracing production cost accumulation forward into the production cost reports in the
cost accounting department is a test for ____________________________.
How do government auditors achieve objectivity?
D. Jackson, CPA, audited Washington Company’s financial statements for the year
ended December 31, 2007. On November 1, 2008, Washington notified Jackson that it
was changing auditors and that Jackson’s services were being terminated. On November
5, 2008, Washington invited Lincoln, CPA, to make a proposal for an engagement to
audit its financial statements for the year ended December 31, 2008.
After checks are signed for vendor invoices, why should vouchers be marked “paid” or
otherwise mutilated?