1
Q
Which phase reflects rising economic activity, rising profits, strong growth, increased demand, rising prices, and lower unemployment?
A) recovery
B) trough
C) contractionary
D) peak
E) expansionary
A
E) expansionary
2
Q
Which phase reflects recovering economic activity, rising demand, profit stabilization, and increases in employment?
A) recovery
B) trough
C) contractionary
D) peak
E) expansionary
A
A) recovery
3
Q
Which phase is the highest point of economic activity, where profits are at their highest levels, firms face capacity constraints, and input shortages lead to higher costs and higher price levels?
A) recovery
B) trough
C) contractionary
D) peak
E) expansionary
A
D) peak
4
Q
Which phase reflects falling economic activity, slowing (decreasing growth) falling profits, reduced demand and higher unemployment?
A) recovery
B) trough
C) contractionary
D) peak
E) expansionary
A
C) contractionary
5
Q
Which phase is the low point of economic activity, where profits are at their lowest levels, and firms have excess capacity and must reduce costs and their workforces?
A) recovery
B) trough
C) contractionary
D) peak
E) expansionary
A
B) trough
6
Q
The primary objective of procedures performed to obtain an understanding of the entity and its environment is to provide an auditor with:
A. An evaluation of the consistency of application of management’s policies.
B. A basis for issuing an opinion on the financial statements.
C. Audit evidence to use in assessing inherent risk.
D. Knowledge necessary for risk assessment and audit planning.
A
D. Knowledge necessary for risk assessment and audit planning
Auditor does this to assess the risk of material misstatement and design/perform further audit procedures
7
Q
When the government establishes a fixed price for a good to meet the economic objective of price stability and product affordability, what are the anticipated long-term effects on consumers and producers?
A. Consumers will buy less and producers will make less.
B. Consumers will buy more and producers will make less.
C. Consumers will buy less and producers will make more.
D. Consumers will buy more and producers will make more.
A
B. Consumers will buy more and producers will make less
Consumers (demand) will increase because price is not rising, staying fixed. Producers (suppliers) will make less because they don’t see it profitable to continue producing the good
8
Q
Which of the following are leading economic indicators of business cycles?
A. Manufacturers’ new orders for consumer goods in constant dollars, number of new building permits, and change in manufacturers’ unfilled orders for durable goods in constant dollars.
B. Number of employees on nonagricultural payrolls, total industrial production, and manufacturing and trade sales in constant dollars.
C. Ratio of manufacturing and trade inventories to sales in constant dollars, average prime rate charged by banks, and the ratio of consumer investment credit outstanding to personal income.
D. Results of decisions requiring clear knowledge of the state of the economy.
A
A. Manufacturers’ new orders for consumer goods in constant dollars, number of new building permits, and change in manufacturers’ unfilled orders for durable goods in constant dollars
9
Q
Which of the following are coincident economic indicators of business cycles?
A. Manufacturers’ new orders for consumer goods in constant dollars, number of new building permits, and change in manufacturers’ unfilled orders for durable goods in constant dollars.
B. Number of employees on nonagricultural payrolls, total industrial production, and manufacturing and trade sales in constant dollars.
C. Ratio of manufacturing and trade inventories to sales in constant dollars, average prime rate charged by banks, and the ratio of consumer investment credit outstanding to personal income.
D. Results of decisions requiring clear knowledge of the state of the economy.
A
B. Number of employees on nonagricultural payrolls, total industrial production, and manufacturing and trade sales in constant dollars
10
Q
Which of the following are lagging economic indicators of business cycles?
A. Manufacturers’ new orders for consumer goods in constant dollars, number of new building permits, and change in manufacturers’ unfilled orders for durable goods in constant dollars.
B. Number of employees on nonagricultural payrolls, total industrial production, and manufacturing and trade sales in constant dollars.
C. Ratio of manufacturing and trade inventories to sales in constant dollars, average prime rate charged by banks, and the ratio of consumer investment credit outstanding to personal income.
D. Results of decisions requiring clear knowledge of the state of the economy.
A
C. Ratio of manufacturing and trade inventories to sales in constant dollars, average prime rate charged by banks, and the ratio of consumer investment credit outstanding to personal income
11
Q
An audit firm is currently in the planning phase of a new retail client audit. Which of the following analytical procedures would most likely not be performed during the planning phase of the audit?
A. Reviewing financial statements and disclosures for unusual transactions or unexpected balances.
B. Comparing current year’s sales per store square foot with the prior year.
C. Comparing the client’s current year’s same-store sales with budgeted amounts.
D. Obtaining selected client financial ratios and comparing to industry averages.
A
A. Reviewing financial statements and disclosures for unusual transactions or unexpected balances
Instead, this would be analytical procedure done by partner/manager during the overall review stage of the audit
12
Q
When performing analytical procedures in the planning stage, the auditor most likely would develop expectations by reviewing which of the following sources of information?
A. Unaudited information from internal quarterly reports.
B. Various account assertions in the planning memorandum.
C. The control risk assessment relating to specific financial assertions.
D. Comments in the prior-year’s management letter.
A
A. Unaudited information from internal quarterly reports
Analytical procedures in planning stage involves comparisons of recorded amounts to independent expectations using financial and non-financial data aggregated at high level
13
Q
An auditor who performed analytical procedures that compared current-year financial information to the comparable prior period noted a significant increase in net income. Given this result, which of the following expectations of recorded amounts would be unreasonable?
A. A decrease in accounts payable.
B. A decrease in costs of goods sold as a percentage of sales.
C. A decrease in retained earnings.
D. A decrease in notes payable.
A
C. A decrease in retained earnings
Decrease in retained earnings makes the least amount of sense. If there was an increase in net income, we would expect an increase in retained earnings instead, since net income and retained earnings are closely tied together
14
Q
Which of the following would an auditor most likely calculate as part of audit planning?
A. Inventory turnover rates for individual products
B. The average age of accounts receivable by customer type
C. Expected interest expense for a bond issue
D. The change in gross profit percentage
A
D. The change in gross profit percentage
This is a gross profitability ratio that can signal issues with other accounts and spot unusual fluctuations or trends
15
Q
An auditor performs procedures to obtain an understanding of the entity and its environment, including its internal control. In what manner are the results from those procedures most likely to be used?
A. To provide evidence on the operating effectiveness of key internal controls
B. To assess the risk of a material misstatement of the financial statements
C. To determine the acceptable level of audit risk
D. To prepare the terms of the engagement letter
A
B. To assess the risk of a material misstatement of the financial statements
16
Q
An auditor obtains knowledge about a new client’s business and its industry to:
A. Make constructive suggestions concerning improvements to the client’s internal control.
B. Evaluate whether the aggregation of identified misstatements causes the financial statements taken as a whole to be materially misstated.
C. Develop an attitude of professional skepticism concerning management’s financial statement assertions.
D. Understand the events and transactions that may have an effect on the client’s financial statements.
A
D. Understand the events and transactions that may have an effect on the client’s financial statements
17
Q
An auditor is required to obtain an understanding of the entity’s business, including business cycles and reasons for business fluctuations. What is the audit purpose most directly served by obtaining this understanding?
A. To decide whether it will be necessary to perform analytical procedures.
B. To allow the auditor to more accurately perform tests of controls.
C. To enable the auditor to accurately identify significant deficiencies in internal control.
D. To assist the auditor in accurately interpreting information obtained during an audit.
A
D. To assist the auditor in accurately interpreting information obtained during an audit
This helps auditor to better understand news and transactions that may affect the FS, perform appropriate tests, and understand the results of those tests
18
Q
Which of the following represents the procedure managers use to identify whether the company has information that unauthorized individuals want, how these individuals could obtain the information, the value of the information, and the probability of unauthorized access occurring?
A. Test of controls.
B. Risk assessment.
C. Systems assessment.
D. Disaster recovery plan assessment.
A
B. Risk assessment
19
Q
Which of the following represents the procedures to determine if described controls have been placed in operation and are working effectively?
A. Test of controls.
B. Risk assessment.
C. Systems assessment.
D. Disaster recovery plan assessment.
A
A. Test of controls
20
Q
Which of the following is not a risk assessment procedure recommended by PCAOB standards when performing an issuer audit?
A. Inquiring of client management and the audit committee about the risks of material misstatement.
B. Performing analytical procedures related to the client’s revenue.
C. Performing preliminary test of controls over selected transaction cycles.
D. Developing an understanding of the client’s internal control over financial reporting.
A
C. Performing preliminary test of controls over selected transaction cycles
This is not a recommended risk assessment procedure, instead, complete risk assessment first. OR completing risk assessment may be done in conjunction with substantive audit procedures
21
Q
An audit firm has been hired to perform an audit for a new, large public client. In order to gain an understanding of the client and their environment, the audit firm should gather information on the following factors with the exception of:
A. Understanding the client’s selection and application of accounting policies and evaluate whether the accounting policies are appropriate for the client’s business.
B. Evaluating the thoroughness of management’s financial performance review to determine if business performance is properly measured.
C. Reviewing the client’s corporate objectives and strategies that are used to achieve these objectives.
D. Obtaining an understanding of the client’s industry and regulatory environment.
A
B. Evaluating the thoroughness of management’s financial performance review to determine if business performance is properly measured
WHEN GAINING UNDERSTANDING, THE MAIN PURPOSE IS TO GATHER INFORMATION< NOT TO DETERMINE FLAWS IN PERFORMANCE
22
Q
Which of the following activities should an auditor perform to obtain sufficient knowledge of the information system as it relates to financial reporting?
A. Understand the related electronic records and specific accounts involved in initiating, authorizing, recording, processing, and reporting transactions.
B. Inquire of internal audit personnel as to the likelihood of material misstatements.
C. Understand the financial reporting process used to prepare financial statements, excluding significant accounting estimates.
D. Inquire of management about business risks to identify, analyze, and manage risks that affect the entity’s objectives.
A
A. Understand the related electronic records and specific accounts involved in initiating, authorizing, recording, processing, and reporting transactions
23
Q
The consumer price index (CPI) is commonly used to evaluate which of the following characteristics of the economy?
A. Price stability
B. Economic growth
C. Full employment
D. Positive balance of payments
A
A. Price stability
CPI measures changes in average price of consumer goods and services
24
Q
The gross domestic product (GDP) is commonly used to evaluate which of the following characteristics of the economy?
A. Price stability
B. Economic growth
C. Full employment
D. Positive balance of payments
A
B. Economic growth
25
The trough of a business cycle is generally characterized by:
A. Shortages of essential raw materials and rising costs.
B. Increasing purchasing power and increasing capital investments.
C. Unused productive capacity and an unwillingness to risk investments.
D. Declining purchasing power and unused productive capacity.
C. Unused productive capacity and an unwillingness to risk investments
Trough is an economic low point with no positive indicators for future
26
The recovery phase of a business cycle is generally characterized by:
A. Shortages of essential raw materials and rising costs.
B. Increasing purchasing power and increasing capital investments.
C. Unused productive capacity and an unwillingness to risk investments.
D. Declining purchasing power and unused productive capacity.
B. Increasing purchasing power and increasing capital investments
27
The inflation phase of a business cycle is generally characterized by:
A. Shortages of essential raw materials and rising costs.
B. Increasing purchasing power and increasing capital investments.
C. Unused productive capacity and an unwillingness to risk investments.
D. Declining purchasing power and unused productive capacity.
D. Declining purchasing power and unused productive capacity
28
At the peak of a business cycle, which of the following conditions is most true?
A. Output (GDP) tends to be below the potential level of output.
B. There is likely to be an excess supply of labor and business inventories are likely to be high.
C. The overall price level is likely to be falling.
D. Capacity constraints and labor shortages are likely to put upward pressure on the overall price level.
D. Capacity constraints and labor shortages are likely to put upward pressure on the overall price level
29
Economic activity is characterized by fluctuations known as business cycles. Which of the following statements properly describes the corresponding phase of the business cycle?
A. A contractionary phase is characterized by an increase in economic activity due to increased business contracts. This stage tends to come after a trough. During this phase, firm profits will generally be increasing due to the increased activity.
B. A trough is the lowest point of economic activity. During a trough, firm profits are likely to be at their lowest level. Firms often try to reduce the size of their workforce and reduce other costs.
C. A peak is the highest point of economic activity and generally follows a contractionary phase. Firm profits will generally be at their highest because costs are at their lowest.
D. An expansionary phase is characterized by rising economic activity and growth. Firm profits are likely to be dropping, as the firm faces capacity constraints and higher competition.
B. A trough is the lowest point of economic activity. During a trough, firm profits are likely to be at their lowest level. Firms often try to reduce the size of their workforce and reduce other costs
30
Which of the following would indicate that the economy is in an expansionary phase?
A. Potential national income will exceed actual national income.
B. Building up of inventories is in excess of consumer demand.
C. The economy’s resources are underused.
D. Businesses increase capital investment.
D. Businesses increase capital investment
31
Which of the following would indicate that the economy is in a contractionary or trough phase ?
A. Potential national income will exceed actual national income.
B. Building up of inventories is in excess of consumer demand.
C. The economy’s resources are underused.
D. Businesses increase capital investment
B. Building up of inventories is in excess of consumer demand
Also when the demand for goods and services declines
32
Which of the following conditions is most true during a recession:
A. The natural rate of unemployment will increase dramatically.
B. Output (GDP) will be increasing.
C. Actual output will exceed potential output.
D. Potential output will exceed actual output
D. Potential output will exceed actual output
33
Which one of the following most accurately describes the normal sequence of a business cycle?
A. Trough, contraction, expansion, and peak.
B. Peak, contraction, expansion, and trough.
C. Expansion, peak, contraction, and trough.
D. Expansion, contraction, trough, and peak.
C. Expansion, peak, contraction, and trough
34
Which of the following economic indicators tends to occur as a result of economic activity?
A. Building permits for residences.
B. Average duration of unemployment.
C. Manufacturing and trade sales.
D. Average new unemployment claims.
B. Average duration of unemployment
35
In trying to predict how long the economy will be in its current recovery phase before entering an expansionary phase, economists will look at all of the following indicators except:
A. The length of time, on average, that job seekers are unemployed.
B. Data regarding new claims for unemployment.
C. Prices for materials used in production.
D. Building permits for new home construction.
A. The length of time, on average, that job seekers are unemployed
This answer choice is the only lagging indicator, which follows economic activity and provides signals after the fact
Choice B, C and D are all leading indicators, which help on predicting economic activity
36
Projections indicate that the economy is entering a slowdown. What is the expected outcome in the near future?
A. A drop in interest rates
B. Inflationary pressures
C. Wage hikes
D. Increasing demand for credit
A. A drop in interest rates
This is a move that the government and Federal Reserve would consider to help stimulate the economy for growth to combat the slowdown
37
An auditor is considering internal control in an automated environment. Under these circumstances, the auditor would need to focus on automated controls for all of the following reasons except:
A. Much of the information used in monitoring the internal control system may be provided through use of information technology.
B. Even manual controls may be dependent to some extent on the effective functioning of automated controls.
C. It is more efficient and cost-effective to focus on automated controls rather than manual controls.
D. Unauthorized access to data, systems, or programs creates an additional control risk.
C. It is more efficient and cost-effective to focus on automated controls rather than manual controls
This is not a true statement. Evaluation of efficiency and effectiveness must be performed on client to client basis
38
Internal control is relevant to:
I.An entire entity.
II.An entity's operating units.
III.An entity's business functions.
A. I only.
B. II only.
C. I, II, and III.
D. III only.
C. I, II, and III
39
In obtaining an understanding of the entity and its environment, including its system of internal control, an auditor is required to obtain knowledge about the:
A. Controls related to each principal transaction class and account balance.
B. Consistency with which the internal controls are currently being applied.
C. Effectiveness of the internal controls that have been placed in operation.
D. Design of relevant controls pertaining to financial reporting in each of the five internal control components.
D. Design of relevant controls pertaining to financial reporting in each of the five internal control components
40
The responsibility to establish, maintain and monitor controls is that of the entity's:
A. Management.
B. Accounting department.
C. External auditor.
D. Internal auditor.
A. Management
Responsible for establishing, maintaining and monitoring internal controls
41
The responsibility to contribute to monitor controls is that of the entity's:
A. Management.
B. Accounting department.
C. External auditor.
D. Internal auditor
D. Internal auditor
42
The responsibility to obtain sufficient knowledge of the system of internal control is that of the entity's:
A. Management.
B. Accounting department.
C. External auditor.
D. Internal auditor
C. External auditor
43
Which of the following would be considered a detective control over standing data?
A. Change control
B. Access and authorization control
C. Reconciliation of changes to the data
D. Read-only rights
C. Reconciliation of changes to the data
Performing reconciliations is detective control because it reviews changes
44
Which of the following would be considered a preventive control over standing data?
A. Change control
B. Access and authorization control
C. Reconciliation of changes to the data
D. Read-only rights
Choice A, B or D are all preventive controls
45
Computing Corp. just hired Janice Thompson as its new security administrator. This role will allow Janice to grant access to the system for the appropriate personnel. Janice is also a talented computer programmer, and because Computing Corp. needs a new programmer, it has agreed to pay Janice more to take on that role as well. This violates what type of control?
A. Access control lists
B. Segregation of duties
C. Authentication control
D. Vulnerability control
B. Segregation of duties
Being a security admin and a programmer has a conflict of interest - ability to create an application that circumvents network security protocols
46
An auditor was testing whether shipments were made only to credit-worthy customers. The client informed the auditor that the information technology system would not print bills of lading for customers that were on credit hold. The auditor would most likely next perform which of the following?
A. Attempt to print a bill of lading for one customer on credit hold and verify with the information technology department that this control cannot be overridden without approval.
B. Review recent shipments for a sample of customers on credit hold and verify with the accounting manager that all shipments were shipped by the due date.
C. Select a sample of customers on credit hold, attempt to print bills of lading for these customers, and verify with the information technology department that only a few customers are on credit hold.
D. Review the customer files for the names of all customers on credit hold and verify with the accounting manager that no shipments were made to these customers after they were listed on credit hold.
A. Attempt to print a bill of lading for one customer on credit hold and verify with the information technology department that this control cannot be overridden without approval
47
Megamart, a retailer with 500 stores, implemented electronic data interchange (EDI) with its largest vendors. Which of the following would be a detective control that Megamart could implement in its information systems environment to help mitigate the risk of data loss when processing EDI transactions?
A. The barring of programmers from accessing the production EDI system
B. EDI software access controls requiring passwords
C. EDI file header and trailer records containing record counts
D. A data security policy that addresses EDI and is supported by the chief executive officer
C. EDI file header and trailer records containing record counts
File header and trailer records would allow the system to verify that all records were properly processed
48
Which of the following constitutes a potential risk associated with the use of information technology in an entity's system of internal control?
A. A reduction in the ability to monitor the entity's activities.
B. The facilitation of additional analyses.
C. A reduction in the circumvention of controls.
D. Unauthorized changes to systems.
D. Unauthorized changes to systems
49
What is the primary objective of data security controls?
A. To monitor the use of system software to prevent unauthorized access to system software and computer programs.
B. To ensure that storage media are subject to authorization prior to access, change, or destruction.
C. To establish a framework for controlling the design, security, and use of computer programs throughout an organization.
D. To formalize standards, rules, and procedures to ensure the organization's controls are properly executed.
B. To ensure that storage media are subject to authorization prior to access, change, or destruction
50
Which of the following types of control best describes procedures to ensure appropriate systems software acquisition?
A. Information-processing.
B. Monitoring.
C. General.
D. Physical.
C. General
51
Which of the following types of control best describes processing of individual transaction and help to ensure that transactions occurred, are authorized, and are completely and accurately processed and reported?
A. Information-processing.
B. Monitoring.
C. General.
D. Physical.
A. Information-processing
52
Which of the following types of control best describes assess the quality of control operation?
A. Information-processing.
B. Monitoring.
C. General.
D. Physical.
B. Monitoring
53
Which of the following types of control best describes safeguarding assets, such as security devices to limit access to programs and restricted areas?
A. Information-processing.
B. Monitoring.
C. General.
D. Physical.
D. Physical
54
Obtaining an understanding of a control involves evaluating the design of the control and determining whether the control has been:
A. Authorized.
B. Implemented.
C. Monitored.
D. Tested.
B. Implemented
55
Which of the following procedures would an auditor most likely perform before the balance sheet date?
A. Confirm with client's lawyer that all litigation probable of assertion has been disclosed to the auditor.
B. Obtain an understanding of the client's control activities.
C. Determine whether there are any liens or encumbrances on assets that have been pledged as collateral.
D. Consider the client's plans and ability to meet imminent purchase commitments and cash flow obligations.
B. Obtain an understanding of the client's control activities
Choice A, C and D are done AFTER balance sheet date
56
Which of the following spreadsheets most likely has the highest risk of data integrity errors?
A. A spreadsheet the CFO uses that is directly linked to the company's accounting system database.
B. A spreadsheet that captures time and attendance transactions from an automated time clock system.
C. A spreadsheet that displays imported comma-delimited text files from the check payment module and is reviewed by the accounts payable administrator.
D. A spreadsheet into which the controller enters summary daily sales data from a printed report of an automated accounting system.
D. A spreadsheet into which the controller enters summary daily sales data from a printed report of an automated accounting system
Spreadsheets with manual inputs carry a higher risk for errors than automated ones
57
Which of the following is least likely to be a continuous activity that an auditor would be expected to perform throughout an audit engagement?
A. Assessing the risk of material misstatement
B. Understanding the entity and its environment
C. Considering client continuance
D. Inquiring as to the design of controls
D. Inquiring as to the design of controls
This is only to be one once during an audit
58
If a budgetary reporting system provides adequate reports, but the reports are not analyzed and acted upon:
A. The control has been implemented but is not operating effectively.
B. The control has been implemented and is operating effectively.
C. The control has not been implemented and is not operating effectively.
D. The control has not been implemented but is operating effectively.
A. The control has been implemented but is not operating effectively
59
Which of the following is the most complete and accurate list of the walkthrough procedures usually performed in an issuer's integrated audit?
A. Inquiry, observation, analytical procedures, and testing of controls.
B. Inquiry, observation, inspection of relevant documentation, and reperformance of controls.
C. Inquiry, sampling, analytical procedures, and testing of controls.
D. Inquiry, inspection of relevant documentation, sampling, and reperformance of controls.
B. Inquiry, observation, inspection of relevant documentation, and reperformance of controls
60
In obtaining an understanding of an entity's system of internal control, an auditor is required to obtain knowledge about the:
Operating effectiveness of controls - YES / NO
Design of controls - YES / NO
Operating effectiveness of controls - NO
Design of controls - YES
61
In order to obtain an initial understanding of the system of internal control sufficient to assess the risk of material misstatement of the financial statements, an auditor would most likely perform which of the following procedures?
A. Expanded substantive testing to identify relevant controls.
B. Risk-assessment procedures to evaluate the design of relevant controls.
C. Analytical procedures to determine the need for specific controls.
D. Tests of key controls to determine whether they are effective.
B. Risk-assessment procedures to evaluate the design of relevant controls
62
Which of the following factors is most likely to affect the extent of the documentation of the auditor's understanding of a client's system of internal controls?
A. The relationship between management, the board of directors, and external stakeholders.
B. The degree to which information technology is used in the accounting function.
C. The industry and the business and regulatory environments in which the client operates.
D. The degree to which the auditor intends to use internal audit personnel to perform substantive tests.
B. The degree to which information technology is used in the accounting function
More complex IT system greatly affects the extent of documentation
63
Which of the following is an inherent limitation of internal controls?
A. Judgmental sampling.
B. Collusion.
C. Segregation of duties.
D. Employee peer review.
B. Collusion
Inherent limitations include collusion, human error and management override
64
According to COSO, the reality that human decision making can be faulty and subject to bias is an example of:
A. The limitations of internal control.
B. The control environment.
C. A risk assessment.
D. A control activity.
A. The limitations of internal control
65
In an integrated audit of a nonissuer, each of the following identifies an inherent limitation to internal control, except:
A. Collusion involving two or more employees.
B. Faulty decision making by employees.
C. An override of internal controls by a low-level employee.
D. Breakdowns in internal control because of employee mistakes.
C. An override of internal controls by a low-level employee
This is the choice because inherent limitations apply for override done by management, not by a low-level employee
66
Which of the following factors would most likely be considered an inherent limitation to an entity's internal control?
A. The ineffectiveness of the board of directors.
B. The complexity of the information processing system.
C. Human judgment in the decision making process.
D. The lack of management incentives to improve the control environment.
C. Human judgment in the decision making process
67
Which approach would an auditor take when they exclude the effect of controls from the assessment of the risk of material misstatement, and when control risk is assessed at maximum?
A) substantive approach
B) combined approach
C) test of controls
D) dual purpose tests
A) substantive approach
68
Which approach would be required when a significant amount of information is initiated, authorized, recorded, processed, or reported electronically?
A) substantive approach
B) combined approach
C) test of controls
D) dual purpose tests
B) combined approach
Combined approach = Tests of operating effectiveness of controls and substantive procedures
69
Which approach of testing would be used to evaluate the operating effectiveness of a control and to support relevant assertions to detect material misstatements?
A) substantive approach
B) combined approach
C) test of controls
D) dual purpose tests
D) dual purpose tests
Dual purpose testing = test of controls & test of details
70
When the auditors risk assessment is based on assumption that controls are operating effectively or when substantive procedures alone are insufficient, what kind of testing should be performed?
A) substantive approach
B) combined approach
C) test of controls
D) dual purpose tests
C) test of controls
71
When there is a large volume of predictable transactions, what kind of audit procedure is more appropriate?
A) substantive analytical procedures, only
B) test of details, only
C) test of controls and test of details
D) substantive analytical procedures and test of details
A) substantive analytical procedures, only
72
When obtaining evidence regarding the existence and valuation of account balances, what kind of audit procedure is more appropriate?
A) substantive analytical procedures, only
B) test of details, only
C) test of controls and test of details
D) substantive analytical procedures and test of details
B) test of details, only
73
If tests of controls indicate that controls are operating effectively, which procedure would be sufficient to reduce detection risk to an acceptably low level?
A) substantive analytical procedures, only
B) test of details, only
C) test of controls and test of details
D) substantive analytical procedures and test of details
A) substantive analytical procedures
74
If tests of controls indicate that controls are not operating effectively, or test of controls were not performed, which procedure would be sufficient to perform?
A) substantive analytical procedures, only
B) test of details, only
C) test of controls and test of details
D) substantive analytical procedures and test of details
B) test of details, only
75
After performing risk assessment procedures, an auditor decided not to perform tests of controls. The auditor most likely decided that:
A. It would be inefficient to perform tests of controls that would result in a reduction in planned substantive tests.
B. The available evidence obtained through tests of controls would not support an increased level of control risk.
C. The assessed level of inherent risk exceeded the assessed level of control risk.
D. A reduction in the assessed level of control risk is justified for certain financial statement assertions.
A. It would be inefficient to perform tests of controls that would result in a reduction in planned substantive tests
The time required to perform test of controls would be greater than the reduction in time spent on substantive testing
76
Which of the following is always necessary in a financial statement audit?
I.Tests of the operating effectiveness of controls.
II.Analytical procedures.
III.Risk assessment procedures.
A. I and III.
B. I and II.
C. I, II, and III.
D. II and III.
D. II and III
77
In performing interviews and examining documents related to preliminary work in a financial statement audit of a nonissuer, an auditor identifies a business risk associated with plans for a new product line. What should the auditor do as a result?
A. Analyze the newly identified risk in conjunction with other known business risks and consider whether there is an immediate consequence for the risk of material misstatement at various levels of the audit.
B. Modify the scope of the engagement to include an analysis of the budget for the new product line and consider the new risk in conjunction with other risks after the budget items have been analyzed.
C. Analyze the newly identified risk in conjunction with economic circumstances related exclusively to the new product line and consider whether there is an immediate consequence for the risk of material misstatement for affected classes of transactions.
D. Modify the financial statement disclosures to include the newly identified risk if it is likely that the new product line will have an adverse effect on the company’s profitability.
A. Analyze the newly identified risk in conjunction with other known business risks and consider whether there is an immediate consequence for the risk of material misstatement at various levels of the audit
78
Which of the following scenarios is least likely to be considered a significant risk that would lead the auditor to assess inherent risk at a high level?
A. The company reported a substantial loss on write-down related to inventory obsolescence.
B. The company has made substantial revisions to their credit policy, allowing for more customers to qualify for financing of large purchases. The result has been a 45% increase in revenues.
C. The company has elected to convert their inventory costing method from LIFO to FIFO.
D. The company contracted with a subsidiary to provide a key component that they used in their manufacturing process.
C. The company has elected to convert their inventory costing method from LIFO to FIFO
Choice A, B, and D are all significant risks to cause to assess inherent risk at high level
79
Providing more supervision during an audit of a nonissuer in response to assessed risks of material misstatement at the financial statement level is an example of:
A. A substantive response.
B. An overall response.
C. Tests of controls.
D. Further audit procedures.
B. An overall response
Another example would be communicating to audit team for an increased need of professional skepticism, OR including Unpredictability in to the selection of procedures, OR updating the nature, timing and extent of further audit procedures OR
80
Which of the following factors is most relevant when an auditor considers the client's organizational structure in the context of control risk?
A. Physical proximity of the accounting function to upper management.
B. The organization's recruiting and hiring practices.
C. Management's attitude toward information processing and accounting departments.
D. The suitability of the client's lines of reporting.
D. The suitability of the client's lines of reporting
81
82
While performing interim audit procedures of accounts receivable, numerous unexpected errors are found resulting in a change of risk assessment. Which of the following audit responses would be most appropriate?
A. Send negative accounts receivable confirmations instead of positive accounts receivable confirmations.
B. Increase the dollar threshold of vouching customer invoices.
C. Move detailed analytical procedures from year end to interim.
D. Use more experienced audit team members to perform year-end testing.
D. Use more experienced audit team members to perform year-end testing
83
Which of the following statements best describes why an auditor would use only substantive procedures to evaluate specific relevant assertions and risks?
A. The relevant internal control components are not well documented.
B. The internal auditor already has tested the relevant controls and found them effective.
C. Testing the operating effectiveness of the relevant controls would not be efficient.
D. The cost of substantive procedures will exceed the cost of testing the relevant controls
C. Testing the operating effectiveness of the relevant controls would not be efficient
84
A senior auditor conducted a dual-purpose test on a client's invoice to determine whether the invoice was approved and to ascertain the amount and other terms of the invoice. Which of the following lists two tests that the auditor performed?
A. Tests of controls and tests of details.
B. Substantive procedures and analytical procedures.
C. Tests of details and substantive procedures.
D. Substantive analytical procedures and tests of controls.
A. Tests of controls and tests of details
Dual purpose testing = Test of controls and test of details
Combined approach = Tests of operating effectiveness of controls and substantive procedures
85
What is the most likely course of action that an auditor would take after determining that performing substantive tests on inventory will take less time than performing tests of controls?
A. Assess control risk at a low level.
B. Perform both tests of controls and substantive tests on inventory.
C. Perform only tests of controls on inventory.
D. Perform only substantive tests on inventory
D. Perform only substantive tests on inventory
***TRICK ON CHOICE A, IN ORDER TO ASSESS CONTROL RISK AT LOW OR MODERATE, TEST OF CONTROLS WOULD NEED TO BE PERFORMED. IN THIS CASE, CONTROL RISK IS AT HIGH (CONTROLS ARE INEFFECTIVE/NOT RELIABLE) THEREFORE, IT IS A WASTE OF TIME TO TEST THEM.
86
In the integrated audit of an issuer, which of the following best states the use of substantive audit procedures in the audit of internal control over financial reporting and in the financial statement audit?
A. Substantive auditing procedures are required in the audit of internal control but not in the financial statement audit.
B. Neither audit requires the performance of substantive auditing procedures.
C. Substantive auditing procedures are required in the financial statement audit, but not in the audit of internal control.
D. Both audits require the performance of substantive auditing procedures.
C. Substantive auditing procedures are required in the financial statement audit, but not in the audit of internal control.
Substantive audit procedures include substantive analytical and test of details, which is only required in financial statement audit, but not audit of internal control
87
Which of the following statements is correct concerning an auditor's assessment of control risk?
A. Evidence about the operation of controls in prior audits may not be considered during the current year's assessment of control risk.
B. The basis for an auditor's conclusions about the assessed level of control risk need not be documented unless the auditor's risk assessment is based on the effective operation of controls.
C. The lower the assessed level of control risk, the less assurance the evidence must provide that the controls are operating effectively.
D. Assessing control risk may be performed concurrently during an audit with obtaining an understanding of the entity's system of internal control.
D. Assessing control risk may be performed concurrently during an audit with obtaining an understanding of the entity's system of internal control
SAME APPLIES TO INHERENT RISK. BOTH INHERENT AND CONTROL RISK (RISK OF MATERIAL MISSTATEMENT FORMULA) CAN BE PERFORMED CONCURRENTLY WITH OBTAINING AN UNDERSTANDING OF THE SYSTEM OF INTERNAL CONTROL
88
In an environment that is highly automated, an auditor determines that it is not possible to reduce detection risk solely by substantive tests of transactions. Under these circumstances, the auditor most likely would:
A. Apply analytical procedures and consider the effect on control risk.
B. Adjust the materiality level and consider the effect on inherent risk.
C. Increase the sample size to reduce sampling risk and detection risk.
D. Perform tests of controls to support a lower level of assessed control risk
D. Perform tests of controls to support a lower level of assessed control risk
Due to high automation, electronic processing can hide errors/unauthorized access. Substantive testing alone cannot reduce the high detection risk. Since it is high, risk on material misstatement (inherent and control risk) must be low to reduce the risk
89
To obtain audit evidence about control risk, an auditor selects tests from a variety of techniques including:
A. Inquiry.
B. Confirmation.
C. Analytical procedures.
D. Calculation.
A. Inquiry
Test of controls procedures = inspect, inquiry, observe and reperform
Substantive procedures = confirmation, recalculation to balance, cut-off, physical examination, verification
90
Which of the following statements about performing tests of controls to support a lower level of control risk is not true?
A. An audit of financial statements is a cumulative process.
B. Observation by the auditor provides more assurance than inquiry alone.
C. Inquiry alone generally will support a conclusion for a lower assessed level of control risk.
D. Prior audits may be considered by the auditor in assessing control risk in the current audit.
C. Inquiry alone generally will support a conclusion for a lower assessed level of control risk
Therefore, choice A, B and D are true statements
91
Which of the following documentation is not required for an audit in accordance with generally accepted auditing standards?
A. The basis for the auditor's decision not to perform tests of controls concurrently with obtaining an understanding of the system of internal control.
B. A client engagement letter that summarizes the timing and details of the auditor's planned fieldwork.
C. An indication that the accounting records agree or reconcile with the financial statements.
D. A written audit plan setting forth the procedures necessary to accomplish the audit's objectives.
A. The basis for the auditor's decision not to perform tests of controls concurrently with obtaining an understanding of the system of internal control
Auditor is welcome as an option to do this step, but it is NOT REQUIRED BY GAAS
92
An auditor's risk assessment is based on the assumption that controls are operating effectively. Which of the following was not a step in making this assessment?
A. Consider whether control activities can have a pervasive effect on financial statement assertions.
B. Obtain an understanding of the entity's accounting system and control environment.
C. Evaluate the effectiveness of the controls with tests of controls.
D. Perform tests of details of transactions to detect material misstatements in the financial statements.
D. Perform tests of details of transactions to detect material misstatements in the financial statements
This step is used to detect material misstatement in FS AFTER the auditor assessed risk. The question asked what helped the auditor make the initial assessment that controls are operating effectively?
93
94
In planning an audit, the auditor's knowledge about the design of relevant controls should be used to:
A. Document the assessed level of inherent risk.
B. Determine whether controls have been circumvented by collusion.
C. Assess the operational efficiency of internal control.
D. Identify the types of potential misstatements that could occur.
D. Identify the types of potential misstatements that could occur
***Auditor is not concerned with operating efficiency, only effectiveness
95
A client maintains a large data center where access is limited to authorized employees. How may an auditor best determine the effectiveness of this control activity?
A. Ask the chief technology officer about known problems.
B. Obtain a list of current data center employees.
C. Observe whether the data center is monitored.
D. Inspect the policy manual establishing this control activity.
C. Observe whether the data center is monitored
96
Which of the following applications of sampling to test controls is most appropriate?
A. Testing a sample of controls to determine segregation of duties between inventory control and sales processing duties.
B. Testing a sample of accounts receivable confirmations.
C. Testing a sample of customer orders for evidence of credit approval.
D. Testing a sample of the budget center directors' allocation of annual budget to sales units.
C. Testing a sample of customer orders for evidence of credit approval
97
When an auditor plans to rely on controls that have changed since they were last tested, which of the following courses of action would be most appropriate?
A. Report the reliance in the report on internal controls.
B. Document that reliance and proceed with the original audit strategy.
C. Inquire of management as to the effectiveness of the controls.
D. Test the operating effectiveness of such controls in the current audit.
D. Test the operating effectiveness of such controls in the current audit
98
An auditor is considering relying on the effectiveness of controls that were last tested during the prior year audit. Each of the following would likely prevent the auditor from relying on the prior year's assessment of the operating effectiveness of controls, except:
A. Changes to the system that enable the creation of new reports.
B. Changes made to accounting system programs.
C. Changes that cause data to be accumulated differently.
D. Changes made to the client's control environment.
A. Changes to the system that enable the creation of new reports
99
An auditor uses the knowledge provided by the understanding of internal control and the final assessed risk of material misstatement primarily to determine the nature, timing, and extent of the:
A. Substantive tests.
B. Tests of controls.
C. Attribute tests.
D. Compliance tests.
A. Substantive tests
Perform test of controls >>> Assess control risk
Determine final assessed risk of material misstatement
Use final risk to plan substantive testing
100
An auditor assess the effectiveness of internal controls to help determine control risk using:
A. Substantive tests.
B. Tests of controls.
C. Attribute tests.
D. Compliance tests.
B. Tests of controls
C. Attribute tests.
D. Compliance tests
Perform test of controls >>> Assess control risk
Determine final assessed risk of material misstatement
Use final risk to plan substantive testing
101
Which of the following procedures would an auditor most likely perform prior to the balance sheet date?
A. Send inquiry letter to client's legal counsel.
B. Perform search for unrecorded liabilities.
C. Review detail and test significant travel and entertainment expenses.
D. Review subsequent events
C. Review detail and test significant travel and entertainment expenses
INCOME STATEMENT ACCOUNTS = PERIOD OF TIME, MORE PREDICTABLE BEFORE BALANCE SHEET DATE
BALANCE SHEET ACCOUNTS = POINT IN TIME, LESS PREDICTABLE BEFORE BALANCE SHEET DATE
102
Before applying principal substantive tests to the details of accounts at an interim date prior to the balance sheet date, an auditor should:
A. Determine that the accounts selected for interim testing are not material to the financial statements taken as a whole.
B. Assess control risk at a low level for the assertions embodied in the accounts selected for interim testing.
C. Consider whether the amounts of the year-end balances selected for interim testing are reasonably predictable.
D. Obtain written representations from management that all financial records and related data will be made available.
C. Consider whether the amounts of the year-end balances selected for interim testing are reasonably predictable
103
In which of the following circumstances, based on the impact to the risk of material misstatement, would an auditor most likely conclude that substantive testing of accounts receivable at an interim date is appropriate?
A. The client has a new sales incentive program in place.
B. There is a high turnover of senior management.
C. It is a first engagement of a new client.
D. Relevant controls during the remaining period are effective.
D. Relevant controls during the remaining period are effective
104
Which of the following explanations best describes why an auditor may decide to reduce tests of details for a particular audit objective?
A. There were many transactions posted to the account during the period.
B. Analytical procedures have revealed no unusual or unexpected results.
C. Audit staff are experienced in performing the planned procedures.
D. The audit is being performed soon after the balance sheet date.
B. Analytical procedures have revealed no unusual or unexpected results
105
An audit client sells 15 to 20 units of a product annually. A large portion of the annual sales occur in the last month of the fiscal year. Annual sales have not materially changed over the past five years. Which of the following approaches would be most effective concerning the timing of audit procedures for revenue?
A. The auditor should perform tests of controls at an interim date to obtain audit evidence about the operational effectiveness of internal controls over sales.
B. The auditor should review period-end compensation to determine if bonuses were paid to meet earnings goals.
C. The auditor should perform analytical procedures at an interim date and discuss any changes in the level of sales with senior management.
D. The auditor should inspect transactions occurring in the last month of the fiscal year and review the related sale contracts to determine that revenue was posted in the proper period.
D. The auditor should inspect transactions occurring in the last month of the fiscal year and review the related sale contracts to determine that revenue was posted in the proper period
106
An auditor decides to perform substantive tests on a client's property and equipment balance as of an interim date. The auditor has not obtained evidence about the operating effectiveness of relevant controls. What additional work must be performed to extend the audit conclusions from the interim date to the balance sheet date?
A. Substantive procedures for the period between the interim date and the balance sheet date.
B. Tests of controls for the period between the interim date and the balance sheet date.
C. Analytical comparison of the current-year interim balance with the prior-year interim balance.
D. Tests of controls for the period between the beginning of the fiscal year and the interim date
A. Substantive procedures for the period between the interim date and the balance sheet date
107
Which of the following risks can be minimized by requiring all employees accessing the information system to use passwords?
A. Firewall vulnerability
B. Collusion
C. Failure of server duplicating function
D. Data entry errors
A. Firewall vulnerability
Primary purpose of firewall is to prevent unauthorized access to a network, requiring use of password
108
In which of the following scenarios would an auditor most likely increase tests of controls?
A. When the client’s accounting system is largely based on manual processes.
B. When the auditor’s assessment of inherent risk is low.
C. When the auditor has decided not to rely on controls and instead elects to increase substantive testing.
D. When the client’s IT system is extensively integrated throughout the company’s accounting system.
D. When the client’s IT system is extensively integrated throughout the company’s accounting system.
109
When reporting non-compliance in auditors report, if there is a material effect on FS and it has not been reflected on FS, opinion should be expressed
A) unqualified
B) withdraw
C) qualified / disclaimer of opinion
D) qualified / adverse
D) qualified / adverse
110
If auditor is unable to obtain sufficient appropriate audit evidence about noncompliance or suspected noncompliance, which opinion to express?
A) unqualified
B) withdraw
C) qualified / disclaimer of opinion
D) qualified / adverse
C) qualified / disclaimer of opinion
111
If client refuses to accept the auditors report as modified, which opinion to express?
A) unqualified
B) withdraw and notify those charged with governance
C) qualified / disclaimer of opinion
D) qualified / adverse
B) withdraw and notify those charged with governance
112
If management indicates in the financial statements that the transaction was consummated on arms-length terms and auditor believes that the statement is unsubstantiated, the auditor should express
A) unqualified
B) withdraw and notify those charged with governance
C) qualified / disclaimer of opinion
D) qualified / adverse
D) qualified / adverse
Consummated on arms length - business deal finalized without influence, collusion or bias
Unsubstantiated - Not supported by evidence
113
A client’s refusal to permit inquiry of the attorneys generally will result in opinion
A) unqualified
B) withdraw
C) disclaimer of opinion
D) adverse
B) withdraw
C) disclaimer of opinion
114
An attorney’s refusal to respond to a letter of inquiry where the attorney has devoted substantial attention to litigation matters calls for a(n)
A) unqualified
B) withdraw and notify those charged with governance
C) qualified / disclaimer of opinion
D) qualified / adverse
C) qualified / disclaimer of opinion
Due to this being a limitation in the scope of the auditor’s examination
115
Which of the following auditing procedures most likely would assist an auditor in identifying related party transactions?
A. Performing analytical procedures for indications of possible financial difficulties.
B. Reviewing confirmations of loans receivable and payable for indications of guarantees.
C. Vouching accounting records for recurring transactions recorded just after the balance sheet date.
D. Inspecting correspondence with lawyers for evidence of unreported contingent liabilities
B. Reviewing confirmations of loans receivable and payable for indications of guarantees
Guarantees are commonly provided by or for related parties
116
Which of the following is an audit procedure that an auditor would most likely perform concerning litigation, claims, and assessments?
A. Request the client's lawyer to evaluate whether the client's pending litigation, claims, and assessments indicate a going concern problem.
B. Confirm directly with the client's lawyer that all litigation, claims, and assessments have been recorded or disclosed in the financial statements.
C. Examine the legal documents in the client's lawyer's possession concerning litigation, claims, and assessments to which the lawyer has devoted substantial attention.
D. Discuss with management the controls adopted for evaluating and accounting for litigation, claims, and assessments.
D. Discuss with management the controls adopted for evaluating and accounting for litigation, claims, and assessments
117
When determining the auditor's and management's responsibility for compliance with laws and regulations during an audit, which of the following statements below would be incorrect?
A. The auditor is expected to detect the client's noncompliance with all laws and regulations affecting the transaction cycles under review during the audit itself.
B. The auditor provides reasonable assurance that the financial statements are free of material misstatement due to noncompliance with laws and regulations.
C. Management and those charged with governance are responsible for ensuring that the company's operations are conducted in accordance with all applicable laws and regulations.
D. The auditor is not responsible for preventing noncompliance with laws and regulations.
A. The auditor is expected to detect the client's noncompliance with all laws and regulations affecting the transaction cycles under review during the audit itself
118
When an auditor becomes aware of a possible noncompliance with laws and regulations by a client, the auditor should obtain an understanding of the nature of the noncompliance to:
A. Evaluate the effect on the financial statements.
B. Determine the reliability of management's representations.
C. Recommend remedial actions to those charged with governance.
D. Consider whether other similar acts may have occurred.
A. Evaluate the effect on the financial statements
119
Which of the following statements is correct regarding the auditor's consideration of the possibility of noncompliance with laws and regulations by clients?
A. The auditor is responsible for preventing noncompliance with laws and regulations and is expected to detect noncompliance with all laws and regulations.
B. The auditor's training, experience, and understanding of the client should be used to provide a basis for the determination as to whether acts of noncompliance with laws and regulations have occurred.
C. If specific information concerning an act of noncompliance with laws and regulations comes to the auditor's attention, the auditor should apply audit procedures specifically directed to ascertaining whether such an act has occurred.
D. If an act of noncompliance with laws and regulations has occurred, the auditor should express a qualified opinion or an adverse opinion on the financial statements taken as a whole.
C. If specific information concerning an act of noncompliance with laws and regulations comes to the auditor's attention, the auditor should apply audit procedures specifically directed to ascertaining whether such an act has occurred
This is the auditors act of professional skepticism
120
Regarding a nonissuer's compliance with laws and regulations, an auditor performing an audit of the entity's financial statements is responsible for:
A. Determining whether an act performed by the entity being audited constitutes noncompliance with existing applicable laws and regulations.
B. Obtaining a general understanding of the legal and regulatory framework applicable to the entity and how the entity is complying with that framework.
C. Preventing noncompliance with existing applicable laws and regulations that determine reported amounts and disclosures in the entity's financial statements.
D. Ensuring that the entity's operations are conducted in accordance with the provisions of laws and regulations relevant to the entity's financial statements.
B. Obtaining a general understanding of the legal and regulatory framework applicable to the entity and how the entity is complying with that framework
121
Which of the following information that comes to an auditor's attention most likely would raise a question about the occurrence of noncompliance with laws and regulations?
A. The exchange of property for similar property in a nonmonetary transaction.
B. The failure to develop adequate procedures that detect unauthorized purchases.
C. The presence of several difficult-to-audit transactions affecting expense accounts.
D. The discovery of unexplained payments made to government employees.
D. The discovery of unexplained payments made to government employees
122
Which of the following information that comes to an auditor's attention most likely would raise a question about the occurrence of related party?
A. The exchange of property for similar property in a nonmonetary transaction.
B. The failure to develop adequate procedures that detect unauthorized purchases.
C. The presence of several difficult-to-audit transactions affecting expense accounts.
D. The discovery of unexplained payments made to government employees.
A. The exchange of property for similar property in a nonmonetary transaction
123
In evaluating an entity's accounting estimates, one of an auditor's objectives is to determine whether the estimates are:
A. Not subject to bias.
B. Consistent with industry guidelines.
C. Based on objective assumptions.
D. Reasonable under the circumstances.
D. Reasonable under the circumstances
124
While auditing a client’s accounting estimates used for their specific elements and accounts, the auditor has certain responsibilities. Which of the following is not a required audit procedure that the auditor would perform when evaluating the client’s accounting estimates?
A. Verify that all material accounting estimates have been developed.
B. Ensure that the accounting estimates used are properly disclosed in accordance with GAAP.
C. Determine if the accounting estimates used are consistent with the client’s primary competitors.
D. Evaluate the degree of uncertainty that is associated with the client’s accounting estimates.
C. Determine if the accounting estimates used are consistent with the client’s primary competitors
Comparing it with competitors is NOT NECESSARY
125
What is the auditor's primary purpose in performing a retrospective review of management's significant accounting estimates reflected in the prior year financial statements of a nonissuer?
A. To reevaluate professional judgments made by the auditor in the prior year
B. To indicate whether a significant deficiency existed
C. To indicate whether a bias by management existed
D. To indicate whether an adjustment should have been recorded
C. To indicate whether a bias by management existed
The review of the prior year accounting estimates may reveal that management estimates were not appropriate and there was management bias in developing the estimates
126
Which of the following is true about an auditor's responsibility with respect to accounting estimates?
A. The auditor has no responsibility with respect to accounting estimates.
B. The auditor is responsible for preparing accounting estimates in accordance with generally accepted auditing standards.
C. The auditor is responsible for evaluating the reasonableness of accounting estimates.
D. The auditor is responsible for both preparing accounting estimates and evaluating their reasonableness.
C. The auditor is responsible for evaluating the reasonableness of accounting estimates
MANAGEMENT is responsible for establishing estimates. AUDITOR is responsible for evaluating the reasonableness of them
127
In evaluating the reasonableness of an accounting estimate, an auditor would be least likely to use which of the following approaches?
A. Develop an independent expectation of the estimate.
B. Review and test the process used to develop the estimate.
C. Review the minutes of board of directors and shareholder meetings for discussion of the estimate.
D. Review subsequent events or transactions occurring prior to audit completion.
C. Review the minutes of board of directors and shareholder meetings for discussion of the estimate
Reading minutes would not provide enough evidence on an estimate. Choice A, B and D are all appropriate methods
128
An auditor of a nonissuer should ask management to review the assumptions and methods used in developing an estimate when the auditor has identified what type of misstatement?
A. A judgmental misstatement
B. A sampling misstatement
C. A nonsampling misstatement
D. A projected misstatement
A. A judgmental misstatement
129
Auditors projection of known misstatements to the remaining population, not to managements estimate is a ____________.
A. A judgmental misstatement
B. A sampling misstatement
C. A nonsampling misstatement
D. A projected misstatement
D. A projected misstatement
130
In evaluating the reasonableness of an accounting estimate, an auditor most likely would concentrate on methods and significant assumptions that are:
A. Deviations from historical patterns.
B. Objective and not susceptible to bias.
C. Consistent with prior periods.
D. Similar to industry guidelines.
A. Deviations from historical patterns
Other choices would be significant or complex, susceptible to management bias, or that have changed compared to previous estimates
131
An auditor is testing a client's pension benefit obligation. Which of the following types of evidence would be most appropriate for determining that the financial statement balance is fairly stated?
A. A client-prepared schedule showing accounting entries made to the general ledger balance.
B. Analytical procedures that compare last year's balance to this year's balance.
C. Confirmation of payments received by retirees.
D. An actuarial valuation obtained by an outside firm.
D. An actuarial valuation obtained by an outside firm
132
An auditor of a nonissuer is required to give special consideration to related party transactions because they:
A. Are not usually conducted in the normal course of business.
B. Are generally required to be accounted for on a basis different from the basis that would be appropriate if the entities were not related.
C. Could cause the financial statements to fail to achieve fair presentation.
D. Usually represent a significant source of revenue and expense for the two related entities
C. Could cause the financial statements to fail to achieve fair presentation
133
After determining that a related party transaction has, in fact, occurred, an auditor should:
A. Add a separate paragraph to the auditor's standard report to explain the transaction.
B. Perform analytical procedures to verify whether similar transactions occurred, but were not recorded.
C. Obtain an understanding of the business purpose of the transaction.
D. Substantiate that the transaction was consummated on terms equivalent to an arm's-length transaction.
C. Obtain an understanding of the business purpose of the transaction
134
Which of the following steps should an auditor perform first to determine the existence of related parties?
A. Review material transactions for undisclosed related party relationships.
B. Review proxy and other materials filed with the SEC.
C. Request a list of related parties from management and others within the company.
D. Examine invoices, contracts, and purchasing orders.
C. Request a list of related parties from management and others within the company
Inquire with the client is the best first step to take on identifying related parties
135
All of the following may be an indication of a related party transaction with the exception of:
A. Consignment sale.
B. Compensating balance arrangements.
C. A loan guarantee.
D. Nonrecurring transaction near year-end.
A. Consignment sale.
Consignment sales are considered arms-length transactions - agreement between independent parties on fair market terms that ensures transparency and fairness
136
During an audit of a nonissuer, if the terms of a related party transaction are found to be materially inconsistent with the explanations provided by management, an auditor should:
A. Communicate to those charged with governance that the auditor will be unable to express an opinion on the financial statements.
B. Consider the reliability of management's explanations and representations on other significant matters.
C. Include an other-matter paragraph in the auditor's report describing the inconsistent explanations provided by management.
D. Include an emphasis-of-matter paragraph in the auditor's report that describes the auditor's inability to obtain assurance over related party transactions and balances.
B. Consider the reliability of management's explanations and representations on other significant matters
Auditor should question the trustworthiness of managements explanations. They should be more skeptical and evaluate other significant information presented during the audit
137
Which of the following procedures most likely would assist an auditor to identify litigation, claims, and assessments?
A. Obtain a letter of representations from the client's underwriter of securities.
B. Read the file of correspondence from taxing authorities.
C. Apply ratio analysis on the current-year's liability accounts.
D. Inspect checks included with the client's cutoff bank statement.
B. Read the file of correspondence from taxing authorities
138
Which of the following procedures would an auditor most likely perform regarding litigation?
A. Confirm the details of pending litigation with the client's adversaries' legal representatives.
B. Inspect the legal documents in the client's lawyer's possession regarding pending litigation.
C. Discuss with management its policies and procedures for identifying and evaluating litigation.
D. Confirm directly with the clerk of the court that the client's litigation is properly disclosed.
C. Discuss with management its policies and procedures for identifying and evaluating litigation
139
Which of the following parties should request inquiry of a client's lawyer?
A. The stockholders.
B. The auditor's attorney.
C. Client management.
D. The auditor.
C. Client management
Letter of inquiry to client’s attorney is made by client management
The auditor would request that the client include specific matters in the letter, which would then be sent out by management to the attorney
140
If a client will not permit inquiry of outside legal counsel, the auditor's report ordinarily will contain a(an):
A. Adverse opinion.
B. Qualified opinion.
C. Unmodified opinion with a separate explanatory paragraph.
D. Disclaimer of opinion.
D. Disclaimer of opinion
141
Which of the following factors most likely would cause a CPA to decline to accept a new audit engagement?
A. Management is unwilling to permit inquiry of its legal counsel.
B. Management acknowledges that the entity has had recurring operating losses.
C. The CPA does not understand the entity's operations and industry.
D. The CPA is unable to review the predecessor auditor's working papers.
A. Management is unwilling to permit inquiry of its legal counsel
142
A client's lawyer is unable to form a conclusion about the likelihood of an unfavorable outcome of pending litigation because of inherent uncertainties. If the litigation's effect on the client's financial statements could be material but it is properly disclosed in the financial statements, the auditor most likely would:
A. Withdraw from the engagement because of the lack of information furnished by the lawyer.
B. Issue an unmodified opinion.
C. Issue a qualified opinion in the auditor's report because of the lawyer's scope limitation.
D. Disclaim an opinion on the financial statements because of the materiality of the litigation's effect.
B. Issue an unmodified opinion
This is so because the financials have the effect of the matter properly disclosed with supported backup
143
Which of the following is the auditor's primary means of obtaining corroboration of information furnished by management concerning litigation, claims, and assessments?
A. A letter of audit inquiry to the client's lawyer.
B. A review of contracts, leases, loan agreements, and similar documents.
C. A letter of representation supplied by management.
D. The minutes of stockholders and directors meetings.
A. A letter of audit inquiry to the client's lawyer
144
During an audit, an auditor discovers lawsuits filed against a client. Which of the following would be the next action taken by the auditor?
A. Have the client assess the degree of probability of an unfavorable outcome for the company.
B. Determine if accrual or disclosure is necessary after the lawsuits come to trial.
C. Accrue the liability.
D. Disclose the contingent liability in a footnote to the financial statements.
A. Have the client assess the degree of probability of an unfavorable outcome for the company
This is how the client would speak to the attorney on a probability on the outcome of the lawsuits
145
To which of the following may the client's attorney properly limit the response to a letter of audit inquiry?
A. Matters to which the attorney has given substantive attention in the form of legal consultation or representation
B. Asserted material and relevant claims that are outstanding at the date of inquiry
C. Items that the attorney believes will result in a material loss to the client
D. Litigation that is in process and may have a negative effect on the client's ability to continue as a going concern
A. Matters to which the attorney has given substantive attention in the form of legal consultation or representation
146
"In connection with an audit of our financial statements, management has prepared, and furnished to our auditors a description and evaluation of certain contingencies."
The foregoing passage most likely is from a(an):
A. Management representation letter.
B. Financial statement footnote disclosure.
C. Audit inquiry letter to legal counsel.
D. Audit committee's communication to the auditor.
C. Audit inquiry letter to legal counsel
147
A client is a defendant in a patent infringement lawsuit against a major competitor. Which of the following items would least likely be included in the attorney's response to the auditor's letter of inquiry?
A. An evaluation of the ability of the client to continue as a going concern if the verdict is unfavorable and maximum damages are awarded.
B. An evaluation of the probability of loss and a statement of the amount or range of loss if an unfavorable outcome is reasonably possible.
C. A discussion of case progress and the strategy currently in place by client management to resolve the lawsuit.
D. A description of potential litigation in other matters or related to an unfavorable verdict in the patent infringement lawsuit.
A. An evaluation of the ability of the client to continue as a going concern if the verdict is unfavorable and maximum damages are awarded
148
In planning an audit, an auditor established materiality at $40,000. The auditor received an attorney's letter indicating that it was probable that each of three lawsuits would be settled for $30,000. Which of the following actions should the auditor take?
A. Add a separate paragraph to the audit report disclosing the contingencies and their amounts.
B. Add a paragraph to the auditor's opinion disclosing a scope limitation.
C. Ask the client to record the liability for the three contingencies.
D. Ask the client to disclose the contingencies in the notes to the financial statements.
C. Ask the client to record the liability for the three contingencies
Client management should record $90k accrual liability, since it is probable, and each of the $30k lawsuits will be settled at that amount
149
Calibro, CPA, believes that there is substantial doubt about the ability of Canto Company, a nonissuer, to continue as a going concern and the concern has not been alleviated based on management's plans. This matter is appropriately disclosed in Canto's financial statements. Calibro should:
A. Issue an unmodified opinion with an other-matter paragraph describing the situation.
B. Issue an unmodified opinion and add a separate section with the heading "Substantial Doubt About the Entity's Ability to Continue as a Going Concern" describing the situation.
C. Withdraw from the engagement, to minimize the association with financial statements that may be misleading.
D. Issue a qualified opinion due to the fact that there is substantial doubt about the ability of Canto Company to continue as a going concern.
B. Issue an unmodified opinion and add a separate section with the heading "Substantial Doubt About the Entity's Ability to Continue as a Going Concern" describing the situation
150
Which of the following conditions most likely suggests that an auditor may have substantial doubt about an entity's ability to continue as a going concern?
A. Assets are pledged for loan collateral.
B. Implementation of updated manufacturing equipment is delayed.
C. Cash flows from operations are negative.
D. Significant related-party transactions exist.
C. Cash flows from operations are negative
This indicator of financial difficulties shows substantial doubt about an entity’s ability to continue as a going concern
151
After considering an entity's negative trends and financial difficulties, an auditor has substantial doubt about the entity's ability to continue as a going concern. The auditor's considerations relating to management's plans for dealing with the adverse effects of these conditions most likely would include management's plans to:
A. Increase current dividend distributions.
B. Purchase assets formerly leased.
C. Reduce existing lines of credit.
D. Increase ownership equity.
D. Increase ownership equity
In a client situation as this, auditor would suggest increasing ownership, borrow money, restructure debt, sell assets, and reduce expenditures
152
A CPA firm is completing the fieldwork for an audit of Swenson Co. for the current year ended December 31. The manager in charge of the audit is performing the final steps in the evidence accumulation phase of the audit and notes that there have been several changes in Swenson during the year under audit. Which of the following items would indicate there could be substantial doubt about Swenson's ability to continue as a going concern for a reasonable period of time?
A. Recurring working capital shortages.
B. Cash infusion by a venture capital firm.
C. Term debt refinanced with a new bank.
D. A lack of significant contracts with new customers.
A. Recurring working capital shortages
153
Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern?
A. Significant related party transactions are pervasive.
B. Arrearages in preferred stock dividends are paid.
C. Restrictions on the disposal of principal assets are present.
D. Usual trade credit from suppliers is denied.
D. Usual trade credit from suppliers is denied
Denial of trade credit is an example of financial difficulty
154
When an auditor concludes there is substantial doubt about a continuing audit client's ability to continue as a going concern for a reasonable period of time, the auditor's responsibility is to:
A. Report to the client's audit committee that management's accounting estimates may need to be adjusted.
B. Reissue the prior year's auditor's report and add an emphasis-of-matter paragraph that specifically refers to "substantial doubt" and "going concern."
C. Assess whether management's plans alleviate the substantial doubt and consider the adequacy of disclosure about the client's possible inability to continue as a going concern.
D. Withdraw from the engagement.
C. Assess whether management's plans alleviate the substantial doubt and consider the adequacy of disclosure about the client's possible inability to continue as a going concern
If substantial doubt remains, a separate section should be added to the auditor's report with the heading "Substantial Doubt About an Entity's Ability to Continue as a Going Concern."
If management's plans alleviate the substantial doubt, an emphasis-of-matter may be added (optional).
155
Under which of the following circumstances would an auditor of a non-issuer issue an qualified or adverse opinion related to substantial doubt about the entity's ability to continue as a going concern?
A. The going concern basis of accounting is appropriate, substantial doubt about the entity's ability to continue as a going concern remains, and related disclosures are adequate.
B. The going concern basis of accounting is appropriate, substantial doubt about the entity's ability to continue as a going concern remains, but related disclosures are inadequate.
C. The going concern basis of accounting is appropriate, substantial doubt about the entity's ability to continue as a going concern has been alleviated, but related disclosures are inadequate.
D. The going concern basis of accounting is appropriate, substantial doubt about the entity's ability to continue as a going concern has been alleviated, and related disclosures are adequate.
B. The going concern basis of accounting is appropriate, substantial doubt about the entity's ability to continue as a going concern remains, but related disclosures are inadequate.
C. The going concern basis of accounting is appropriate, substantial doubt about the entity's ability to continue as a going concern has been alleviated, but related disclosures are inadequate.
Either B or C. The key is the inadequate disclosure which would result in qualified or adverse opinion
156
Green, CPA, concludes that substantial doubt about JKL Co.'s, a nonissuer, ability to continue as a going concern remains. If JKL's financial statements adequately disclose its financial difficulties, Green's auditor's report under U.S. auditing standards should:
Include an emphasis-of-matter paragraph - YES / NO
Specifically use the words "going concern" - YES / NO
Specifically use the words "substantialdoubt" - YES / NO
Include an emphasis-of-matter paragraph - NO
Specifically use the words "going concern" - YES
Specifically use the words "substantialdoubt" - YES
Emphasis of matter is only optional, IF concern is alleviated
Substantial doubt about going concern paragraph is added IF concern remains. No EOM AT ALL!
157
Mead, CPA, had substantial doubt about Tech Co.'s ability to continue as a going concern when reporting on Tech's audited financial statements for the year ended June 30, Year 4. That doubt has been removed in Year 5. What is Mead's reporting responsibility if Tech is presenting its financial statements for the year ended June 30, Year 5, on a comparative basis with those of Year 4?
A. The separate going concern section included in the Year 4 auditor's report should not be repeated.
B. The separate going concern section included in the Year 4 auditor's report should be repeated in its entirety.
C. An emphasis-of-matter paragraph describing Tech's plans for financial recovery should be included.
D. An emphasis-of-matter paragraph describing Mead's reasons for the removal of doubt should be included
A. The separate going concern section included in the Year 4 auditor's report should not be repeated
Keep going concern section in Y4, but do not repeat in Y5. Also since it is alleviated, an EOM paragraph is NOT REQUIRED. IT MAY BE ADDED AS AN OPTION
158
Place the hierarchy of audit evidence in order from most reliable to lease reliable:
External evidence
Oral evidence
Auditors direct personal knowledge
Internal evidence
1) Auditors direct personal knowledge
2) External evidence
3) Internal evidence
4) Oral evidence
159
Which of the following types of audit evidence is the most persuasive?
A. Client representation letter.
B. Client work sheets supporting cost allocations.
C. Prenumbered client purchase order forms.
D. Bank statements obtained from the client.
D. Bank statements obtained from the client
Best assurance is one that is not prepared by the client.
160
In order to obtain a reasonable basis for an audit opinion regarding the fairness of the client’s financial statements, the auditor should usually obtain and rely on evidence that is:
A. Conclusive.
B. Cost appropriate.
C. Assured beyond a reasonable doubt.
D. Persuasive.
D. Persuasive
Subjective concept that is unique to each audit
161
During an audit of a new client, the auditor obtains several pieces of evidence from different sources. Which source of evidence would be considered the most valid (reliable)?
A. A reconciliation of the payroll ledgers prepared by the client.
B. Information received from a discussion with client management.
C. Accounts receivable confirmation sent directly to the auditor.
D. Bank confirmation received from the client.
C. Accounts receivable confirmation sent directly to the auditor
162
Which of the following would not represent audit evidence obtained through the auditor’s direct personal knowledge?
A. The auditor observes a year-end inventory count by the client.
B. Accounts payable confirmations are sent out by and returned to the auditor.
C. The auditor re-computes a sample of vendor invoices.
D. A sample of investment transactions is examined by the auditor to determine if the transactions were recorded in the proper accounts.
B. Accounts payable confirmations are sent out by and returned to the auditor
This represents external evidence that is considered 2nd most reliable evidence. Direct personal knowledge would have the auditor personally observe, inspect, recompute or examine something firsthand during an audit
163
An auditor is in the process of gathering evidence during the current audit. Which of the following would not be considered corroborating evidence?
A. Sales invoices
B. Board minutes
C. Confirmations
D. Inquiries
A. Sales invoices
Sales invoice would be considered accounting records of the client. Other examples are contracts, ledgers, worksheets, checks or journal entries
164
Which of the following statements is generally correct about the reliability of audit evidence?
A. Information obtained indirectly from independent outside sources is more persuasive than the auditor's direct personal knowledge obtained through observation and inspection.
B. Reliability of audit evidence refers to the audit evidence obtained from outside the entity.
C. Reliability of audit evidence refers to the amount of corroborative evidence obtained.
D. The more effective the internal control structure, the more assurance it provides about the reliability of the accounting data and financial statements
D. The more effective the internal control structure, the more assurance it provides about the reliability of the accounting data and financial statements
Reliability refers to the quality (accuracy, completeness, authenticity, and what’s susceptible to management bias)
165
Which of the following sources of corroborating information would most likely increase the assurance that an auditor of a nonissuer obtains from management's representations?
A. A confirmation received from the entity's bank.
B. Reports of performance measurement routinely prepared for management's review.
C. Minutes of meetings of the entity's strategic planning committee.
D. Oral evidence gained from the auditor's discussion with employees.
A. A confirmation received from the entity's bank
External evidence is most likely to increase assurance
166
Assuming the auditor intends to use the information produced by the client, which one of the following is not required?
A. The information obtained must contain sufficient detail for the purpose of the auditor’s test.
B. The information provided should be in complete form and deemed reliable by the auditor.
C. The information obtained should be consistent with the prior year’s audit.
D. The information received must be accurate.
C. The information obtained should be consistent with the prior year’s audit
167
Which of the following is a false statement regarding the use of accounting records as a form of audit evidence?
A. An auditor tests accounting records by using analytical procedures and substantive procedures.
B. Internal consistency among a client’s accounting records provides limited evidence that the financial statements are fairly presented.
C. Accounting records alone provide sufficient support for an audit opinion.
D. Accounting records consist of records of initial journal entries and any supporting records.
C. Accounting records alone provide sufficient support for an audit opinion
In addition to obtaining accounting records, auditor should also perform analytical procedures and substantive procedures
168
PCAOB standards state that the relevance of audit evidences depends on all but which of the following?
A. Whether the audit procedure is designed to test for an understatement or overstatement.
B. The timing of the audit procedure.
C. Whether the audit procedure is designed to directly test an assertion or control.
D. The auditor's risk assessment.
D. The auditor's risk assessment
169
Which of the following statements concerning audit evidence is correct?
A. The difficulty and expense of obtaining audit evidence concerning an account balance is always a valid basis for omitting the test.
B. A client's accounting data can be sufficient audit evidence to support the financial statements.
C. The measure of the sufficiency of audit evidence lies in the auditor's judgment.
D. To be appropriate, audit evidence should be either reliable or relevant, but need not be both.
C. The measure of the sufficiency of audit evidence lies in the auditor's judgment
170
Which of the following ultimately determines the sufficiency and appropriateness of audit evidence to support the auditor's conclusions?
A. Professional judgment.
B. Professional standards.
C. Professional experience.
D. Professional requirements.
A. Professional judgment
This is used to evaluate the sufficiency and appropriateness of audit evidence
171
Which of the following is an inaccurate statement regarding the sufficiency of audit evidence?
A. The amount of evidence gathered during an audit procedure has an indirect impact on the level of detection risk.
B. The auditor uses professional judgment in determining the amount and type of evidence necessary for an audit procedure.
C. The greater the risk of material misstatement, the more evidence that is generally required for the audit procedure.
D. The higher the quality of evidence obtained during the audit, the smaller is the quantity of audit evidence that may be necessary for the audit procedure
A. The amount of evidence gathered during an audit procedure has an indirect impact on the level of detection risk
True statement is, the amount of evidence directly affects the level of detection risk. Detection risk is the risk that evidence gathered by auditor from their procedures will not be adequate to support the FS assertions
172
An auditor is required to document the auditor's understanding of the:
I. Entity's control activities that help ensure management directives are carried out.
II. Entity's control environment factors that help the auditor plan the engagement.
A. II only.
B. Neither I nor II.
C. I only.
D. Both I and II.
D. Both I and II.
173
For analytical procedures, in which case is it a REQUIREMENT (MUST) and which case is it NOT REQUIRED (MAY)?
A) Planning
B) Substantive procedures
C) Final overall review
A) Planning - REQUIRED
B) Substantive procedures NOT REQUIRED
C) Final overall review - REQUIRED
174
Fill in the blanks
For directional testing:
_____________(1) forward from source documents to journal entries provides evidence for ______________(2)
_____________(3) backward from journal entries to source documents provides evidence for ______________(4)
A) Vouch + Cut off ; Trace + Completeness
B) Trace + Existence ; Vouch + Valuation
C) Trace + Completeness ; Vouch + Existence
D) Vouch + Accuracy ; Trace + Classification
C) Trace + Completeness ; Vouch + Existence
___Trace__(1) forward from source documents to journal entries provides evidence for ____Completeness_(2)
If a test starts with Source documents, assertion is most likely to be COMPLETENESS because the goal is to ensure transactions have been included in FS
___Vouching _(3) backward from journal entries to source documents provides evidence for __Existence__(4)
If a test starts with Financials, assertion is most likely to be EXISTENCE because the goal is to ensure there is support for transactions and they truly exist
175
What kind of confirmation responds directly to auditor by providing requested information or by stating that the party agrees or disagrees with the information in the request?
A) positive
B) blank
C) negative
D) oral
A) positive
176
What kind of confirmation responds directly to auditor by asking the 3rd party to fill in the requested information using their own records?
A) positive
B) blank
C) negative
D) oral
B) blank
Be mindful of expecting a lower response rate due to additional effort required by 3rd party
177
What kind of confirmation responds directly to auditor by providing requested information only if the confirming party disagrees with the information in the request?
A) positive
B) blank
C) negative
D) oral
C) negative
178
Based on the situations below, what kind of confirmation would provide sufficient appropriate audit evidence if used in conjunction with other substantive testing?
- RMM is low and auditor obtained sufficient appropriate audit evidence on effectiveness of relevant controls
- population of items is large number of small homogeneous items
- reasonable basis for expecting low exception rate
A) positive
B) blank
C) negative
D) oral
C) negative
179
Fill in the blank:
When auditing asset balances, auditor generally focuses on testing ______________(1) assertion, because this is more likely to be overstated
When auditing liability balances, auditor generally focuses on testing _____________(2) assertion, because this is more likely to be understated
A) liability ; stockholders equity
B) stockholders equity ; asset
C) asset ; liability
D) other income ; program expenses
C) asset ; liability
For asset accounts, assets are more likely to be overstated for EXISTENCE assertion
For liability accounts, liabilities are more likely to be understated for COMPLETENESS assertion
180
Fill in the blank:
When auditing revenue transactions, auditor generally focuses on testing ______________(1) assertion, because this is more likely to be overstated
When auditing expenses transactions, auditor generally focuses on testing _____________(2) assertion, because this is more likely to be understated
A) liability ; stockholders equity
B) revenue ; expenses
C) asset ; liability
D) program expenses ; other income
B) revenue ; expenses
Revenue transactions are more likely to be overstated under EXISTENCE assertion
Expense transactions are more likely to be understated under COMPLETENESS assertion
181
The objective of tests of details of transactions performed as substantive tests is to:
A. Attain assurance about the reliability of the information system relevant to financial reporting.
B. Comply with generally accepted auditing standards.
C. Detect material misstatements in the financial statements.
D. Evaluate whether management's controls operated effectively
C. Detect material misstatements in the financial statements
Substantive testing is concerned with dollar amounts and consists of test of details and analytical procedures
182
The objective of tests of controls is to:
A. Attain assurance about the reliability of the information system relevant to financial reporting.
B. Comply with generally accepted auditing standards.
C. Detect material misstatements in the financial statements.
D. Evaluate whether management's controls operated effectively
A. Attain assurance about the reliability of the information system relevant to financial reporting
D. Evaluate whether management's controls operated effectively
183
Auditors try to identify predictable relationships when using analytical procedures. Relationships involving transactions from which of the following accounts most likely would yield the highest level of evidence?
A. Travel and entertainment expense
B. Accounts payable
C. Interest expense
D. Accounts receivable
C. Interest expense
Relationships among income statement accounts are more predictable because they are over a PERIOD OF TIME, rather than balance sheet accounts, which are POINT IN TIME.
Travel and entertainment expense account has more management discretion on it, meaning they have more freedom and judgment in making decisions within the account
Interest expense has LESS management discretion, making it the correct choice, because this account has relationships with loan balances and interest rates, thus making it more predictable
184
In determining whether transactions have been recorded, the direction of the audit testing should be from the:
A. General ledger balances.
B. Adjusted trial balance.
C. Original source documents.
D. General journal entries.
C. Original source documents
This would be a TRACE UP from Source documents up to Financials for the COMPLETENESS Assertion. C.S.A.R. - Completeness.Source.Accounting Records)
185
In determining whether transactions exist, the direction of the audit testing should be from the:
A. General ledger balances.
B. Adjusted trial balance.
C. Original source documents.
D. General journal entries.
A. General ledger balances.
B. Adjusted trial balance
D. General journal entries
This would be a VOUCH DOWN from either GL, adjusted TB or JE report to Source documents for the EXISTENCE assertion. -E.A.R.S. (Existence.Accounting Records. To Source)
186
If an auditor of an issuer examines purchase orders obtained from the issuer to verify proper authorization of transactions, then the auditor is conducting:
A. A confirmation.
B. An inspection.
C. An observation.
D. A reperformance.
B. An inspection
Inspection involves examining records or documents
187
An auditor has identified the controller's review of the bank reconciliation as a control to test. In connection with this test, the auditor interviews the controller to understand the specific data reviewed on the reconciliation. In addition, the auditor verifies that the bank reconciliation is properly prepared by the accountant and reviewed by the controller as evidenced by their respective sign-offs. Which of the following types of audit procedures do these actions illustrate?
A. Observation and inspection of records.
B. Inquiry and inspection of records.
C. Confirmation and reperformance.
D. Analytical procedures and reperformance.
B. Inquiry and inspection of records
Interviewing = INQUIRY
Verifying proper preparation by reviewing the sign off = INSPECTION
188
In an audit of a nonissuer's defined benefit pension plan, which of the following procedures most effectively tests that benefit payments to plan participants are paid in accordance with the plan document?
A. Sending confirmations to plan participants to ascertain that the amount paid to them in the fiscal year is the same as recorded in the general ledger account related to benefit payments.
B. Testing the accuracy and completeness of benefit payments made to plan participants and comparing the benefit payments recorded in the general ledger to the benefit payment records in participant records.
C. Inquiring of the plan administrator about the internal control procedures in place to ensure that the benefit payments to plan participants are paid in accordance with the plan provisions.
D. Recalculating benefits for selected participants based on the plan provisions using relevant service and salary history to support the recorded benefits paid to the participants.
D. Recalculating benefits for selected participants based on the plan provisions using relevant service and salary history to support the recorded benefits paid to the participants
REMEMBER THAT IF QUESTION ASKS ABOUT SUFFICIENT APPROPRIATE AUDIT EVIDENCE, IF YOU SEEE INQUIRY, AUTOMATICALLY ELIMINATE THAT ANSWER CHOICE! INQUIRY ALONE DOES NOT PROVIDE SUFFICIENT EVIDENCE
189
As part of the current audit engagement, the auditor initially determines that the Treasury Stock account had minimal activity during the year. In designing audit procedures for the client’s Treasury Stock account, the auditor would most likely use:
A. Other audit procedures.
B. Substantive analytical procedures.
C. Test of details.
D. Risk assessment procedures.
C. Test of details
190
For audits of financial statements made in accordance with generally accepted auditing standards, the use of analytical procedures is required to some extent:
As a substantive test - YES / NO
In the final review stage - YES / NO
As a substantive test - NO
In the final review stage - YES
Analytical procedures are REQUIRED only for planning and in final review stage!
For Substantive testing, it is NOT REQUIRED
191
Which of the following is true about using analytical procedures as a substantive test?
A. Analytical procedures are required to be used to some extent as a substantive test.
B. Analytical procedures are only required to be used as a substantive test for material account balances andclasses of transactions.
C. Analytical procedures are not required to be used as a substantive test and are more likely to be used for accounts that are predictable.
D. Analytical procedures are not required to be used as a substantive test and are more likely to be used when transactions affecting the account are subject to management discretion.
C. Analytical procedures are not required to be used as a substantive test and are more likely to be used for accounts that are predictable
192
When applying analytical procedures during an audit, which of the following is the best approach for developing expectations?
A. Comparing client data with client-determined expected results to reduce detailed tests of account balances.
B. Identifying reasonable explanations for unexpected differences before talking to client management.
C. Considering the pattern of several unusual changes without trying to explain what caused them.
D. Considering unaudited account balances and ratios to calculate what adjusted balances should be.
B. Identifying reasonable explanations for unexpected differences before talking to client management
This helps the auditor in assessing if managements explanations are reasonable. Their explanations should always be corroborated with other evidence
193
When should an auditor use analytical procedures during the course of an audit?
A. During the final review phase of an audit (only).
B. During the planning and final review phases of an audit.
C. During the planning phase on an audit (only).
D. During the audit fieldwork phase (only) to obtain audit evidence.
B. During the planning and final review phases of an audit
194
The auditor would not be required to use analytical procedures for which of the following purposes?
A. In gaining an understanding of the client and their environment.
B. In obtaining corroborating evidence when the evidence gathered by the auditor is circumstantial.
C. In performing the final review of the overall reasonableness of account balances.
D. In applying risk measurement procedures to alert the auditor to problem areas requiring more attention.
B. In obtaining corroborating evidence when the evidence gathered by the auditor is circumstantial
Analytical procedures MAY be performed in conjunction with other substantive procedures, but it is NOT REQUIRED.
It is only REQUIRED for Choice A and Choice C
195
Which of the following steps should be performed first in applying analytical procedures?
A. Investigate and evaluate significant differences from the expectation.
B. Develop an expectation of a balance or ratio by using relationships that are expected to exist.
C. Compare the client's recorded balance or ratio with the expectation.
D. Determine whether the difference between the expectation and the recorded amount is reasonable.
B. Develop an expectation of a balance or ratio by using relationships that are expected to exist
196
U.S. auditing standards require the auditor to perform analytical procedures related to:
A. Interest expense.
B. Internal controls.
C. A management representation letter.
D. Revenue.
D. Revenue
197
Which of the following would not be considered an analytical procedure?
A. Computing accounts receivable turnover by dividing credit sales by the average net receivables and comparing to prior year.
B. Developing the expected current-year sales based on the sales trend of the prior five years and comparing it to the sales revenues recorded in the financial statements.
C. Estimating payroll expense by multiplying the number of employees by the average hourly wage rate and the total hours worked and comparing it to the actual payroll expense recorded in the financial statements.
D. Projecting an error rate by comparing the results of a statistical sample with the actual population characteristics.
D. Projecting an error rate by comparing the results of a statistical sample with the actual population characteristics
198
In the audit of financial statements, an auditor applied analytical procedures as a substantive test but did not detect a material misstatement in an account balance. Which of the following is the most likely reason the auditor failed to detect the misstatement?
A. The misstatement was obscured by offsetting factors resulting from the diversified nature of the entity's operations.
B. The expectations used by the auditor were very precise and so led to a wide range of expected differences from expectations.
C. The auditor developed expectations at a detailed line of business level rather than at a broad, company-wide level.
D. The auditor did not document additional auditing procedures performed in response to significant unexpected differences arising from the analytical procedures
A. The misstatement was obscured by offsetting factors resulting from the diversified nature of the entity's operations.
199
An auditor compares annual revenues and expenses with similar amounts from the prior year and investigates all changes exceeding 10%. This procedure most likely could indicate that:
A. Unrealized gains from increases in the value of available-for-sale debt securities were recorded in the income account for trading securities.
B. Fourth quarter payroll taxes were properly accrued and recorded, but were not paid until early in the subsequent year.
C. Notice of an increase in property tax rates was received by management, but was not recorded until early in the subsequent year.
D. The annual provision for credit loss expense was inadequate because of worsening economic conditions.
A. Unrealized gains from increases in the value of available-for-sale debt securities were recorded in the income account for trading securities
Unrealized gains should’ve been recorded in other comprehensive income
200
An auditor is planning to use substantive analytical procedures in the current audit. Which of the following is not a primary factor that affects the efficiency and effectiveness of these procedures in detecting possible misstatements by the client?
A. There is a clear understanding of the relationships among data.
B. The data used to develop an expectation is available and reliable.
C. A more precise expectation developed will result in greater effectiveness for identifying misstatements.
D. The analytical procedures should be applied to assertions that have potential misstatements which are apparent from an examination of detailed evidence.
D. The analytical procedures should be applied to assertions that have potential misstatements which are apparent from an examination of detailed evidence
The false statement for the correct answer should be:
The analytical procedures would be most effective and efficient if they were applied to misstatements that are NOT APPARENT. This means missstatments that are not obvious from detailed evidence alone. It isn’t immediately visible or clear. Analytics would be able to help detect errors that one cannot see from just simple examination
201
Analytical procedures are most appropriate when testing which of the following types of transactions?
A. Long-term debt transactions.
B. Payroll and benefit liabilities.
C. Acquisitions and disposals of fixed assets.
D. Operating expense transactions.
D. Operating expense transactions
Relationships with INCOME STATEMENT accounts are MORE PREDICTABLE & PERIOD OF TIME. Therefore it is more appropriate for analytical procedures
Relationships with BALANCE SHEET accounts are LESS PREDICTABLE & POINT IN TIME. Therefore it is less appropriate for analytical procedures
202
Which of the following is a true statement regarding documentation requirements for analytical procedures?
A. When an analytical procedure is used as the principal substantive test of a significant financial statement assertion, the auditor is required to document the reasons analytical procedures were performed instead of tests of details.
B. When an analytical procedure is used as the principal substantive test of a significant financial statement assertion, the auditor is required to document both the auditor's expectation and the factors considered in developing that expectation.
C. When an analytical procedure is used during the overall review stage of the audit, the auditor is required to document the auditor's expectation and any additional procedures performed to investigate significant unexplained differences.
D. When an analytical procedure is used as the principal substantive test of a significant financial statement assertion, the auditor is required to document his or her expectation and management's concurrence with that expectation.
B. When an analytical procedure is used as the principal substantive test of a significant financial statement assertion, the auditor is required to document both the auditor's expectation and the factors considered in developing that expectation
203
If the objective of a test of details is to detect overstatements of sales/assets, the auditor should trace transactions from the:
A. Source documents to the accounting records.
B. Accounting records to the source documents.
C. Cash receipts journal to the sales journal.
D. Sales journal to the cash receipts journal.
B. Accounting records to the source documents
For OVERSTATEMENT, this is for assertion, EXISTENCE. Therefore, auditor should be trailing from Accounting records to Source documents.
THINK E.AR.S = Existence.Accounting Records. Source
204
If the objective of a test of details is to detect understatement of expenses/liabilities, the auditor should trace transactions from the:
A. Source documents to the accounting records.
B. Accounting records to the source documents.
C. Cash receipts journal to the sales journal.
D. Sales journal to the cash receipts journal.
A. Source documents to the accounting records
For UNDERSTATEMENT, this is for assertion, COMPLETENESS. Therefore, auditor should be trailing from Source documents to Accounting records
THINK C.S.AR = Completeness.Source.Accounting Records
205
Analytical procedures performed in the final review stage of an audit generally would include:
A. Considering the adequacy of the evidence gathered in response to unexpected balances identified in planning.
B. Calculating projected uncorrected misstatements estimated through audit sampling techniques.
C. Reassessing the factors that assisted the auditor in deciding on preliminary materiality levels and audit risk.
D. Summarizing uncorrected misstatements specifically identified through tests of details of transactions and balances.
A. Considering the adequacy of the evidence gathered in response to unexpected balances identified in planning
206
Which of the following statements regarding directional testing is correct?
A. In order to ensure that an asset has not been overstated, an auditor may want to vouch to source documentation.
B. In order to ensure that an expense has not been understated, an auditor may want to test the existence assertion.
C. In order to test the completeness assertion, an auditor may select a sample of items from the accounting records, and vouch to their corresponding source documentation.
D. In order to test the existence assertion, an auditor may select a sample of items and trace from their corresponding source documentation to corresponding accounting records.
A. In order to ensure that an asset has not been overstated, an auditor may want to vouch to source documentation
O >>> E.AR.S
Overstatement >> Existence >> Accounting Records >>> Source
207
Analytical procedures performed in the overall review stage of an audit suggest that several accounts have unexpected relationships. The results of these procedures most likely would indicate that:
A. The communication with those charged with governance should be revised.
B. Irregularities exist among the relevant account balances.
C. Additional tests of details are required.
D. Control activities are not operating effectively
C. Additional tests of details are required
If analytics suggest unexpected relationships, additional test of details is required
208
While performing tests of details on a client’s investment transactions, the auditor’s test starts with source documents and then traces transaction information to the client’s journal entries. The auditor’s directional testing is most likely testing which of the following assertions?
A. Existence.
B. Completeness.
C. Valuation.
D. Cutoff.
B. Completeness
THINK C.S.AR to start with Source to Accounting Records. Journal entries in this case are the “Accounting Records”
Completeness fits in the blank.
209
Which financial statement assertion is violated when an expense occurring in one year is not recorded until the following year?
A. Accuracy
B. Classification
C. Occurrence
D. Completeness
D. Completeness
Assertion related to anything that should’ve been recorded has been recorded
210
Which financial statement assertion is violated when an expense is recorded in current year, but did not actually occur until the following year?
A. Accuracy
B. Classification
C. Occurrence
D. Completeness
C. Occurrence
Because the expense transaction was recorded prematurely before it actually happened (EXISTENCE)
211
Which of the following is a form of accounts receivable confirmation request that should be used when accounts are in dispute or the dollar value is large?
A. Preventive
B. Negative
C. Detective
D. Positive
D. Positive
212
While auditing an existing client, the auditor sends out fifty positive accounts receivable confirmation requests. If the auditor only receives forty of the confirmations back from the client’s customers, the auditor may do all of the following except for:
A. Performing alternative audit procedures for each nonresponse confirmation.
B. Issuing a qualified audit opinion given the nonresponse exceptions.
C. Requesting that the client intervene in the confirmation process.
D. Sending second and third confirmation requests if needed.
B. Issuing a qualified audit opinion given the nonresponse exceptions
213
Which of the following disclaimers of liability included within a response to an auditor's confirmation request would allow the auditor to rely on the confirmation as appropriate audit evidence for an audit of a nonissuer?
A. Information is obtained from electronic data sources, which might not contain certain information in the respondent's possession.
B. Information in the confirmation may not be relied upon by the recipient.
C. Information is not guaranteed to be accurate or current and could be a matter of opinion.
D. Information is furnished as a matter of courtesy without a duty to do so and without responsibility, liability, or warranty, expressed or implied.
D. Information is furnished as a matter of courtesy without a duty to do so and without responsibility, liability, or warranty, expressed or implied
Examples of disclaimers that do not affect reliability of information:
-information is furnished as a matter of courtesy
-reply is given solely for purpose of the auditor without responsibillity on part of respondent
214
Which of the following circumstances most likely would cause an auditor to suspect that there are material misstatements in an entity's financial statements?
A. There are unusual discrepancies between the entity's records and confirmation replies.
B. Cash transactions are electronically processed and recorded, leaving no paper audit trail.
C. Management enforces strict budgetary controls over the entity's departmental supervisors.
D. The monthly bank reconciliation ordinarily includes several large outstanding checks.
A. There are unusual discrepancies between the entity's records and confirmation replies
215
Confirmation of accounts receivable that have been categorized initially by an auditor as "exceptions" most likely could be due to:
A. Responses that were faxed rather than mailed to the auditor.
B. Customers who have credit or zero balances with the client.
C. Accounts receivable that have been classified as uncollectible.
D. Payments mailed to the client that have not been recorded.
D. Payments mailed to the client that have not been recorded
Exception because there is a difference in the entity’s records and the information provided by the confirming party. Auditor would need to verify receipt date to determine that it is NOT a misstatement
216
During the audit of a client’s accounts receivable transaction cycle, the auditor mails out external confirmations to the client’s customers. If some customers provide confirmation responses in electronic form, what is the most effective way for the auditor to improve the reliability of these electronic responses?
A. Directly contact the customer to validate identity and accuracy of information received.
B. Send out second confirmation requests and request a manual response.
C. Perform additional alternative procedures to substantiate the electronic confirmation responses.
D. No follow up by the auditor is necessary as further reliability improvement cannot be made.
A. Directly contact the customer to validate identity and accuracy of information received
217
Which of the following would not be considered a relevant assertion when testing transactions and events during a client audit?
A. Rights and obligations.
B. Valuation, allocation, and accuracy.
C. Cutoff.
D. Existence and occurrence.
A. Rights and obligations
For Relevant assertions under Transactions - remember COVEUP
For Relevant assertions under Accounts/disclosures - remember CVERUP
218
Which of the following tests of details most likely would help an auditor determine whether revenues have been misstated?
A. Testing for inventory purchases that were recorded after the end of the accounting period
B. Testing for liabilities that were recorded in the financial records of unconsolidated, related entities
C. Testing for equipment depreciation expenses that were not recorded
D. Testing for unrecorded discounts given to customers
D. Testing for unrecorded discounts given to customers
Discounts provided to customers would reduce the amount of revenue, so if they were not recorded, revenues could be overstated
219
PCAOB has established risk assessment standards for issuer audits. Which of the following is not a financial statement assertion as recognized by PCAOB standards?
A. Cutoff.
B. Disclosure.
C. Presentation.
D. Occurrence.
A. Cutoff
Cut off is NOT an assertion under PCAOB standards. Instead, it will be covered under Existence/Occurrence and Completeness assertions
220
An auditor wants to determine the accuracy of a given account balance on a client’s financial statements. To test the valuation, allocation, and accuracy assertion, the auditor may perform all of the following audit procedures except for:
A. Vouching a sample of transactions impacting the general ledger account to the supporting documentation.
B. Reconciling the supporting schedules to the account items reported in the general ledger.
C. Footing and cross-footing the account balance to supporting schedules.
D. Performing a recalculation of the estimates made by the client pertaining to the account balance.
A. Vouching a sample of transactions impacting the general ledger account to the supporting documentation
This answer choice would be testing the existence and occurrence assertion instead of the valuation, allocation, and accuracy assertion that was mentioned in the question
221
If an auditor performs an inspection of documentation supporting a client’s account balances, he or she would most likely be testing any of the following financial statement assertions, with the exception of:
A. Understandability of presentation and classification.
B. Valuation, allocation, and accuracy.
C. Rights and obligations.
D. Completeness.
D. Completeness
Inspection of documentation is NOT primary audit procedure, therefore, Completeness would NOT be used
222
Which of the following procedures would an auditor most likely perform to test controls relating to management's assertion about the completeness of cash receipts for cash sales at a retail outlet?
A. Compare the cash balance in the general ledger with the bank confirmation request.
B. Observe the consistency of the employees' use of cash registers and tapes.
C. Inquire about employees' access to recorded but undeposited cash.
D. Trace the deposits in the cash receipts journal to the cash balance in the general ledger.
B. Observe the consistency of the employees' use of cash registers and tapes
223
The risk that the sample is not representative of the population and that the auditor’s conclusion will be different from the conclusion had the auditor examined 100% of population is called
A) fraud risk
B) audit risk
C) conceptual risk
D) sampling risk
D) sampling risk
When Auditor samples from population (universe), the assumption is that the sample is representative of the population (characteristics of sample are comparable to population). The risk is when sample is not representative of the population
224
Either statistical or no statistical approach is acceptable under _____________________ standard. When properly applied, either method should result in sample size that provides ____________________.
The auditor must exercise ____________________ in both statistical and non statistical sampling
GAAS ; sufficient audit evidence ; professional judgment
225
Note what kind of testing is most appropriate for the type of sampling. Test of controls or substantive testing
-Attribute sampling
-Variables sampling
-Probability proportional to size
-Attribute sampling - TEST OF CONTROLS
-Variables sampling - SUBSTANTIVE TESTING
-Probability proportional to size - SUBSTANTIVE TESTING
226
The risk that the sample supports the conclusion that the recorded amount balance is not materially misstated, when in fact it is materially misstated, this is
A) incorrect rejection
B) incorrect acceptance
C) correct rejection
D) premature selection of sample
B) incorrect acceptance
Sample fails to identify an existing material misstatement
227
The risk that the sample supports the conclusion that the recorded amount balance is materially misstated, when in fact it is not materially misstated, this is
A) incorrect rejection
B) incorrect acceptance
C) correct rejection
D) premature selection of sample
A) incorrect rejection
Sample mistakenly indicates a material misstatement
228
Risk that the assessed level of control risk based on the sample is LESS than the true risk based on the actual operating effectiveness of the control
A) inherent risk too high
B) fraud risk too low
C) control risk too low
D) control risk too high
C) control risk too low
-Lower deviation rate than what actually exists
-Auditor fails to identify existing problem with not testing enough
-incorrect acceptance
-Effectiveness - possibly not detecting existing material misstatement due to lack of testing
229
Risk that the assessed level of control risk based on the sample is GREATER than the true risk based on the actual operating effectiveness of the control
A) inherent risk too high
B) fraud risk too low
C) control risk too low
D) control risk too high
D) control risk too high
-Higher deviation rate than what actually exists
-Auditor falsely identifies a problem when none actually exists. Unnecessary testing
-Incorrect rejection
-Efficiency - does more work than necessary
230
In determining the sample size:
For Risk of assessing control risk too low
-risk of assessed level of control risk is LESS than true level of control risk
-if auditor is willing to accept greater risk - SMALL SAMPLE SIZE
231
In determining the sample size:
For Risk of assessing control risk too high
-risk of assessed level of control risk is MORE than true level of control risk
-if auditor is willing to accept smaller risk - LARGE SAMPLE SIZE
232
In determining the sample size:
Tolerable deviation rate:
As the auditor is willing to accept a greater deviation rate, a _____________ sample size can be used
Smaller sample size
Inverse relationship
233
In determining the sample size:
Tolerable deviation rate:
As the auditor is willing to accept a smaller deviation rate, a _____________ sample size can be used
Larger sample size
Inverse relationship
234
In determining the sample size:
Expected deviation rate:
As the auditor expects FEWER deviations, a ___________ sample size is needed
Smaller sample size
Direct relationship
235
In determining the sample size:
Expected deviation rate:
As the auditor expects MORE deviations, a ___________ sample size is needed
Larger sample size
Direct relationship
236
If the upper deviation rate is LESS THAN OR EQUAL TO auditors tolerable deviation rate, auditor may
A) deny the control
B) rely on the control
C) withdraw from the engagement
D) express an adverse opinion
B) rely on the control
Upper deviation rate - maximum rate of control failures within a population. Likely error rate to determine if controls are effective
Tolerable deviation rate - maximum rate of exceptions (errors) in control procedure that an auditor will accept without changing their original reliance on the control
FORMULA: Sample deviation rate + allowance for sampling risk = upper deviation rate
237
If the upper deviation rate is GREATER THAN auditors tolerable deviation rate, auditor may
A) deny the control
B) rely on the control
C) withdraw from the engagement
D) express an adverse opinion
A) deny the control
If not relying on control, auditor would test compliance with other control, or modify the nature, extent or timing of substantive testing to agree to reduced reliance on the control
Upper deviation rate - maximum rate of control failures within a population. Likely error rate to determine if controls are effective
Tolerable deviation rate - maximum rate of exceptions (errors) in control procedure that an auditor will accept without changing their original reliance on the control
FORMULA: Sample deviation rate + allowance for sampling risk = upper deviation rate
238
Assume that the upper deviation rate is determined to be 4.7%. If tolerable rate is 3%, would the auditor rely on the control?
YES / NO
NO, DO NOT RELY because
Upper deviation rate 4.7% > tolerable rate 3%. If this is so, you would deny the control
239
Assume that the upper deviation rate is determined to be 4.7%. If tolerable rate is 6%, would the auditor rely on the control?
YES / NO
YES - RELY because
Upper deviation rate 4.7% is < Tolerable rate 6%
240
As a result of tests of controls, an auditor assessed control risk too low and decreased substantive testing. This assessment occurred because the true deviation rate in the population was:
A. Less than the risk of assessing control risk too low, based on the auditor's sample.
B. Less than the deviation rate in the auditor's sample.
C. More than the risk of assessing control risk too low, based on the auditor's sample.
D. More than the deviation rate in the auditor's sample.
D. More than the deviation rate in the auditor's sample
True risk based on actual operating effectiveness of control = deviation rate in auditors sample
True deviation rate and risk of assessing control risk too low SHOULD NEVER BE COMPARED
241
As a result of tests of controls, an auditor assessed control risk too high and increased substantive testing. This assessment occurred because the true deviation rate in the population was:
A. Less than the risk of assessing control risk too low, based on the auditor's sample.
B. Less than the deviation rate in the auditor's sample.
C. More than the risk of assessing control risk too low, based on the auditor's sample.
D. More than the deviation rate in the auditor's sample.
B. Less than the deviation rate in the auditor's sample
True risk based on actual operating effectiveness of control = deviation rate in auditors sample
True deviation rate and risk of assessing control risk too low SHOULD NEVER BE COMPARED
242
A principal advantage of statistical methods of attribute sampling over nonstatistical methods is that they provide a scientific basis for planning the:
A. Expected population deviation rate.
B. Sample size.
C. Tolerable rate.
D. Risk of overreliance.
B. Sample size
243
Each of the following is a qualitative factor that an auditor of a nonissuer may consider relevant when evaluating whether misstatements are material, except:
A. The risk of incorrect acceptance of a misstatement.
B. The masking effect of the misstatement on a change in earnings in the context of industry conditions.
C. The potential effect of the misstatement on the entity's compliance with a contractual agreement.
D. The significance of the financial statement element affected by the misstatement
A. The risk of incorrect acceptance of a misstatement
Because this is an element of sampling risk that the auditor considers when designing audit procedures. This qualitative factor is considered before potential misstatements are identified
Choice B, C, and D are factors that are discovered when a misstatement is identified
244
As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses control risk lower than appropriate. The most likely explanation for this situation is that:
A. The deviation rates of both the auditor's sample and the population is less than the tolerable rate.
B. The deviation rate in the auditor's sample is less than the tolerable rate, but the deviation rate in the population exceeds the tolerable rate.
C. The deviation rates of both the auditor's sample and the population exceed the tolerable rate.
D. The deviation rate in the auditor's sample exceeds the tolerable rate, but the deviation rate in the population is less than the tolerable rate.
B. The deviation rate in the auditor's sample is less than the tolerable rate, but the deviation rate in the population exceeds the tolerable rate.
-Sample from auditor appeared healthy, so CR was assessed too low
-In fact, True population has more deviations, meaning controls are weaker than they were assessed
-Less testing was chosen, but it was not enough and you fail to identify issues in controls
245
As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses control risk high than appropriate. The most likely explanation for this situation is that:
A. The deviation rates of both the auditor's sample and the population is less than the tolerable rate.
B. The deviation rate in the auditor's sample is less than the tolerable rate, but the deviation rate in the population exceeds the tolerable rate.
C. The deviation rates of both the auditor's sample and the population exceed the tolerable rate.
D. The deviation rate in the auditor's sample exceeds the tolerable rate, but the deviation rate in the population is less than the tolerable rate.
D. The deviation rate in the auditor's sample exceeds the tolerable rate, but the deviation rate in the population is less than the tolerable rate.
-Sample from auditor appeared worse, so CR was assessed too high
-In fact, True population has less deviations, meaning controls are stronger than they were assessed
-More than enough testing was chosen, and problem was incorrectly identified that was not an issue
246
As a result of tests of controls, an auditor assesses control risk too high. This incorrect assessment most likely occurred because:
A. The auditor believes that the control activity will reduce the extent of substantive testing when, in fact, it will not.
B. Control risk based on the auditor's sample is greater than the true operating effectiveness of the client's control activity.
C. The auditor believes that the control activity relates to the client's assertions when, in fact, it does not.
D. Control risk based on the auditor's sample is less than the true operating effectiveness of the client's control activity.
B. Control risk based on the auditor's sample is greater than the true operating effectiveness of the client's control activity
247
As a result of tests of controls, an auditor assesses control risk too low. This incorrect assessment most likely occurred because:
A. The auditor believes that the control activity will reduce the extent of substantive testing when, in fact, it will not.
B. Control risk based on the auditor's sample is greater than the true operating effectiveness of the client's control activity.
C. The auditor believes that the control activity relates to the client's assertions when, in fact, it does not.
D. Control risk based on the auditor's sample is less than the true operating effectiveness of the client's control activity.
D. Control risk based on the auditor's sample is less than the true operating effectiveness of the client's control activity
248
A client matches receiving reports with invoices prior to payment. The auditor selects a sample of invoices and reperforms the matching process. Because of a poorly chosen sample, the auditor inappropriately assesses control risk as too high. Which of the following outcomes will most likely occur?
A. The auditor will seek too much assurance from substantive testing.
B. The auditor will be less likely to detect material misstatements.
C. The audited financial statements will likely be misstated.
D. Achieved audit risk will not be reduced to an acceptably low level.
A. The auditor will seek too much assurance from substantive testing
If control risk is too high, detection risk would be low, therefore triggering more substantive testing than necessary
249
The risk of incorrect acceptance and the likelihood of assessing control risk too low relate to the:
A. Allowable risk of tolerable misstatement.
B. Preliminary estimates of materiality levels.
C. Efficiency of the audit.
D. Effectiveness of the audit.
D. Effectiveness of the audit
250
The risk of incorrect rejection and the likelihood of assessing control risk too high relate to the:
A. Allowable risk of tolerable misstatement.
B. Preliminary estimates of materiality levels.
C. Efficiency of the audit.
D. Effectiveness of the audit.
C. Efficiency of the audit
251
Which of the following statements is correct concerning statistical sampling in tests of controls?
A. As the population size increases, the sample size should increase proportionately.
B. In determining tolerable rate, an auditor considers detection risk and the sample size.
C. Deviations from specific control activities at a given rate ordinarily result in misstatements at a lower rate.
D. There is an inverse relationship between the expected population deviation rate and the sample size.
C. Deviations from specific control activities at a given rate ordinarily result in misstatements at a lower rate
252
Match the correct term with the definition:
-Audit risk, sampling risk and non-sampling risk
(A)_______________ risk includes all aspects of audit risk that are not due to sampling. It is always present and cannot be measured; the auditor can only attempt to reduce this risk to a very low level through adequate planning and supervision of the audit and quality management of all firm practices. Nonsampling risk can arise because an auditor failed to recognize misstatements in documents examined, or selecting inappropriate audit procedures.
(B)________________ risk arises from the possibility that, when a substantive test is restricted to a sample, conclusions might be different than if the auditor had tested each item in the population. Sampling risk can arise when a control is not being as effective as the auditor believes, OR when a control being more effective than the auditor believes
(C)_________________ risk refers to uncertainty in applying audit procedures to specific risks
A) non-sampling risk
B) sampling risk
C) audit risk
253
Which of the following statements about audit sampling risks is correct for a nonissuer?
A. Nonsampling risk arises from the possibility that, when a substantive test is restricted to a sample, conclusions might be different than if the auditor had tested each item in the population.
B. Nonsampling risk can arise because an auditor failed to recognize misstatements.
C. Sampling risk is derived from the uncertainty in applying audit procedures to specific risks.
D. Sampling risk includes the possibility of selecting audit procedures that are not appropriate to achieve the specific objective.
B. Nonsampling risk can arise because an auditor failed to recognize misstatements
254
In assessing the tolerable rate of deviations of a test of controls that was performed using statistical sampling, an auditor should consider that:
A. When the degree of assurance desired in a sample is high, the auditor should allow for a high level of sampling risk.
B. Increasing the number of items selected for the test of controls usually increases the tolerable rate of deviations.
C. Deviations from pertinent controls at a given rate ordinarily result in misstatements at a lower rate.
D. Deviations from pertinent controls do not affect the risk of material misstatement in the accounting records.
C. Deviations from pertinent controls at a given rate ordinarily result in misstatements at a lower rate
Sometimes the control is not working, but this DOES NOT mean there is indeed a dollar misstatement. The actual misstatement rate could be lower than the control deviation rate. Once the auditor changes the nature, extent and timing of testing for more persuasive evidence, the testing can result in misstatements that are lower than the deviation (error/failure) rate
255
When an auditor of a nonissuer uses statistical sampling techniques to perform a test of controls related to an assertion, factors that influence the sample size include:
A. The tolerable misstatement.
B. The expected rate of deviation of the population to be tested.
C. The nonissuer's assessment of the risk of material misstatement.
D. The assurance obtained from other substantive procedures directed at the same assertion.
B. The expected rate of deviation of the population to be tested
256
For which of the following audit tests would an auditor most likely use attribute sampling?
A. Inspecting employee time cards for proper approval by supervisors.
B. Selecting accounts receivable for confirmation of account balances.
C. Making an independent estimate of the amount of a LIFO inventory.
D. Examining invoices in support of the valuation of fixed asset additions.
A. Inspecting employee time cards for proper approval by supervisors
Attribute sampling relates to estimate the rate of occurrence for specific characteristics. Think YES or NO questions that involves assertions authorization, validity, completeness, accuracy, classification, GAAP and proper period.
257
For which of the following audit tests would a CPA most likely use attribute sampling?
A. Identifying entries posted to incorrect accounts.
B. Evaluating the reasonableness of depreciation expense.
C. Estimating the amount in an expense account.
D. Selecting receivables for confirmation of account balances.
A. Identifying entries posted to incorrect accounts.
258
The degree of audit risk always present in an audit engagement is referred to as a combination of nonsampling and sampling risk. Which of the following is an example of nonsampling risk?
A. The auditor selecting inappropriate auditing procedures.
B. A control not being as effective as the auditor believes.
C. A control being more effective than the auditor believes.
D. The auditor concluding the account balance is not materially misstated when it is, in fact, materially misstated.
A. The auditor selecting inappropriate auditing procedures
259
The degree of audit risk always present in an audit engagement is referred to as a combination of nonsampling and sampling risk. Which of the following is an example of sampling risk?
A. The auditor selecting inappropriate auditing procedures.
B. A control not being as effective as the auditor believes.
C. A control being more effective than the auditor believes.
D. The auditor concluding the account balance is not materially misstated when it is, in fact, materially misstated.
B. A control not being as effective as the auditor believes.
C. A control being more effective than the auditor believes.
D. The auditor concluding the account balance is not materially misstated when it is, in fact, materially misstated.
260
If an auditor of a nonissuer is unable to apply a designed audit procedure to an item selected as part of a sample for a test of controls and no alternative procedures are possible, then the auditor should:
A. Treat the item as a deviation from the prescribed control.
B. Revise the sample selection method to a more random selection method.
C. Perform the designed procedure on a replacement item.
D. Treat the item as a misstatement.
A. Treat the item as a deviation from the prescribed control
With this conclusion, this proves that there is a lack of evidence that the control is operating effectively
261
As a result of tests of controls, the auditor assesses control risk too low and thereby decreases substantive testing. Which statement makes this true?
A. The deviation rates of both the auditor's sample and the population is less than the tolerable rate.
B. The deviation rate in the auditor's sample is less than the tolerable rate, but the deviation rate in the population exceeds the tolerable rate.
C. The deviation rates of both the auditor's sample and the population exceed the tolerable rate.
D. The deviation rate in the auditor's sample exceeds the tolerable rate, but the deviation rate in the population is less than the tolerable rate.
B. The deviation rate in the auditor's sample is less than the tolerable rate, but the deviation rate in the population exceeds the tolerable rate.
262
The sample size of a test of controls varies inversely with:
Expected population deviation rate - YES / NO
Tolerable rate - YES / NO
Expected population deviation rate - NO [amount of errors/failures an auditor is expecting - DIRECT RELATIONSHIP]
Tolerable rate - YES [amount of errors/failures an auditor is willing to accept before adjusting procedures and reliability]
263
In determining the number of documents to select for a test to obtain assurance that all sales returns have been properly authorized, an auditor should consider the tolerable rate of deviation from the control activity. The auditor should also consider the:
I. Likely rate of deviations. - YES / NO
II. Allowable risk of assessing control risk too high. - YES / NO
I. Likely rate of deviations. - YES
II. Allowable risk of assessing control risk too high. - NO [main concern is assessing control risk too low instead]
264
Which of the following statements is ordinarily correct about the sample size in statistical sampling when testing controls?
A. As the population size doubles, the sample size should also double.
B. The population size has little effect on the sample size.
C. The expected population deviation rate has little effect on determining the sample size.
D. As the tolerable deviation rate increases, the sample size should also increase.
B. The population size has little effect on the sample size
265
An auditor who uses statistical sampling for attributes in testing controls should reduce the planned reliance on a prescribed control when the:
A. Tolerable rate less the allowance for sampling risk exceeds the sample rate of deviation.
B. Sample rate of deviation plus the allowance for sampling risk equals the tolerable rate.
C. Sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate.
D. Sample rate of deviation is less than the expected rate of deviation used in planning the sample.
C. Sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate
266
An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide 1% risk of assessing control risk too low (99% confidence) that not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience that about 2.5% of the sales invoices lacked approval. A sample of 200 invoices was examined and 7 of them were lacking approval. The auditor then determined the upper deviation rate to be 8%.
The allowance for sampling risk was:
A. 3.5%
B. 1%
C. 5.5%
D. 4.5%
A. 3.5%
Upper deviation rate = sample deviation rate + allowance for sampling risk
8% = [7 / 200] + allowance for sampling risk
8% = 3.5% + ___4.5%__
267
An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide 1% risk of assessing control risk too low (99% confidence) that not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience that about 2 1/2% of the sales invoices lacked approval. A sample of 200 invoices was examined and 7 of them were lacking approval. The auditor then determined the upper deviation rate to be 8%.
In the evaluation of this sample, the auditor decided to increase the level of the preliminary assessment of control risk because the:
A. Upper deviation rate (8%) was more than the percentage of errors in the sample (3.5%).
B. Tolerable rate (7%) was less than the upper deviation rate (8%).
C. Expected deviation rate (2.5%) was less than the tolerable rate (7%).
D. Expected deviation rate (7%) was more than the percentage of errors in the sample (3.5%).
B. Tolerable rate (7%) was less than the upper deviation rate (8%).
If tolerable rate > upper deviation rate = don’t rely on the controls and increase the assessed control risk
-Remember that the upper deviation rate WILL ALWAYS BE MORE THAN the percentage of errors
268
What is an auditor's evaluation of a statistical sample for attributes when a test of 50 documents results in 3 deviations if tolerable rate is 7%, the expected population deviation rate is 5%, and the allowance for sampling risk is 2%?
A. Modify the planned assessed level of control risk because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate.
B. Modify the planned assessed level of control risk because the tolerable rate plus the allowance for sampling risk exceeds the expected population deviation rate.
C. Accept the sample results as support for the planned assessed level of control risk because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate.
D. Accept the sample results as support for the planned assessed level of control risk because the tolerable rate less the allowance for sampling risk equals the expected population deviation rate.
A. Modify the planned assessed level of control risk because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate
First calculate the Sample deviation rate = # of deviations / # of documents
Sample deviation + allowance = upper deviation rate. Upper deviation is compared with tolerable rate
[3/50] + 2% = 8% > 7%. Since upper deviation is GREATER than tolerable rate, the planned assessed control risk cannot be relied on, and it must be modified
269
An auditor uses an attribute sampling plan to determine whether large expenditures are being properly approved. The auditor is willing to accept a 2% risk of assessing control risk too low, and has a tolerable rate of 5%. A sample of 100 invoices is selected, and only one is found to be lacking appropriate approval. One invoice selected by the auditor cannot be located. Which statement is true?
A. The invoice selected by the auditor that cannot be located is ignored in the calculation of the sample deviation rate.
B. Since the auditor has a tolerable rate of 5%, he or she can be 95% certain that he or she will make a correct decision.
C. There is not enough information given to determine whether the auditor should rely on this control.
D. Since the sample deviation rate is less than the tolerable rate, the auditor should rely on this control.
C. There is not enough information given to determine whether the auditor should rely on this control
Since we do not know the upper deviation rate or the allowance for for sampling risk, which is compared to tolerable rate, there is not enough information to tell us if we can rely on the control
270
FOR SUBSTANTIVE TESTING: When determining the sample size, which of the following parameters have a direct relationship or an inverse relationship with sample size:
-Tolerable misstatement
-Expected misstatement
-Standard deviation (population variability)
-Acceptable level of risk
-Assessed level of risk
-Tolerable misstatement - INVERSE RELATIONSHIP
-Expected misstatement - DIRECT RELATIONSHIP
-Standard deviation (population variability) - DIRECT RELATIONSHIP
-Acceptable level of risk - INVERSE RELATIONSHIP
-Assessed level of risk - DIRECT RELATIONSHIP
PAGE A3, 100
271
FOR TEST OF CONTROLS: When determining the sample size, which of the following factors have a direct relationship or an inverse relationship with sample size:
-risk of assessing control risk too low
-tolerable deviation rate
-expected deviation rate
-population size
-risk of assessing control risk too low - INVERSE RELATIONSHIP
-tolerable deviation rate - INVERSE RELATIONSHIP
-expected deviation rate - DIRECT RELATIONSHIP
-population size - THERE IS NO ISSUE / VERY LITTLE EFFECT WITH DETERMINING SAMPLE SIZE.
PAGE A3-91
272
Formula on how to calculate Mean per Unit Estimation to obtain point estimate
Point estimate = Average value [audited value / # sample size] * # of accounts in population
Page A3-100
Average value of items in sample to estimate population value
273
Formula on how to calculate Ratio estimation to obtain point estimate
Point estimate = (Audited value / book value) * Total value in account
Use of ratios of audited / corrected values of items to book values to project true population value
274
Formula on how to calculate Difference estimation to obtain Projected error and point estimate
Projected error = [(Book value - audited value) / # sample size] * # in population
Point estimate = Total value in account - projected error
Use of average difference between audited or correct value of items and book values of each to project actual population value
275
Sampling interval formula
Sampling interval = Tolerable misstatement / reliability factor
-Tolerable misstatement - max dollar error that may exist in the account without causing FS to be materially misstated
-Reliability factor - risk of incorrect acceptance and are generally obtained from a table
276
Sample size formula
Sample size = Recorded amount of the population [Book value] / Sampling interval
277
In statistical sampling methods used in substantive testing, an auditor most likely would stratify a population into meaningful groups if:
A. The population has highly variable recorded amounts.
B. Probability-proportional-to-size (PPS) sampling is used.
C. The standard deviation of recorded amounts is relatively small.
D. The auditor's estimated tolerable misstatement is extremely small.
A. The population has highly variable recorded amounts
278
In a probability-proportional-to-size sample with a sampling interval of $10,000, an auditor discovered that a selected account receivable with a recorded amount of $5,000 had an audited amount of $4,000. If this were the only misstatement discovered by the auditor, the projected misstatement of this sample would be:
A. $5,000
B. $2,000
C. $1,000
D. $10,000
B. $2,000
Sample error = recorded amount - audited amount
5,000 - 4,000 = 1,000
Tainting factor = Sample error / recorded amount
1,000 / 5,000 = 20%
Projected misstatement = Tainting factor * Sampling interval
20% * 10,000 = 2,000
279
In selecting an appropriate sample for a substantive test, the auditor most likely would stratify the population if the:
A. Auditor plans to give greater representation to large recorded amounts.
B. Desired assessed level of control risk is less than the prior year.
C. Technique to be used is attribute sampling.
D. Auditor suspects that management fraud has occurred during the year.
A. Auditor plans to give greater representation to large recorded amounts
Stratification = Separate samples into relatively homogeneous groups, which are now known as a seperate population [reduced sample size]. This is commonly used when a population has highly variable recorded amounts of
280
Stratified mean per unit (MPU) sampling is a statistical technique that may be more efficient than unstratified MPU because it usually:
A. Yields a weighted sum of the strata standard deviations that is greater than the standard deviation of the population.
B. Produces an estimate having a desired level of precision with a smaller sample size.
C. May be applied to populations where many monetary errors are expected to occur.
D. Increases the variability among items in a stratum by grouping sampling units with similar characteristics.
B. Produces an estimate having a desired level of precision with a smaller sample size
281
How would increases in tolerable misstatement and assessed level of control risk affect the sample size in a substantive test of details?
Increase in tolerable misstatement - INCREASE SAMPLE / DECREASE SAMPLE
Increase in assessed level of control risk - INCREASE SAMPLE / DECREASE SAMPLE
Increase in tolerable misstatement - DECREASE SAMPLE
[Tolerable misstatement the the max error the auditor is wiling to accept without modifying assessment/opinion. If they can allow for more errors/failures, a smaller sample size can be used. INVERSE RELATIONSHIP]
Increase in assessed level of control risk - INCREASE SAMPLE
[Increase in control risk (weaker controls) would trigger a lower detection risk. Having a lower detection risk would require more substantive testing, which would ask for a larger sample size for more evidence. This is needed to reduce the chance of missing material misstatement. DIRECT RELATIONSHIP]
282
An auditor established a $60,000 tolerable misstatement for an asset with an account balance of $1,000,000. The auditor selected a sample of every twentieth item from the population that represented the asset account balance and discovered overstatements of $3,700 and understatements of $200. Under these circumstances, the auditor most likely would conclude that:
A. There is an unacceptably high risk that the actual misstatements in the population exceed the tolerable misstatement because the total projected misstatement is more than the tolerable misstatement.
B. There is an unacceptably high risk that the tolerable misstatement exceeds the sum of actual overstatements and understatements.
C. The asset account is fairly stated because the total projected misstatement is less than the tolerable misstatement.
D. The asset account is fairly stated because the tolerable misstatement exceeds the net of projected actual overstatements and understatements.
A. There is an unacceptably high risk that the actual misstatements in the population exceed the tolerable misstatement because the total projected misstatement is more than the tolerable misstatement
Net overstatement = 3,700 [overstatement] - 200 [understatement] = 3,500
Total population misstatement projection = 3,500 * 20 [Nth method for sample size from population] = 70,000
Compare the projected misstatement with tolerable misstatement
70,000 > 60,000 = high risk since projected misstatement exceeds tolerable misstatement
283
In a test of purchase orders, the auditor selected a random sample of 60 items out of a population of 1,200 purchase orders. The auditor discovered $4,000 in overstatement in the sample. The company's materiality is $65,000. The tolerable misstatement for purchases is $50,000. What should the auditor do next?
A. Pass on the exceptions.
B. Consider expanding the size of the sample.
C. Project the detected error to the entire population.
D. Propose an adjustment to purchases.
C. Project the detected error to the entire population
284
An auditor of a nonissuer used an audit data analytic to perform tests of details, which resulted in the identification of a high number of possible misstatements. In this situation, the auditor would most appropriately:
A. Refine and reperform the analytic until the number of possible misstatements identified is low.
B. Manually test each possible misstatement identified to determine whether it is an actual misstatement.
C. Group possible misstatements by similar characteristics and perform further analysis on each group.
D. Conclude that the account contains misstatements that are not clearly inconsequential in the aggregate.
C. Group possible misstatements by similar characteristics and perform further analysis on each group
Grouping data of items that are homogeneous [common characteristics]
285
Which of the following statements is correct concerning probability proportional to size (PPS) sampling, also known as dollar unit sampling?
A. The auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan.
B. Overstated units have a lower probability of sample selection than units that are understated.
C. The sampling interval is calculated by dividing the number of physical units in the population by the sample size.
D. The sampling distribution should approximate the normal distribution.
A. The auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan
286
Which of the following is the primary objective of probability proportional to sample size?
A. To identify zero and negative balances.
B. To identify overstatement errors.
C. To increase the proportion of smaller-value items in the sample.
D. To identify items where controls were not properly applied.
B. To identify overstatement errors
287
While testing a sample of an audit client's bank reconciliations during the year under audit, an auditor notices that several immaterial deposits in transit did not clear the bank in a timely manner. The auditor suspects that there may be fraud. Which of the following audit responses is most appropriate in this situation?
A. Because the findings are not material, the auditor should project the errors to the population and consider the materiality of the projected misstatement in the auditor's concluding procedures.
B. The auditor should report the finding to the appropriate level of management immediately.
C. The auditor should consider the implications for the integrity of management or employees and the possible effect on other aspects of the audit.
D. The auditor should focus on material misstatements and not consider these immaterial findings or potential errors further.
C. The auditor should consider the implications for the integrity of management or employees and the possible effect on other aspects of the audit
288
When interpreting results and finding relationships for ADAs, match the analytical technique with the best chart to use
-Regression analysis
-Variance analysis
-Period over period analysis
-Classification
Trend analysis
-Regression analysis - SCATTER PLOTS for relationships
-Variance analysis - BULLET CHART
-Period over period analysis - BAR OR COLUMN CHART for comparative information
-Classification - SCATTER PLOTS, PIE CHART OR TREE MAP
Trend analysis - LINE CHART for trend information
289
Place the audit hierarchy in order of least reliable to most reliable. (Most being 1 and Least being 6)
Internal evidence obtained directly by auditor
Oral evidence
External evidence obtained directly by auditor
Auditors direct personal knowledge
External evidence received by client, then provided to auditor
Internal evidence provided by the client
1. Auditors direct personal knowledge [MOST RELIABLE]
2. External evidence obtained directly by auditor
3. External evidence received by the client and provided to auditor
4. Internal evidence obtained directly by auditor
5. Internal evidence provided by client
6. Oral evidence [LEAST RELIABLE]
290
Amber is currently auditing Blissful Springs. Blissful Springs is a completely outdoor retail chain and does not typically have many, if any, sales during cold or rainy days. Amber wants to perform an audit data analytic that correlates sales with weather data. Which of the following approaches to obtaining the weather data would be the best way to enhance that data's reliability?
A. Amber should obtain the weather data internal to Blissful Springs using query language.
B. Amber should request that Blissful Springs provide a report of daily weather information.
C. Amber should utilize an external government website that maintains weather data.
D. Amber should discuss with management weather patterns and impact and document the results.
C. Amber should utilize an external government website that maintains weather data
1. Auditors direct personal knowledge [MOST RELIABLE]
2. External evidence obtained directly by auditor
3. External evidence received by the client and provided to auditor
4. Internal evidence obtained directly by auditor
5. Internal evidence provided by client
6. Oral evidence [LEAST RELIABLE]
For this answer choice, EXTERNAL EVIDENCE is the absolute best
291
Audit data analytics provide many benefits during the course of an audit. Which of the following is not a benefit of applying audit data analytics?
A. Expanded audit coverage through testing of full populations.
B. Insights gained from evaluating metadata and relationships among data both internal and external to the firm.
C. Enhanced fraud detection.
D. Simplifying the creation and documentation of workpapers
D. Simplifying the creation and documentation of workpapers
ADA’s may require additional documentation concerning the rationale of analytic applied
292
Elizabeth is performing a classification analysis using past sales data. The data she is working with was sourced directly from a spreadsheet. She is currently reviewing the spreadsheet controls employed by the client for this data. Based on this, Elizabeth is currently performing which step of the audit data analytic process?
A. Evaluate and address the outcomes of the audit data analytic.
B. Review and analyze the relevance and reliability of the sourced data.
C. Plan the audit data analytic.
D. Perform the audit data analytic.
B. Review and analyze the relevance and reliability of the sourced data
293
Frank wants to evaluate Copeland Distributor's year-end allowance for credit losses. Frank obtains a listing of all customers with open balances as of the end of the fiscal period. Frank decides to age the data to evaluate the reasonableness of the allowance for credit losses balance. What type of data analytic is Frank executing?
A. Predictive analytic
B. Descriptive analytic
C. Prescriptive analytic
D. Diagnostic analytic
B. Descriptive analytic
In this instance, this analytic would help find out “WHAT HAPPENED WITHIN DATA”
294
Frank wants to estimate Copeland Distributor’s expected future credit losses based on historical customer payment patterns and trends. He uses the past aging data to forecast the allowance for credit losses for the upcoming period. What type of data analytic is Frank executing?
A. Predictive analytic
B. Descriptive analytic
C. Prescriptive analytic
D. Diagnostic analytic
A. Predictive analytic
In this instance, this analytic provides expected or predicted outcomes based on historical data
295
Frank wants to determine the best course of action to reduce Copeland Distributor’s future credit losses. After analyzing the aging data and customer payment patterns, he develops recommendations for management on how to improve collection efforts and adjust credit policies. What type of data analytic is Frank executing?
A. Predictive analytic
B. Descriptive analytic
C. Prescriptive analytic
D. Diagnostic analytic
C. Prescriptive analytic
In this instance, this analytic will help recommend / prescribe actions to be taken based on advanced analytics to reach a goal - THINK DOCTOR prescribing medication to help with an illness
296
Frank notices that the allowance for credit losses has significantly increased compared to prior periods. He analyzes the aging data and other customer payment trends to understand why the 90+ days past due category has grown so much this year. What type of data analytic is Frank executing?
A. Predictive analytic
B. Descriptive analytic
C. Prescriptive analytic
D. Diagnostic analytic
D. Diagnostic analytic
In this instance, this analytic will investigate why something happened
297
Which of the following terms is used to describe the unique attribute that identifies a specific record in a table?
A. A foreign key
B. A primary key
C. A secondary key
D. A schema
B. A primary key
A primary key is required so that a table record is always uniquely indentifiable
298
Which of the following terms is used to describe the a column (column group) found in a relationship database table that links data between two tables?
A. A foreign key
B. A primary key
C. A secondary key
D. A schema
A. A foreign key
Used to create a relationship between two tables. It references the primary key of another table
299
Which of the following terms is used to describe a non-identifying column used to find a row in a table?
A. A foreign key
B. A primary key
C. A secondary key
D. A schema
C. A secondary key
It serves as a candidate key for the primary key but is not actually the primary key chosen
300
Which of the following terms is used to describe the organization of data that represents the construction of the database management system (DBMS)?
A. A foreign key
B. A primary key
C. A secondary key
D. A schema
D. A schema
301
Which of the following are components of a relational database?
A. Tables, class hierarchies, foreign key
B. Tables, primary key, attributes
C. Object classes, class hierarchies, foreign key
D. Object classes, primary key, attributes
B. Tables, primary key, attributes
Tables will contain attributes (columns) and records (rows) with primary keys to uniquely identify records
302
Elaine is currently auditing the payroll process at Vanderman Retailers. Vanderman currently outsources its payroll function to Pay Services. Elaine has decided to run a drill-down analysis on changes in values throughout the year and obtains all the necessary data from Pay Services. Which of the following would be the best way to evaluate the reliability of the data obtained for this analytic?
A. Perform validation of sourced data through review of batch totals, hash totals, and record counts.
B. Perform summary statistics on the data and review outcomes to learn whether they tie to auditor expectations.
C. Use confirmations to verify balances.
D. Request a SOC 1® report for Pay Services.
D. Request a SOC 1® report for Pay Services
This helps to obtain assurance that controls are in place at a service organization that is employed by the audited entity
303
Which of the following errors most likely would be detected by analyzing financial totals?
A. A transposition error on one employee's paycheck on a weekly payroll run.
B. A missing digit in an invoice number in a batch of daily sales.
C. Malfeasance resulting from a receivable clerk's pocketing of a customer's payment and altering of the related records.
D. A purchase order mistakenly entered into two different batches.
A. A transposition error on one employee's paycheck on a weekly payroll run
Manual total will be calculated and will be compared to computer generated batch control total. This discrepancy would be picked up during the process
304
Brian is currently auditing the fixed-assets process at a large manufacturing firm. He wants to run a simple diagnostic analytic on changes in the different asset types that make up the fixed-assets account. He wants to obtain reliable data to ensure that the analytic can be utilized as audit evidence. Which of the following types of data obtained by Brian would be considered the most reliable?
A. Digital copies of the invoices for all major fixed-assets purchases during the year provided by the fixed-assets manager.
B. A spreadsheet provided by the fixed-assets manager detailing all changes to the fixed-assets accounts during the year, including dates and values.
C. A spreadsheet obtained by Brian through a query of the fixed-assets database.
D. Data obtained through verbal interviews with the fixed-assets manager.
C. A spreadsheet obtained by Brian through a query of the fixed-assets database
Based on this hierarchy, correct answer choice lines up best with #4, which is higher than the other choices
1. Auditors direct personal knowledge [MOST RELIABLE]
2. External evidence obtained directly by auditor
3. External evidence received by the client and provided to auditor
4. Internal evidence obtained directly by auditor
5. Internal evidence provided by client
6. Oral evidence [LEAST RELIABLE]
305
Which of the following is accurate as it pertains to utilizing visualizations to present audit data analytics findings?
A. Visualizations should be used sparingly because they do not provide audit evidence.
B. The type of visualization utilized will not change how the results are interpreted.
C. When utilizing a graph, scaling is an appropriate consideration to avoid misinterpretation of differences.
D. Visualizations are utilized for communicating findings and are not part of the analysis.
C. When utilizing a graph, scaling is an appropriate consideration to avoid misinterpretation of differences
306
Which of the following is not a reason an auditor may apply audit data analytics (ADAs) when concluding an audit?
A. The auditor will have a deeper knowledge of the entity being audited and may reperform tests done in the risk assessment process.
B. To update existing analytics with numbers that were revised during the audit.
C. To verify the assertions of accuracy and occurrence for all material transactions.
D. To gain comfort that no material misstatements went unidentified during the audit.
C. To verify the assertions of accuracy and occurrence for all material transactions
This procedure would not be done when concluding an audit. Instead, this would be done during substantive procedures.
Choice A, B, and D are more appropriate
307
The degree of audit risk always present in an audit engagement is referred to as a combination of nonsampling and sampling risk. Which of the following is an example of nonsampling risk?
A. A control being more effective than the auditor believes.
B. The auditor concluding the account balance is not materially misstated when it is, in fact, materially misstated.
C. The auditor selecting inappropriate auditing procedures.
D. A control not being as effective as the auditor believes.
C. The auditor selecting inappropriate auditing procedures
Other examples of non-sampling risk includes
-auditor selecting inappropriate auditing procedures
-inappropriate audit evidence
-failure by auditor to recognize misstatements in documents examined
308
What is an auditor's evaluation of a statistical sample for attributes when a test of 50 documents results in 3 deviations if tolerable rate is 7%, the expected population deviation rate is 5%, and the allowance for sampling risk is 2%?
A. Modify the planned assessed level of control risk because the tolerable rate plus the allowance for sampling risk exceeds the expected population deviation rate.
B. Accept the sample results as support for the planned assessed level of control risk because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate.
C. Modify the planned assessed level of control risk because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate.
D. Accept the sample results as support for the planned assessed level of control risk because the tolerable rate less the allowance for sampling risk equals the expected population deviation rate.
C. Modify the planned assessed level of control risk because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate
Sample deviation rate = # deviations / # items to test
= 3 / 50
= 6%
Sample deviation rate + allowance for sampling risk > tolerable rate. Modify the assessed control risk
309
An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide 1% risk of assessing control risk too low (99% confidence) that not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience that about 2 1/2% of the sales invoices lacked approval. A sample of 200 invoices was examined and 7 of them were lacking approval. The auditor then determined the upper deviation rate to be 8%.
In the evaluation of this sample, the auditor decided to increase the level of the preliminary assessment of control risk because the:
A. Upper deviation rate (8%) was more than the percentage of errors in the sample (3.5%).
B. Expected deviation rate (7%) was more than the percentage of errors in the sample (3.5%).
C. Expected deviation rate (2.5%) was less than the tolerable rate (7%).
D. Tolerable rate (7%) was less than the upper deviation rate (8%).
D. Tolerable rate (7%) was less than the upper deviation rate (8%
Since upper deviation rate 8% > tolerable rate 7%
OR
Tolerable rate 7% < Upper deviation rate 8%
310
After obtaining an understanding of internal control and performing risk assessment procedures, an auditor decided not to perform tests of controls. The auditor most likely concluded that the:
A. Assessed level of inherent risk exceeded the assessed level of control risk.
B. Additional evidence to support a reduction in control risk was not cost-beneficial to obtain.
C. Internal control was properly designed and justifiably may be relied on.
D. Evidence obtainable through tests of controls would not support an increased level of control risk.
B. Additional evidence to support a reduction in control risk was not cost-beneficial to obtain
311
An auditor of a nonissuer should design tests of details to ensure that sufficient audit evidence supports which of the following?
A. The planned level of control risk.
B. Management's assertions that controls exist and are operating efficiently.
C. The effectiveness of controls.
D. The planned level of assurance at the relevant assertion level.
D. The planned level of assurance at the relevant assertion level
For Choice A, B and C, those are objectives of tests of controls
312
Which of the following would not be considered a relevant assertion when testing transactions and events during a client audit?
A. Cutoff.
B. Valuation, allocation, and accuracy.
C. Existence and occurrence.
D. Rights and obligations.
D. Rights and obligations
Under umbrella of transactions and events: COVEUP
C - completeness
O - cutoff
V - valuation, allocation and accuracy
E - existence
UP - understandability of presentation and classification
313
When auditing a client’s property, plant, and equipment transactions, which of the following test of details can be used to support the existence and occurrence assertion?
A. Review fixed asset purchases and dispositions right before and after year-end to determine if recorded in the correct period.
B. Recalculate any revaluation losses or surplus transactions made to property, plant, and equipment during the year.
C. Vouch a sample of purchases to the vendor invoice and receiving report.
D. Examine a sample of material charges to repairs and maintenance expense to determine if any items should have been capitalized.
C. Vouch a sample of purchases to the vendor invoice and receiving report
E.AR.S
Existence is from Accounting records to Source
Accounting records = sample of purchases
Source = invoice and receiving report
314
The scope of an audit is NOT restricted when an attorney's response to an auditor as a result of a client's letter of audit inquiry limits the response to:
A. The probable outcome of asserted claims and pending or threatened litigation.
B. The attorney's opinion of the entity's historical experience in recent similar litigation.
C. Matters to which the attorney has given substantive attention in the form of legal representation.
D. An evaluation of the likelihood of an unfavorable outcome of the matters disclosed by the entity.
C. Matters to which the attorney has given substantive attention in the form of legal representation
NOT RESTRICTIVE - when the attorney;s response covers matters they have directly and substantively handled, ensuring the auditor receives complete, concrete and specific information that they can trust and rely on
315
A company's new time clock process requires hourly employees to select an identification number and then choose the clock-in or clock-out button. A video camera captures an image of the employee using the system. Which of the following exposures can the new system be expected to change the least?
A. Inaccurate accounting of employees' hours
B. Fraudulent reporting of employees' own hours
C. Recording of other employees' hours
D. Errors in employees' overtime computation
D. Errors in employees' overtime computation
Miscalculation of the wage or overtime premium amount could occur even if hours worked are accurately controlled and captured by the time and attendance system.
316
Which of the following procedures would least likely be included to test management’s assertion of valuation, allocation, and accuracy?
A. Independent recalculation.
B. Observation.
C. Inspection.
D. Reconciliation.
B. Observation
Observation would be performed to support assertion for completeness or existence instead!
317
Which of the following presumptions is correct about the reliability of audit evidence?
A. Information obtained indirectly from outside sources is the most reliable evidential matter.
B. To be reliable, audit evidence should be conclusive rather than persuasive.
C. Reliability of audit evidence refers to the amount of corroborative evidence obtained.
D. An effective internal control structure provides more assurance about the reliability of audit evidence.
D. An effective internal control structure provides more assurance about the reliability of audit evidence
Reliability: quality of evidence, such as its source, nature and circumstances under which evidence is obtained
318
Which of the following presumptions is correct about the sufficiency of audit evidence?
A. Information obtained indirectly from outside sources is the most reliable evidential matter.
B. To be reliable, audit evidence should be conclusive rather than persuasive.
C. Sufficiency of audit evidence refers to the amount of corroborative evidence obtained.
D. An effective internal control structure provides more assurance about the reliability of audit evidence.
C. Sufficiency of audit evidence refers to the amount of corroborative evidence obtained
319
All of the following may be an indication of a related party transaction with the exception of:
A. Nonrecurring transaction near year-end.
B. Compensating balance arrangements.
C. A loan guarantee.
D. Consignment sale.
D. Consignment sale
320
Which of the following auditing procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern?
A. Confirming with third parties the details of arrangements to maintain financial support.
B. Reconciling the cash balance per books with the cut-off bank statement and the bank confirmation.
C. Comparing the entity's depreciation and asset capitalization policies to other entities in the industry.
D. Inspecting title documents to verify whether any assets are pledged as collateral.
A. Confirming with third parties the details of arrangements to maintain financial support
321
An auditor may achieve audit objectives related to particular assertions by:
A. Increasing the level of detection risk.
B. Preparing audit documentation.
C. Adhering to a system of quality management.
D. Performing analytical procedures.
D. Performing analytical procedures
322
A company’s management provided its auditors with information concerning litigation, claims, and assessments. Which of the following is the auditor’s primary means of corroborating management’s information?
A. Inquiring of company’s outside counsel.
B. Inquiring of the company’s in-house counsel.
C. Meeting with the company’s audit committee.
D. Meeting with the company’s chairman of the board.
A. Inquiring of company’s outside counsel
Outside counsel (external) which is better for corroboration of information
323
An auditor obtains knowledge about a new client's business and its industry to:
A. Understand the events and transactions that may have an effect on the client's financial statements.
B. Evaluate whether the aggregation of identified misstatements causes the financial statements taken as a whole to be materially misstated.
C. Develop an attitude of professional skepticism concerning management's financial statement assertions.
D. Make constructive suggestions concerning improvements to the client's internal control.
A. Understand the events and transactions that may have an effect on the client's financial statements
324
Economic fluctuations (or business cycles) are best described as:
A. Fluctuations of equal duration and equal severity in the level of economic activity over time.
B. Fluctuations in the level of economic activity, relative to a long-term growth trend.
C. Long run increases in a nations standard of living.
D. Changes in the profits of a given firm from one year to the next.
B. Fluctuations in the level of economic activity, relative to a long-term growth trend
325
Which of the following statements concerning data mining is (are) correct?
I.
Data mining is the analysis of data in a data warehouse performed in an attempt to discover hidden patterns and trends in business.
II. Data mining assists managers in making business decisions and strategic planning.
III. Although it will take a little longer without a computer, a manager would be able to perform data mining analysis manually.
A. II and III only.
B. I, II, and III.
C. I and II only.
D. I and III only.
C. I and II only
326
Which of the following statements is correct concerning probability proportional to size (PPS) sampling, also known as dollar unit sampling?
A. The auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan.
B. Overstated units have a lower probability of sample selection than units that are understated.
C. The sampling interval is calculated by dividing the number of physical units in the population by the sample size.
D. The sampling distribution should approximate the normal distribution.
A. The auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan
Inputs for PPS are tolerable misstatement, risk of incorrect acceptance (reliability factor) and recorded amount of population being sampled
327
When an auditor concludes there is substantial doubt about a continuing audit client's ability to continue as a going concern for a reasonable period of time, the auditor's responsibility is to:
A. Withdraw from the engagement.
B. Assess whether management's plans alleviate the substantial doubt and consider the adequacy of disclosure about the client's possible inability to continue as a going concern.
C. Report to the client's audit committee that management's accounting estimates may need to be adjusted.
D. Reissue the prior year's auditor's report and add an emphasis-of-matter paragraph that specifically refers to "substantial doubt" and "going concern."
B. Assess whether management's plans alleviate the substantial doubt and consider the adequacy of disclosure about the client's possible inability to continue as a going concern
If substantial doubt REMAINS, separate section should be added to auditors report “Substantial double about entity’s ability to continue as going concern”
If managements plans ALLEVIATE the substantial doubt, an EOM paragraph, MAY be added, NOT Required!
328
Which of the following types of sampling allows an auditor to quantify sampling risk?
A. Block.
B. Attribute.
C. Haphazard.
D. Stratified nonstatistical.
B. Attribute
Statistical approach used to test controls. This allows auditors to quantify risk. This is statistical because every population item has an equal chance of being selected
329
If an organization decides to analyze sales by looking at the average sales by region, it would be implementing which type of data analytic process?
A. Diagnostic analytics
B. Descriptive analytics
C. Prescriptive analytics
D. Predictive analytics
B. Descriptive analytics
This one spelled out what happened within the data
330
Edward was recently hired to be an internal auditor at Retail Co. His first assignment is to create a visual depiction of the entire revenue process. His manager noted that Edward should indicate whether processes are manual or automated and to label current controls and identify potential control deficiencies. Which documentation technique should Edward utilize?
A. System interface diagram
B. Data flow diagram
C. Flowchart
D. Process narrative
C. Flowchart
Wrong answer explanations:
A. System interface diagram - focus on interfacing of clients and systems
B. Data flow diagram - depict the logical flow of data
D. Process narrative - written descriptions, not visual depictions
331
To determine the sample size for a test of controls, an auditor should consider the tolerable deviation rate, the allowable risk of assessing control risk too low, and the:
A. Upper deviation rate.
B. Expected deviation rate.
C. Risk of incorrect acceptance.
D. Risk of incorrect rejection.
B. Expected deviation rate
Auditors best estimate of the deviation rate in population
Incorrect answer explanation:
A. Upper deviation rate - evaluate a balance AFTER sampling plan has been performed
C + D. Risk of incorrect acceptance / rejection are considered in direct tests of balances
332
When obtaining an understanding of an entity's controls, an auditor should concentrate on the substance of the controls rather than their form because:
A. The procedures may be operating effectively but may not be documented.
B. Management may implement procedures whose costs exceed their benefits.
C. Management may establish appropriate procedures but not enforce compliance with them.
D. The procedures may be so inappropriate that no reliance is contemplated by the auditor.
C. Management may establish appropriate procedures but not enforce compliance with them
“Substance over form” means that controls appear on the surface to exist, but in reality are not operating effectively. Even when appropriated procedures are established, management may not enforce them
333
An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide 1% risk of assessing control risk too low (99% confidence) that not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience that about 2 1/2% of the sales invoices lacked approval. A sample of 200 invoices was examined and 7 of them were lacking approval. The auditor then determined the upper deviation rate to be 8%.
In the evaluation of this sample, the auditor decided to increase the level of the preliminary assessment of control risk because the:
A. Expected deviation rate (2.5%) was less than the tolerable rate (7%).
B. Expected deviation rate (7%) was more than the percentage of errors in the sample (3.5%).
C. Upper deviation rate (8%) was more than the percentage of errors in the sample (3.5%).
D. Tolerable rate (7%) was less than the upper deviation rate (8%).
D. Tolerable rate (7%) was less than the upper deviation rate (8%).
Comparison of Upper deviation rate versus tolerable rate
Upper deviation 8% > tolerable rate 7%
334
During an audit of a nonissuer’s financial statements, an auditor should perform tests of controls to obtain sufficient appropriate audit evidence about the operating effectiveness of relevant controls if:
A. The auditor does not presume that client management has committed fraud.
B. Substantive procedures alone cannot provide sufficient appropriate audit evidence.
C. The auditor does not intend to rely on the operating effectiveness of controls.
D. More financial documentation is available through tests of controls.
B. Substantive procedures alone cannot provide sufficient appropriate audit evidence
335
During an audit of a nonissuer’s financial statements, an auditor should NOT perform tests of controls to obtain sufficient appropriate audit evidence about the operating effectiveness of relevant controls if:
A. The auditor does not presume that client management has committed fraud.
B. Substantive procedures alone cannot provide sufficient appropriate audit evidence.
C. The auditor does not intend to rely on the operating effectiveness of controls.
D. More financial documentation is available through tests of controls.
C. The auditor does not intend to rely on the operating effectiveness of controls
336
When there are numerous property and equipment transactions during the year, an auditor who plans to assess control risk at a low level usually performs:
A. Tests of controls and extensive tests of property and equipment balances at the end of the year.
B. Tests of controls and limited tests of current year property and equipment transactions.
C. Analytical procedures for current year property and equipment transactions.
D. Analytical procedures for property and equipment balances at the end of the year.
B. Tests of controls and limited tests of current year property and equipment transactions
Since CR is assessed at low level, auditor should:
-test controls to evaluate effectiveness of controls
-limit substantive testing, because CR is low, DR will be high, which would require Sub testing to be low
337
Which of the following sample planning factors would influence the sample size for a substantive test of details for a specific account?
Expected amount of misstatements - YES / NO
Measure of tolerable misstatement - YES / NO
Expected amount of misstatements - YES
Measure of tolerable misstatement - YES
338
Which of the following levels would most likely address the risk of material misstatement by the auditor’s consideration of an entity’s control environment?
A. Classes of transactions.
B. Specific account balances.
C. Disclosures.
D. Financial statements.
D. Financial statements
The control environment is pervasive and reflects the overall tone of the organization. Financial statement level shows where
339
An auditor examining inventory most likely would use variables sampling rather than attributes sampling to:
A. Estimate whether the dollar amount of inventory is reasonable.
B. Identify whether inventory items are properly priced.
C. Discover whether misstatements exist in inventory records.
D. Determine whether discounts for inventory are properly recorded
A. Estimate whether the dollar amount of inventory is reasonable
340
An auditor examining inventory most likely would use attribute sampling rather than attributes sampling to:
A. Estimate whether the dollar amount of inventory is reasonable.
B. Identify whether inventory items are properly priced.
C. Discover whether misstatements exist in inventory records.
D. Determine whether discounts for inventory are properly recorded
B. Identify whether inventory items are properly priced.
C. Discover whether misstatements exist in inventory records.
D. Determine whether discounts for inventory are properly recorded
Attributes = test the characteristics of each item in a sample
341
Which of the following best explains why an analytical procedure might be used as a substantive test?
A. To assess the conclusions reached by staff auditors.
B. To determine the adequacy of evidence gathered in response to unusual or unexpected balances.
C. To assist in planning the nature, timing, and extent of the auditing procedures to be performed.
D. To achieve audit objectives in the most effective and efficient manner possible
D. To achieve audit objectives in the most effective and efficient manner possible
342
Which of the following best explains why an analytical procedure might be used in the overall review stage of audit?
A. To assess the conclusions reached by staff auditors.
B. To determine the adequacy of evidence gathered in response to unusual or unexpected balances.
C. To assist in planning the nature, timing, and extent of the auditing procedures to be performed.
D. To achieve audit objectives in the most effective and efficient manner possible
A. To assess the conclusions reached by staff auditors.
B. To determine the adequacy of evidence gathered in response to unusual or unexpected balances
343
Which of the following best explains why an analytical procedure might be used in the planning stage of audit?
A. To assess the conclusions reached by staff auditors.
B. To determine the adequacy of evidence gathered in response to unusual or unexpected balances.
C. To assist in planning the nature, timing, and extent of the auditing procedures to be performed.
D. To achieve audit objectives in the most effective and efficient manner possible
C. To assist in planning the nature, timing, and extent of the auditing procedures to be performed
344
In an audit of financial statements, an auditor's primary consideration regarding internal control is whether the control:
A. Affects management's financial statement assertions.
B. Enhances management's decision-making processes.
C. Provides adequate safeguards over access to assets.
D. Reflects management's philosophy and operating style.
A. Affects management's financial statement assertions
345
In obtaining an understanding of an entity's system of internal control, an auditor is required to obtain knowledge about the:
Operating effectiveness of controls YES / NO
Design of controls - YES / NO
Operating effectiveness of controls NO [Auditor is NOT required to obtain knowledge on operating effectiveness]
Design of controls - YES [Auditor IS required to obtain knowledge on design of controls, and to ensure that it is implemented
346
Which of the following best describes the purpose of an auditor's external inquiry sent to the client's attorney?
A. To corroborate information provided by management with respect to litigation, claims, and assessments.
B. To develop an appropriate understanding of controls in place with respect to the recognition of litigation, claims, and assessments.
C. To obtain reasonable assurance from the client's attorney regarding fair presentation of litigation, claims, and assessments in the financial statements.
D. To evaluate the operating effectiveness of controls in place with respect to the recognition of litigation, claims, and assessments.
A. To corroborate information provided by management with respect to litigation, claims, and assessments
347
Match the appropriate term with the blanks noted below
A. Scatter plot
B. Bullet chart
C. Pie chart
D. Line chart
_______________ show proportional makeup of population by class or by category.
_______________ best utilized for analyzing relationships
_______________ best to demonstrate trends b/c they address forward moving concept of time
_______________ best utilized for variance analysis
Pie chart (C) show proportional makeup of population by class or by category.
Scatter plot (A) best utilized for analyzing relationships
Line chart (D) best to demonstrate trends b/c they address forward moving concept of time
Bullet chart (B) best utilized for variance analysis
348
In an environment that is highly automated, an auditor determines that it is not possible to reduce detection risk solely by substantive tests of transactions. Under these circumstances, the auditor most likely would:
A. Apply analytical procedures and consider the effect on control risk.
B. Perform tests of controls to support a lower level of assessed control risk.
C. Increase the sample size to reduce sampling risk and detection risk.
D. Adjust the materiality level and consider the effect on inherent risk.
B. Perform tests of controls to support a lower level of assessed control risk
Due to the IT system being complex and automated, errors might not be caught by substantive testing alone. Test of controls to review access controls, program change control and automated processing controls will help to gain more assurance
349
In evaluating the reasonableness of an accounting estimate, an auditor would be least likely to use which of the following approaches?
A. Develop an independent expectation of the estimate.
B. Review and test the process used to develop the estimate.
C. Review subsequent events or transactions occurring prior to audit completion.
D. Review the minutes of board of directors and shareholder meetings for discussion of the estimate.
D. Review the minutes of board of directors and shareholder meetings for discussion of the estimate
In minutes, these meetings may mention estimates, but these discussions are generally high level and not detailed enough to provide reliable audit evidence about estimate reasonableness
Choice A, B, C will provide more concrete, direct substantive evidence
350
Correct answer
00:02:18
An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide 1% risk of assessing control risk too low (99% confidence) that not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience that about 2.5% of the sales invoices lacked approval. A sample of 200 invoices was examined and 7 of them were lacking approval. The auditor then determined the upper deviation rate to be 8%.
The allowance for sampling risk was:
A.OPTION
A. 3.5%
B. 4.5%
C. 1%
D. 5.5%
B. 4.5%
Allowance for sampling risk = upper deviation - sampling deviation rate
= 8% - [7 / 200]
= 8% - 3.5%
= 4.5%
351
Which of the following statements extracted from a client's lawyer's letter concerning litigation, claims, and assessments most likely would cause the auditor to request clarification?
A. "I believe that the company will be able to defend this action successfully."
B. "I believe that the plaintiff will have problems establishing any liability."
C. "I believe that the plaintiff's case against the company is without merit."
D. "I believe that this action has only a remote chance in establishing any liability.
B. "I believe that the plaintiff will have problems establishing any liability
This is a vague response, and auditor will have a tough time figuring out if “problems” mean probable, reasonably possible or remote?
352
Which of the following is not a procedure the auditor would use in evaluating the reasonableness of an accounting estimate?
A. Use subsequent events to determine whether the estimate was reasonable.
B. Confirm via the management representation letter that management has disclosed all significant estimates.
C. Determine how management developed their estimate and test the procedures they used.
D. Develop an independent estimate and compare it to management's estimate.
B. Confirm via the management representation letter that management has disclosed all significant estimates
This answer choice would not be enough to substantiate the reasonableness of the estimates
353
Which limitation on response from an attorney in response to auditor’s inquiry may result in a qualified opinion?
A. An inherent uncertainty making it difficult for a lawyer to form conclusions regarding pending litigation.
B. The attorney's refusal to respond when the attorney has given substantial attention to the matter.
C. The client's refusal to permit inquiry of the attorney.
D. The attorney limits replies to matters to which he or she has given substantial attention.
B. The attorney's refusal to respond when the attorney has given substantial attention to the matter
This answer choice best shows the example of a scope limitation
354
Which limitation on response from an attorney in response to auditor’s inquiry may result in a disclaimer of opinion or withdrawal from the audit?
A. An inherent uncertainty making it difficult for a lawyer to form conclusions regarding pending litigation.
B. The attorney's refusal to respond when the attorney has given substantial attention to the matter.
C. The client's refusal to permit inquiry of the attorney.
D. The attorney limits replies to matters to which he or she has given substantial attention.
C. The client's refusal to permit inquiry of the attorney
355
Which of the following statements is correct concerning statistical sampling in tests of controls?
A. There is an inverse relationship between the sample size and the tolerable rate.
B. Deviations from control procedures at a given rate usually result in misstatements at a higher rate.
C. As the population size doubles, the sample size should also double.
D. The qualitative aspects of deviations are not considered by the auditor.
A. There is an inverse relationship between the sample size and the tolerable rate
356
Which of the following is not a risk assessment procedure recommended by PCAOB standards when performing an issuer audit?
A. Performing analytical procedures related to the client’s revenue.
B. Developing an understanding of the client’s internal control over financial reporting.
C. Inquiring of client management and the audit committee about the risks of material misstatement.
D. Performing preliminary test of controls over selected transaction cycles.
D. Performing preliminary test of controls over selected transaction cycles
357
If an auditor performs an inspection of documentation supporting a client’s account balances, he or she would most likely be testing any of the following financial statement assertions, with the exception of:
A. Understandability of presentation and classification.
B. Valuation, allocation, and accuracy.
C. Rights and obligations.
D. Completeness.
D. Completeness
Inspection of documentation would NOT be a primary audit procedure used to test the completeness assertion
358
Which of the following situations represents a limitation, rather than a failure, of internal control?
A. A movie theater cashier sells reduced-price tickets to full-paying customers and pockets the difference.
B. A bank teller embezzles several hundred dollars from the cash drawer.
C. A purchasing employee and an outside vendor participate in a kickback scheme.
D. A jewelry store employee steals a small necklace from a display cabinet.
C. A purchasing employee and an outside vendor participate in a kickback scheme
When you see limitation, think of “inherent limitations”, which are circumvention of controls by collusion [two or more people], human error and management override of controls
359
Jackson wants to present the findings of his audit data analytic to his manager. He has decided to run a simple linear regression analysis to determine if utility expenses correspond with daily temperatures. Which visualization technique will aid Jackson in presenting and reviewing this audit data analytic with his manager?
A. Bar chart
B. Line chart
C. Scatter plot
D. Pie chart
C. Scatter plot
Scatter plots show the relationship among variables, and allow for regression lines to be added to show the direction and strength of correlation
Bar charts - comparative information
Line charts - trend information
Pie charts - proportional information
360
What type of evidence is gathered by the auditor when accounts receivable confirmations are sent to a client’s customers?
A. Corroborating evidence.
B. Accounting record evidence.
C. Substantive evidence.
D. Internal evidence.
A. Corroborating evidence
361
During an audit of a nonissuer, if the terms of a related party transaction are found to be materially inconsistent with the explanations provided by management, an auditor should:
A. Include an other-matter paragraph in the auditor's report describing the inconsistent explanations provided by management.
B. Communicate to those charged with governance that the auditor will be unable to express an opinion on the financial statements.
C. Include an emphasis-of-matter paragraph in the auditor's report that describes the auditor's inability to obtain assurance over related party transactions and balances.
D. Consider the reliability of management's explanations and representations on other significant matters.
D. Consider the reliability of management's explanations and representations on other significant matters
362
During an audit of a new client, the auditor obtains several pieces of evidence from different sources. Which source of evidence would be considered the most valid (reliable)?
A. Accounts receivable confirmation sent directly to the auditor.
B. Information received from a discussion with client management.
C. Bank confirmation received from the client.
D. A reconciliation of the payroll ledgers prepared by the client.
A. Accounts receivable confirmation sent directly to the auditor
363
During an audit of a new client, the auditor obtains several pieces of evidence from different sources. Which source of evidence would be considered the least valid (reliable)?
A. Accounts receivable confirmation sent directly to the auditor.
B. Information received from a discussion with client management.
C. Bank confirmation received from the client.
D. A reconciliation of the payroll ledgers prepared by the client.
B. Information received from a discussion with client management
This is considered Oral evidence, which is the least reliable than both external and internal evidence
364
In evaluating the reasonableness of an entity's accounting estimates, an auditor most likely concentrates on methods and significant assumptions that are:
A. Similar to industry guidelines.
B. Deviations from historical patterns.
C. Objective and not susceptible to bias.
D. Stable and not sensitive to variation.
B. Deviations from historical patterns
For reasonableness of estimates, auditor would focus on assumptions that are:
-significant to estimate
-sensitive to variations
-deviations from historical patterns
-subjective and susceptible to misstatement or bias
365
An auditor is considering internal control in an automated environment. Under these circumstances, the auditor would need to focus on automated controls for all of the following reasons except:
A. Unauthorized access to data, systems, or programs creates an additional control risk.
B. It is more efficient and cost-effective to focus on automated controls rather than manual controls.
C. Much of the information used in monitoring the internal control system may be provided through use of information technology.
D. Even manual controls may be dependent to some extent on the effective functioning of automated controls.
B. It is more efficient and cost-effective to focus on automated controls rather than manual controls
366
A principal advantage of statistical methods of attribute sampling over nonstatistical methods is that they provide a scientific basis for planning the:
A. Tolerable rate.
B. Risk of overreliance.
C. Expected population deviation rate.
D. Sample size.
D. Sample size
Helps to plan the sample size
However, with choice A, B and C, this helps in determining a statistical sample size
367
An auditor of a nonissuer should ask management to review the assumptions and methods used in developing an estimate when the auditor has identified what type of misstatement?
A. A projected misstatement
B. A judgmental misstatement
C. A nonsampling misstatement
D. A sampling misstatement
B. A judgmental misstatement
368
An auditor’s projection of known misstatements to the remaining population has identified what type of misstatement?
A. A projected misstatement
B. A judgmental misstatement
C. A nonsampling misstatement
D. A sampling misstatement
A. A projected misstatement
CPA - AUD Flashcard Deck
flashcards
Decks in class (16)
# Cards
-
A1 - Audit Reports132
-
A2 - Engagement Quality And Acceptance, Planning And Internal Control199
-
A3 - Risk, Evidence And Sampling249
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A4 - Performing Further Procedures, Forming Conclusions, And Communications264
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A5 - Integrating Audits, Attestation Engagements, Compliance, And Gov’t Audits157
-
A6 - Accounting And Review Service Engagements, Interim Reviews And Ethics And Professional…205
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AUD A1 - A6 TB Simulations (ONLY)36
-
AUD - Simulation Exam Questions 1-6 MCQ + SIMS35
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A1 - MCQ183
-
A2 - MCQ276
-
A3 - MCQ368
-
A4 - MCQ384
-
A5 - MCQ228
-
A6 - MCQ241
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A1 - A6 SIMS91
-
A1 - A6 Simulated Exams MCQ And SIMS114
