Accountants should be under orders to record sales and accounts receivable when
A. the customer’s order is received.
B. all supporting documentation of shipping is in order.
C. the item has been paid for.
D. the terms are agreed upon.
To provide assurance that each voucher is submitted and paid only once, an auditor
most likely would examine a sample of paid vouchers and determine whether each
voucher is
A. supported by a vendor’s invoice.
B. stamped “paid” by the check signer.
C. prenumbered and accounted for.
D. approved for authorized purchases.
A sample selection method in which items are selected in a nonsystematic manner is
referred to as
A. block selection.
B. haphazard selection.
C. systematic random selection.
D. unrestricted random selection.
An auditor selected items for test counts while observing a client’s physical inventory.
The auditor then traced the test counts to the client’s inventory listing. This procedure
most likely obtained evidence concerning management’s balance assertion of
A. rights and obligations.
B. completeness.
C. existence.
D. accuracy and valuation.
An auditor selected items from the client’s detailed inventory listing (that agreed to the
financial statements). During the physical inventory observation, the auditor then found
each item selected and counted the number of units on hand. Assuming that the amount
on hand was the same as the amount in the client’s detailed inventory listing, this
procedure most likely would provide evidence concerning management’s assertion of
A. completeness.
B. valuation.
C. presentation and disclosure.
D. existence.
E. rights and obligations.
Which of the following types of sampling applications can appropriately be used under
generally accepted auditing standards?
A. Statistical sampling: Yes; Nonstatistical sampling: Yes
B. Statistical sampling: Yes; Nonstatistical sampling: No
C. Statistical sampling: No; Nonstatistical sampling: Yes
D. Statistical sampling: No; Nonstatistical sampling: No
The inherent risk that accounts payable may be omitted or otherwise understated
typically is
A. low.
B. high.
C. moderate.
D. indeterminate.
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%. In addition, based on prior
engagements, the audit team anticipates an expected deviation rate of 2%. What would
be the impact of reducing the tolerable rate of deviation from 7% to 5% on the sample
size?
A. Increase sample size by 181 items
B. Decrease sample size by 181 items
C. Increase sample size by 93 items
D. Decrease sample size by 93 items
A primary advantage of using computer-assisted audit techniques (CAATs) packages to
audit the financial statements of a client that uses computerized information systems is
that the auditor may
A. access information stored on computer files even with a limited understanding of the
client’s hardware and software features.
B. consider increasing the use of substantive tests of transactions in place of analytical
procedures.
C. substantiate the accuracy of data by using self-checking digits and hash totals.
D. reduce the level of required tests of controls to a relatively small amount.
A vendor’s invoice received and held by the client would be considered what type of
evidence?
A. External
B. Internal
C. External-internal
D. Written representation
What procedures should an auditor perform for a positive confirmation that is not
returned by the client’s customer?
Attestation engagements may be more difficult than financial statement audits when
A. the establishment of suitable measurement criteria is difficult.
B. internal controls are difficult to assess.
C. when management may not understand the underlying assumptions of the attestation.
D. when the report may be submitted to individuals with insufficient knowledge of the
nature of an attestation engagement.
Lauren hires Humphrey, a CPA, to audit her financial statements. The engagement letter
includes a statement acknowledging that audited financial statements are needed for a
filing with a regulatory body. Humphrey completes the audit and issues an unqualified
opinion. Based on the audited financial statements, Key Largo Bank approves a loan to
Lauren. Four months later, Lauren files for bankruptcy. Key Largo Bank would most
likely sue Humphrey claiming
A. it was in privity of the contract.
B. it was a primary beneficiary.
C. it was a foreseen party.
D. it was a foreseeable party.
The production planner determines what inventory is needed for future production
using
A. finished goods inventory status report for the product being produced.
B. bill of materials for the product being produced.
C. standard costs for the product being produced.
D. manpower availability report from human resources.
The effectiveness of general controls is an important consideration for audit teams when
assessing control risk on an audit. Which management assertions are primarily affected
by general controls?
A. Completeness and Accuracy
B. Occurrence and Rights and Obligations
C. Accuracy and Occurrence
D. Completeness and Occurrence
Program audits do not include determining
A. the extent to which the desired results or benefits established by the legislature are
being achieved.
B. the effectiveness of organizations, programs, activities, or functions.
C. whether the agency has complied with laws and regulations applicable to the
program.
D. whether the financial statements of an audited entity fairly present the financial
position in accordance with GAAP.
Roberts, CPA, decided to use monetary unit sampling in the audit of a client’s accounts
receivable balance. The recorded amount of the accounts receivable control account
totaled $2,000,000 and consisted of approximately 5,000 accounts. Roberts established
a tolerable misstatement of $100,000, a risk of incorrect acceptance of 5%, and an
expected misstatement of $10,000.
a. Calculate the sample size.
b. Calculate the sampling interval.
When a production plan is complete the production planner needs to determine
A. what raw materials need to be ordered.
B. labor rates for the jobs are needed to produce the orders.
C. which vendors need to supply raw materials.
D. what equipment needs to be purchased to meet production quotas.
When auditing PP&E, the auditor’s approach is generally to
A. examine evidence supporting the amounts in the ending balance.
B. examine evidence supporting additions during the year.
C. follow a reliance strategy, testing internal controls and analytical procedures.
D. concentrate on finding unrecorded assets.
Place the following steps in the sampling process in the order in which they are
performed.
1 = Measure sample items
2 = Select sample items
3 = Define the population
A. 1, 2, 3
B. 3, 1, 2
C. 2, 1, 3
D. 3, 2, 1
The risk of material misstatement differs from detection risk in that it
A. arises from the misapplication of audit procedures.
B. may be assessed in either quantitative or non-quantitative terms.
C. exists independently of the financial statement audit.
D. can be changed at the auditor’s discretion.
The first significant case under section 11 of the Securities Act of 1933 charging
auditors with not conducting a reasonable investigation was
A. Rusch Factors v. Levin.
B. United States v. Benjamin.
C. Escott v. BarChris Construction Corp.
D. Ernst & Ernst v. Hochfelder.
The definition of internal audit includes all of the following except
A. independence and objectivity.
B. provision of assurance and consulting activity.
C. determination of efficient and effective performance.
D. additional value and improved operations.
Which of the following statements is most accurate regarding sufficient and appropriate
documentation?
A. Accounting estimates are not considered sufficient and appropriate documentation.
B. Sufficient and appropriate documentation should include evidence that the audit
working papers have been reviewed.
C. If additional evidence is required to document significant findings or issues, the
original evidence is not considered sufficient and appropriate and therefore should be
deleted from the working papers.
D. Audit documentation is the property of the client, and sufficient and appropriate
copies should be retained by the auditor for at least five years.
Other Comprehensive Basis of Accounting (OCBOA) includes all of the following
EXCEPT
A. statements that conform to a regulatory agency.
B. statements prepared on a tax basis.
C. statements that conform to accounting principles that are generally accepted.
D. statements prepared on a cash basis.
Selecting a sample of cost accounting reports for labor and vouching it to time records
is a procedure designed to test the ASB transaction assertion of
A. occurrence.
B. valuation.
C. completeness.
D. presentation and disclosure.
When disclaiming an opinion due to a client-imposed scope limitation, auditors should
describe the nature of the scope limitation in an additional paragraph and modify the
A. introductory paragraph.
B. introductory paragraph and Auditor’s Responsibility section.
C. introductory paragraph, Auditor’s Responsibility section, and opinion paragraph.
D. Auditor’s Responsibility section and opinion paragraph.
Which of the following is not true with respect to the responsibilities for establishing
generally accepted auditing standards?
A. Auditing standards for both public and private entities must be formally approved by
the Securities and Exchange Commission.
B. Interpretive publications are issued by the AICPA to provide guidance on the
application of generally accepted auditing standards in specific circumstances.
C. The PCAOB is the body with formal authority for the creation of auditing standards
for the audits of public entities.
D. If specific guidance is not provided by PCAOB Auditing Standards, auditors may
refer to Statements on Auditing Standards that have not been amended or superseded.
A responsible party for information to subject to an attestation engagement would not
include
A. the client’s controller.
B. the independent accountant.
C. the client’s Vice President of Marketing.
D. a client employee named in a contract or regulation as being responsible for the
information.
Which of the following best describes the primary role and responsibility of
independent external auditor?
A. Produce a company’s annual financial statements and notes.
B. Express an opinion on the fairness of a company’s annual financial statements and
footnotes.
C. Provide business consulting advice to audit clients.
D. Obtain an understanding of the client’s internal control structure and give
management a report about control problems and deficiencies.
An auditor wishes to perform tests of controls on a client’s cash disbursements
procedures. If the control activities leave no audit trail of documentary evidence, the
auditor most likely will test the activities by
A. confirmation and observation.
B. observation and inquiry.
C. analytical procedures and confirmation.
D. inquiry and analytical procedures.
What is an auditor’s evaluation of a statistical sample for attributes when a test of 100
documents results in 4 deviations if the tolerable rate of deviation is 5%, the expected
population deviation rate is 3%, and the allowance for sampling risk is 2%?
A. Accept the sample results as support for planned reliance on the control because the
tolerable rate of deviation less then allowance for sampling risk equals the expected
population deviation rate.
B. Modify planned reliance on the control because the sample rate of deviation plus the
allowance for sampling risk exceeds the tolerable rate of deviation.
C. Modify planned reliance on the control because the tolerable rate of deviation plus
the allowance for sampling risk exceeds the expected population deviation rate.
D. Accept the sample results as support for planned reliance on the control because the
sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate
of deviation.
Which of the following situations represents an internal control weakness in the payroll
department?
A. Payroll department personnel are rotated in their duties.
B. Paychecks are distributed by the employees’ immediate supervisor.
C. Payroll records are reconciled with quarterly tax reports.
D. The timekeeping function is independent of the payroll department.
Interest expense related to interest-bearing liabilities could be audited using analytical
procedures. Describe how this might be done and how the results would be used.
Below are descriptions representing different sampling risks associated with attributes
and variables sampling. Match the term is most closely associated with the definition.
Each term is associated with only one description.
1.Risk of assessing control risk too high. A.The auditor concludes that
the account balance is fairly stated when, in fact, it is
misstated.
2.Risk of incorrect rejection. B.The client’s internal
controls are not functioning effectively.
3.Risk of assessing control risk too low. C.The auditor’s substantive
procedures reveal that the client’s account balance is not fairly
stated.
4.Risk of incorrect acceptance. D.The auditor’s sample
indicates that the client’s control policies and procedures are not
functioning effectively.
Indicate how each of the following conditions affect sample size in a monetary unit
sampling application by using the letters I (increase), D (decrease), or N (no effect),
assuming that all other factors are held constant.
___ 1. An increase in the expected misstatement from $5,000 to $10,000.
___ 2. A decrease in the population size from $1,500,000 to $1,350,000.
___ 3. An increase in the tolerable misstatement from $25,000 to $35,000.
___ 4. An increase in the risk of incorrect rejection from 5 percent to 10 percent.
___ 5. A decrease in the risk of incorrect acceptance from 5 percent to 1 percent.
For each of the descriptions 1-6, match the correct word or phrase from A-H.
Explain the bottom-up approach and the top-down approach to quantifying overall
materiality.
XYZ Company has investment securities held by a broker. An auditor is reviewing the
last broker’s statement for the year. For each of the tests 1-5, select the ASB balance
assertions listed in A-D that the auditor is testing.
The test of controls for purchases, cash disbursements, and accounts payable include
the following audit procedures. Next to each of the procedures, indicate the related
transaction assertion.
Indicate whether each of the following characteristics relate to the risk of overreliance
(O), risk of underreliance (U), both (B), or neither (N).
____ 1. Is specifically considered by the auditor in determining sample size and
evaluating sample results.
____ 2. Is characterized by the auditor’s sample indicating that the control is
functioning effectively.
____ 3. Results in the auditor drawing an incorrect conclusion with respect to the
population being examined.
____ 4. Is also referred to as the risk of assessing control risk too high.
____ 5. Results in an effectiveness loss to the auditor.
____ 6. Is used to determine the appropriate sample selection method.
____ 7. Is characterized by the population deviation rate being less than the tolerable
rate of deviation.
____ 8. Is an example of a sampling risk to which the auditor is exposed when
performing tests of controls.