The audit team is planning to examine a sample of control policies and procedures.
Assume that, based on the intended degree of reliance on internal control, the audit
team wishes to control the risk of overreliance to 5% and establishes a tolerable
deviation rate of 8%. Based on past audits, the audit team would normally estimate the
expected population deviation rate at 2%; however, because of improvements in the
client’s internal control, they now feel that a rate of 1.25% is appropriate. Which of the
following is not true with respect to the impact of the reduction in the expected
population deviation rate on sample size?
A. The reduction in the expected population deviation rate would result in a smaller
sample size.
B. The audit team would likely need to have a reasonable justification for establishing a
lower expected population deviation rate.
C. The resultant sample size assuming the reduction in the expected population
deviation rate would be 77 items.
D. The reduction in the expected population deviation rate would result in the audit
team examining 19 fewer items.
Which of the following statements is not true with respect to the evidence that would be
gathered when assessments of control risk are high?
A. Auditors would be required to rely on external (rather than internal) forms of
evidence.
B. Auditors would be required to perform procedures at interim periods, rather than at
year end.
C. Auditors would be required to confirm a larger number of customer accounts
receivable balances.
D. Auditors would be required to obtain more evidence through direct personal
observation.
Prior to beginning the fieldwork on a new audit engagement in which the audit team
does not possess expertise in the industry in which the client operates, the audit team
should
A. reduce audit risk by lowering the preliminary levels of materiality.
B. design special substantive tests to compensate for the lack of industry expertise.
C. engage financial experts familiar with the nature of the industry.
D. obtain knowledge of matters that relate to the nature of the entity’s business.
Auditors of governmental units would not be presumed to be independent if they are
A. free from sources of personal impairment.
B. independent under AICPA Code of Professional Conduct rules.
C. auditing the branch of government to which they are assigned.
D. elected or appointed and reporting to a legislative body of government.
Judgments about the frequency of control deviations that identify a particular control
risk level are related to
A. sample rate of deviation.
B. tolerable rate of deviation.
C. upper limit rate of deviation.
D. expected population deviation rate.
The accounting, auditing, and investigating agency of the U.S. Congress, headed by the
U.S. Comptroller General is known as
A. the Federal Bureau of Investigation (FBI).
B. the U.S. General Accountability Office (GAO).
C. the Internal Revenue Service (IRS).
D. the United States Legislative Auditors (USLA).
When an entity uses a trust company as custodian of its marketable securities, the
possibility of concealing fraud most likely would be reduced if the
A. trust company has no direct contact with the entity employees responsible for
maintaining investment accounting records.
B. securities are registered in the name of the trust company rather than the entity itself.
C. interest and dividend checks are mailed directly to an entity employee who is
authorized to sell securities.
D. the trust company places the securities in a bank safe deposit vault under the
custodian’s exclusive control.
Is the confirmation of cash and accounts receivable required according to auditing
standards? Explain.
The focus of controls in the finance and investment cycle is on
A. proper authorizations and competent personnel.
B. computer controls over transactions.
C. physical security of assets.
D. prenumbered documents.
Which of the following is mostly concerned with the benefits derived from the
expenditure of funds?
A. Operational auditing.
B. Performance auditing.
C. Management auditing.
D. Financial statement auditing.
Which of the following is not an input control activity?
A. Reasonableness tests
B. Record counts
C. Financial totals
D. Hash totals
In a compilation engagement,
A. all appropriate disclosures must be presented.
B. managers or owners may choose to omit all the footnote disclosures.
C. financial statements must be presented in prescribed forms.
D. an auditor provides only negative assurance.
Which of the following is true with respect to the auditors’ report on summary financial
statements?
A. Auditors can only issue a report on summary financial statements if they have
expressed an unmodified opinion on the full financial statements.
B. The report will indicate whether the summary financial statements are fairly stated in
relation to the full financial statements.
C. The report will express negative assurance on whether the summary financial
statements are prepared in accordance with AICPA presentation guidelines.
D. The report will express an opinion on whether the summary financial statements
present the financial condition, results of operations, and cash flows in accordance with
generally accepted accounting principles.
Sources of financial and nonfinancial data in do not include
A. financial account information for comparable prior periods.
B. nonfinancial information such as physical production statistics.
C. company budgets and forecasts.
D. Bureau of Labor statistics.
Jones, CPA, is performing a sampling application to determine the average number of
patrons attending the performance of a musical on a weeknight. She randomly selects
five weeknight performances during the month of May and calculates an average of 230
patrons per performance, with an associated precision of 25 patrons. This precision is
determined based on a confidence level of 95 percent.
A. What is Jones’ exposure to sampling risk?
B. What is the precision interval associated with Jones’ sample?
C. Provide an explanation of the sampling interval calculated in (b) above.
D. If theaters needed an average attendance of 200 patrons per weeknight to remain
profitable, what would Jones’ conclusion be with respect to this question?
The reporting standards for an attestation are different from that of an audit because
they require
A. the report to include an opinion.
B. the report to identify the subject matter of the assertion being reported on.
C. the report requires a statement that the presentation is not in accordance with GAAP.
D. the report requires a disclosure of the procedures performed during the attestation.
When a company uses a service organization to prepare its payroll, the company’s
auditors
A. have no obligation concerning the internal controls at the service organization.
B. need to understand the internal controls over the transaction regardless of the
location of the control.
C. must audit the internal controls at the service organization.
D. should include the audit report of the service company’s auditors with their auditors’
report.
To determine the client’s planned amount and timing of production of a product, the
auditor will review the
A. sales forecast.
B. inventory reports.
C. production plan.
D. purchases journal.
Bama’s accounts receivable were recorded at $600,000. Assume that the auditor
determined a sample size of 20 customer accounts and prepared confirmations to be
addressed to those customers. One misstatement was determined; an account recorded
at $10,000 was confirmed to have a balance of $5,000.
What is the appropriate sampling interval?
A. $60
B. $250
C. $500
D. $30,000
The set of items about which a conclusion is made in a sampling application is referred
to as a(n)
A. sampling unit.
B. sample.
C. population unit.
D. population.
CPA Krogstad is the executive in charge of the Omaha office of the audit firm. He is
responsible for the practice in all areas of audit, tax, and consulting, but he does not
serve as a field audit partner or a reviewer. CPA Ward is the partner in charge of the
Dodger, Inc. audit (an SEC filing). The audit firm’s independence is impaired if
A. Krogstad owns Dodger common stock.
B. Krogstad’s brother owns 10 shares of Dodger common stock.
C. Ward’s sister-in-law is a sales representative with a territory in California.
D. Ward’s fellow partner CPA Felix in the Omaha office has a wife who owns Dodger
stock through a mutual fund held in her own employer’s employee benefit plan.
Which of the following concepts is least related to the risk of material misstatement?
A. Control risk
B. Detection risk
C. Inherent risk
D. Materiality
Counting different parts of inventory at different times of the year is called
A. LIFO inventory.
B. inventory cutoff.
C. cycle counting.
D. just-in-time inventory.
The primary consideration when planning whether to send confirmations of accounts
receivable before the balance sheet date is the
A. type of confirmation to be used.
B. client’s internal control over transactions affecting receivables.
C. availability of staff auditors.
D. number of customer accounts.
An audit failure occurs when
A. a client goes bankrupt or has serious financial difficulty.
B. auditors fail to conduct the examination in accordance with generally accepted
auditing standards, which results in the failure to identify material misstatements in the
financial statements.
C. auditors cannot collect audit fees owed to them by the client.
D. auditors are sued by a third party.
The precision interval has a ____ percent probability of including the ____.
A. sampling risk; adjusted sample estimate
B. sampling risk; true population value
C. 1 minus sampling risk; adjusted sample estimate
D. 1 minus sampling risk; true population value
Cutoff tests designed to detect credit sales made before the end of the year that have
been recorded in the subsequent year provide assurance about the PCAOB assertion of
A. presentation.
B. completeness.
C. rights.
D. existence.
An auditor that is requested to provide a report on application of requirements of an
appropriate financial reporting framework may not
A. issue an opinion on the accounting treatment of a hypothetical transaction.
B. discuss the requirements with the client’s current auditors.
C. limit the report to the sole use of specified parties.
D. state that differences in facts, circumstances or assumptions might change the
conclusion.
To obtain evidence that controls over access to computer programs are properly
functioning, audit teams most likely would
A. create checkpoints at periodic intervals after data processing to test for unauthorized
use of the system.
B. examine the transaction log to discover whether any transactions were lost or entered
twice due to a system malfunction.
C. enter invalid identification numbers or passwords to ascertain whether the system
rejects them.
D. vouch a random sample of processed transactions to assure proper authorization.
Which of the following events or activities may occur following the audit report release
date?
A. Interim testing
B. Roll-forward work
C. Subsequent events
D. Subsequently discovered facts
Which of the following categories of general controls includes retention and recovery
techniques for data and related programs?
A. Access to programs and data
B. Computer operations
C. Data file controls
D. Program change controls
Which of the following organizational positions would evaluate the existing system and
design new computerized processing systems and documentation?
A. Programmer
B. Systems analyst
C. Computer operator
D. Data conversion operator
Which of the following is the assertion with the highest inherent risk in auditing
inventory?
A. Completeness.
B. Rights.
C. Existence.
D. Properly classification on the balance sheet.