Auditing Exam 3

Asate - Dr. Steve

A software application will not allow a sale to be processed if a customer is over its credit limit. This is an example of:

a. a detective control

b. a preventive control

c. an IT general control

d. an IT-dependent manual control

b. a preventive control

The software application compares all sales invoices with underlying shipping information on the bills of lading and packing slips with sales invoices. If differences are revealed, a report is generated for review and follow-up by the billing supervisor. This is an example of:

a. a detective control

b. a preventive control

c. an IT general control

d. an IT-dependent manual control

a. a detective control

ITGCs are important because they:

a. prevent unauthorized personnel from having access to data and applications

b. impact the effectiveness of manual controls

c. prevent the reliability of electronic audit evidence

d. allow client staff to change programs without needing to receive authorization for the change

a. prevent unauthorized personnel from having access to data and applications

Which of the following represents an example of an IT application control?

a. The assistant controller performs a monthly bank reconciliation and follow-up of unexpected outstanding items

b. The accounts receivable manager reviews credit balances in accounts receivable quarterly to determine their causes

c. The software application compares all sales invoices with underlying shipping information on the bills of lading and packing slips with sales invoices. If differences are revealed, a report is generated for review and follow-up by the billing supervisor

d. All changes to software applications must be reviewed and approved by the department affected by the application

c. The software application compares all sales invoices with underlying shipping information on the bills of lading and packing slips with sales invoices. If differences are revealed, a report is generated for review and follow-up by the billing supervisor

An auditor is going to test the client’s controls over bank reconciliations. The auditor will perform which of the following audit procedures for this test of controls?

a. Software-based audit techniques using test data

b. Inquiry of the person performing the bank reconciliation

c. Reperformance of the bank reconciliation procedure

d. Inquiry of the person performing the bank reconciliation and reperformance of the bank reconciliation procedure

d. Inquiry of the person performing the bank reconciliation and reperformance of the bank reconciliation procedure

The auditor decides which controls to test by considering: 

a. the points at which error or fraud can occur

b. the nature of controls implemented by mangement

c. the significance of each control in achieving its control objective

d. all of the answer choices are correct

d. all of the answer choices are correct

When obtaining an understanding of internal controls, the auditor identifies important programmed application controls over the occurrence of sales. However, the auditor has serious concerns about the adequacy of the control environment due to a weak tone at the top about control consciousness. Which of the following best describes how the auditor should respond to this situation when planing tests of controls related to the occurrence of sales?

a. The auditor could assess control risk as low for an assertion after performing software-based audit techniques on controls relevant to the assertion

b. The auditor could assess control risk as low for an assertion after performing software-based audit techniques on controls relevant to that assertion and assessing the adequacy of segregation of duties

c. The auditor will probably assess control risk at the maximum irrespective of the quality of the programmed application controls

d. The auditor could assess control risk as low for an assertion if ITGCs were tested and shown to be strong

c. The auditor will probably assess control risk at the maximum irrespective of the quality of the programmed application controls

Which of the following would require the auditor to increase the level of control testing for a particular control?

a. The control is performed monthly instead of daily

b. There are several controls relating to a particular audit objective

c. The WCGW addressed by the control is not very imporatnt

d. A high degree of reliance is to be placed on the control to limit the amount of substantive procedures required

d. A high degree of reliance is to be placed on the control to limit the amount of substantive procedures required

Benchmarking is a process that involves:

a. comparing the effectiveness of one control with another control

b. an audit strategy that allows an auditor to rely on IT application controls if manual follow-up procedures are strong

c. an audit strategy that allows the auditor to use evidence from testing an IT application control in a prior period if the application has not been changed

d. an audit strategy that allows the auditor to test only identified key controls rather than all controls used by the client

c. an audit strategy that allows the auditor to use evidence from testing an IT application control in a prior period if the application has not been changed

If an auditor decides to assess control risk as low based on IT application control procedures, which of the following would not be part of the auditor’s strategy for testing controls?

a. Testing the effectiveness of IT general control procedures

b. Testing the effectiveness of management review controls used to monitor the results of operations

c. Testing the effectiveness of manual follow-up procedures

d. Testing the effectiveness of the application with test data

b. Testing the effectiveness of management review controls used to monitor the results of operations

If an auditor performs tests of controls and determines that a control is not effective, what should the auditor’s next step in testing controls be?

a. Document the results of tests of controls and proceed with primarily substantive approach

b. Determine if a compensating control exists

c. Perform tests of controls on compensating controls

d. Document the results of tests of controls and proceed with the planned audit strategy

b. Determine if a compensating control exists

An unqualified independent service auditor’s opinion in a SOC 1, type 2 report states that:

a. management’s description of the system that was designed and implemented through the period in question is presented fairly.

b. the controls related to the control objectives stated in the description were suitably designed to provide reasonable assurance that the control objectives would be achieved if the controls operated effectively throughout the period

c. the controls operated effectively to provide reasonable assurance that the control objectives stated in the description were achieved throughout the period

d. all of the answer choices are correct 

d. all of the answer choices are correct 

An important part of management’s assertion in a SOC 1, Type 2 report is that the service organization’s management asserts that:

a. its internal controls will prevent, or detect and correct, all material misstatements

b. the company’s control environment is effective

c. the control objectives stated in the description were suitably designed and operated effectively throughout the period covered by the report

d. the system of internal controls has no material weaknesses or significant deficiencies

c. the control objectives stated in the description were suitably designed and operated effectively throughout the period covered by the report

When the user entity outsources key aspects of its accounting system to an outside service organization, the user auditor needs to obtain a SOC 1, type 2 report to determine:

a. if any management letter comments are warranted

b. how service organization controls will influence choices about the nature, timing, and extent of substantive audit procedures

c. if user entity controls can be relied on

d. if service organization controls address cybersecurity risks

b. how service organization controls will influence choices about the nature, timing, and extent of substantive audit procedures

Working papers:

a. document the auditor’s conclusion about control risk and the basis for that conclusion

b. are necessary for the first-year auditor to keep track of the daily work but are not important to the overall audit

c. document the results of the tests but not the purpose of the control selected for testing

d. document the purpose of the control selected for testing and the conclusion made by the auditor but not the results of the test

a. document the auditor’s conclusion about control risk and the basis for that conclusion

A management letter:

a. lists only the material weaknesses discovered during the audit

b. is written by management to the auditor at the start of the audit

c. contains recommendations for improving significant deficiencies and material weaknesses in internal control discovered during the course of the audit

d. is only required for public company audits

c. contains recommendations for improving significant deficiencies and material weaknesses in internal control discovered during the course of the audit

Software will not allow sale to be processed to a customer that has exceeded its credit limit.

a. Preventive control, IT application control

b. Preventive control, IT general control

c. Detective control, IT application control

d. Detective control, IT general control

a. Preventive control, IT application control

Personnel responsible for running computer programs are prevented form accessing and changing computer software.

a. Preventive control, IT application control

b. Preventive control, IT general control

c. Detective control, IT application control

d. Detective control, IT general control

b. Preventive control, IT general control

Computer software generates a daily report of all shipping documents (bills of lading) that have not resulted in a sales invoices

a. Preventive control, IT application control

b. Preventive control, IT general control

c. Detective control, IT application control

d. Detective control, IT general control

c. Detective control, IT application control

An accounting clerk follows-up on a computer-generated report of all shipping documents (bills of lading) that have not resulted in a sales invoices, to determine if an invoice should be generated

a. Preventive control, IT dependent manual control

b. Preventive control, IT general control

c. Detective control, IT dependent manual control

d. Detective control, IT general control

c. Detective control, IT dependent manual control

An accounting employee performs a monthly bank reconciliation

a. Preventive control, IT dependent manual control

b. Preventive control, IT general control

c. Detective control, IT dependent manual control

d. Detective control, IT general control

c. Detective control, IT dependent manual control

Valuable inventory is stored in a locked storeroom where access is limited to a few key individuals

a. Preventive control, IT dependent manual control

b. Preventive control, Manual control

c. Detective control, IT dependent manual control

d. Detective control, Manual control 

b. Preventive control, Manual control

Management reviews business risks quarterly (or as significant risks emerge) and documents controls intended to respond to risks

a. Preventive control, IT dependent manual control

b. Preventive control, Manual control

c. Detective control, IT dependent manual control

d. Detective control, Manual control 

b. Preventive control, Manual control

Computer software will only allow paychecks to be written to individuals who are on a master employee file

a. Preventive control, IT application control

b. Preventive control, Manual control

c. Detective control, IT application control

d. Detective control, Manual control 

a. Preventive control, IT application control

Management reviews a report of variances from budget monthly and investigates unusual variances

a. Preventive control, IT application control

b. Preventive control, IT dependent manual control

c. Detective control, IT application control

d. Detective control, IT dependent manual control

d. Detective control, IT dependent manual control

Password controls limit access to specific computer files and software application. Passwords are changed regularly

a. Preventive control, IT application control

b. Preventive control, IT dependent manual control

c. Detective control, IT application control

d. Detective control, IT dependent manual control

a. Preventive control, IT application control

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

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. Substantive procedures and analytical procedures

b. Substantive analytical procedures and tests of controls

c. Tests of controls and tests of details

d. Tests of details and substantive procedures

c. Tests of controls and tests of details

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 substantive tests on inventory

d. Perform only tests of controls on inventory

c. Perform only substantive tests on inventory

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. 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

d. 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

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. Inspect the policy manual establishing this control activity

b. Ask the chief technology officer about known problems

c. Observe whether the data center is monitored

d. Obtain a list of current data center employees

c. Observe whether the data center is monitored

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 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

An advantage of using statistical over nonstatistical sampling methods in tests of controls is that the statistical methods:

a. Can more easily convert the sample into a dual-purpose test useful for substantive testing

b. Eliminate the need to use judgment in determining appropriate sample sizes

c. Afford greater assurance than a nonstatistical sample of equal size

d. Provide an objective basis for quantitatively evaluating sample risk

d. Provide an objective basis for quantitatively evaluating sample risk

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 exceed the tolerable rate

b. The deviation rates of both the auditor’s sample and the population is less than the tolerable rate

c. 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

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

c. 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

As a result of tests of controls, an auditor assesses control risk too high. This incorrect assessment most likely occurred because:

a. control risk based on the auditor’s sample is less than the true operating effectiveness of the client’s control activity

b. The auditor believes that the control activity relates to the client’s assertions when, in fact, it does not

c. The auditor believes that the control activity will reduce the extent of substantive testing when, in fact, it will not

d. Control risk based on the auditor’s sample is greater than the true operating effectiveness of the client’s control activity

d. Control risk based on the auditor’s sample is greater than the true operating effectiveness of the client’s control activity

For which of the following audit tests would a CPA most likely use attribute sampling?

a. Identifying entries posted to incorrect accounts

b. Estimating the amount in an expense account

c. Evaluating the reasonableness of depreciation expense

d. Selecting receivables for confirmation of account balances

a. Identifying entries posted to incorrect accounts

An auditor who uses statistical sampling for attributes in testing controls should reduce the planned reliance on a prescribed control when the:

a. Sample rate of deviation plus the allowance for sampling risk equals the tolerable rate

b. Sample rate of deviation is less than the expected rate of deviation used in planning the sample

c. Tolerable rate less the allowance for sampling risk exceeds the sample rate of deviation

d. Sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate

d. Sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate

An auditor is using statistical sampling in testing whether cash disbursements were properly authorized. The sample results indicate that the sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate. Under these circumstances, the auditor most likely would reduce the:

a. Planned reliance on the prescribed control

b. Assessed level of control risk

c. Planned reliance on substantive tests

d. Tolerable rate of deviations

a. Planned reliance on the prescribed control

If an auditor of a nonissuer discovers an unexpectedly high number of deviations during procedures performed on a sample to test management's review and approval of time sheets, then the auditor would most appropriately:

a. Increase the tolerable rate of deviation

b. Extrapolate the impact of the exceptions on other key controls requiring management review

c. Propose an audit adjustment

d. Increase the assessed risks of material misstatement

d. Increase the assessed risks of material misstatement

An auditor's letter issued on significant deficiencies relating to a nonissuer's internal control observed during a financial statement audit should:

a. Include a brief description of the test of controls performed in searching for significant deficiencies and material weaknesses

b. Indicate that the significant deficiencies should be disclosed in the annual report to the entity’s shareholders

c. Include a paragraph describing management’s assessment concerning the effectiveness of internal control

d. Indicate that the audit’s purpose was to report on the financial statements and not provide an opinion on internal control

d. Indicate that the audit’s purpose was to report on the financial statements and not provide an opinion on internal control

Which of the following factors should an auditor consider in making a judgment about whether a control deficiency is a significant deficiency?

I.	The likelihood that a control will fail to prevent or detect a misstatement.
II.	The magnitude of the misstatement that could result from the deficiency.

a. I only

b. II only

c. Both I and II

d. Neither I nor II

c. Both I and II

With respect to the financial statement audit of a nonissuer, significant deficiencies are matters that come to an auditor's attention, which should be communicated to an entity's management and those charged with governance because they represent:

a. material irregularities or illegal acts perpetrated by high-level management

b. Deficiencies in the design or operation of internal control that are important enough to merit attention by those responsible for oversight of the company’s financial reporting

c. Flagrant violations of the entity’s documented conflict-of-interest policies

d. Intentional attempts by client personnel to limit the scope of the auditor’s fieldwork

b. Deficiencies in the design or operation of internal control that are important enough to merit attention by those responsible for oversight of the company’s financial reporting

To what degree, if at all, is a significant deficiency related to a material weakness?

a. It is less severe than a material weakness

b. It is more severe than a material weakness

c. It is unrelated to a material weakness

d. It is equivalent to a material weakness

a. It is less severe than a material weakness

A control deficiency would be considered a material weakness when the likelihood that potential financial statement misstatements will not be prevented, or detected/corrected, and the magnitude of such misstatements are at a minimum:

		Likelihood	Magnitude
	A.	Reasonable	Material
	B.	Probable	Material
	C.	Reasonable	More than inconsequential
	D.	Probable	More than inconsequential

a. Reasonable, Material

Which of the following best describes the responsibility of the auditor to report significant deficiencies and material weaknesses in a financial statement audit of a nonissuer?

a. The auditor must communicate both significant deficiencies and material weaknesses

b. the auditor must communicate material weaknesses, but need not disclose significant deficiencies

c. The auditor must communicate significant deficiencies, but need not separately identify material weaknesses

d. Neither significant deficiencies nor material weaknesses are required to be communicated

a. The auditor must communicate both significant deficiencies and material weaknesses

Which of the following is the relevant authoritative literature for an audit of internal control of a nonissuer?

a. Statements on Auditing Standards

b. Statements on Standards for Attestation Engagements

c. PCAOB Auditing Standards

d. Statements on Standards for Accounting and Review Services

a. Statements on Auditing Standards

In an audit of an issuer:

I.	Management must assess and report on internal control.
II.	The auditor must assess and report on internal control.

a. I only

b. II only

c. Either I or II

d. Both I and II

d. Both I and II

In an audit of an issuer, the auditor must provide an opinion on which of the following?

I.	The financial statements.
II.	The audit committee's oversight of financial reporting and internal control.
III.	The effectiveness of internal control.

a. I and III only

b. I, II, and III

c. I and II only

d. I only

a. I and III only

Jackson is auditing the financial statements of Saffer Company, an issuer. Which of the following is true?

a. Jackson is not required to audit internal control, but should report any significant deficiencies or material weaknesses noted

b. Saffer is required to obtain an audit of its internal control, but a professional other than Jackson may be hired for this purpose

c. Jackson is required to audit and report on Saffer’s internal control

d. If Jackson provides an adverse opinion on the financial statements, an audit of Saffer’s internal control is not permitted

c. Jackson is required to audit and report on Saffer’s internal control

Which of the following statements correctly describes the "top-down approach" used during an audit of internal control over financial reporting?

a. Begin reviewing balance sheet accounts and then review income statement accounts

b. Begin reviewing income statements accounts and then review balance sheet accounts

c. Begin by understanding the overall risks to internal control over financial reporting at the financial statement level

d. Begin by understanding the overall risks to internal control over financial reporting at the general ledger level

c. Begin by understanding the overall risks to internal control over financial reporting at the financial statement level

Which of the following best describes the responsibility of the auditor with respect to significant deficiencies and material weaknesses in an audit of an issuer?

		Must be Communicated to Management and the Audit Committee	Results in an Adverse Opinion of the Effectiveness of Internal Control
	A.	Both significant deficiencies and material weaknesses	Both significant deficiencies and material weaknesses
	B.	Both significant deficiencies and material weaknesses	Material weaknesses but not significant deficiencies
	C.	Material weaknesses but not significant deficiencies	Both significant deficiencies and material weaknesses
	D.	Material weaknesses but not significant deficiencies	Material weaknesses but not significant deficiencies

b. Both significant deficiencies and material weaknesses, Material weaknesses but not significant deficiencies

Which of the following best describes the responsibility of the auditor to report significant deficiencies and material weaknesses in an engagement to audit the effectiveness of a nonissuer's internal control?

a. The auditor must communicate both significant deficiencies and material weaknesses

b. The auditor must communicate material weaknesses, but need not disclose significant deficiencies

c. The auditor must communicate significant deficiencies, but need not separately identify material weaknesses

d. neither significant deficiencies nor material weaknesses are required to be communicated

a. The auditor must communicate both significant deficiencies and material weaknesses

Which of the following best describes an auditor’s responsibility with respect to communicating internal control deficiencies of issuers?

a. The auditor is required to communicate all deficiencies in internal control to management, deficiencies that constitute a significant deficiency to the audit committee, and deficiencies that constitute a material weakness to the full board of directors

b. The auditor is required to communicate all deficiencies in internal control to management, and deficiencies that constitute a significant deficiency or a material weakness to management and the audit committee

c. The auditor is not required to communicate control deficiencies to management or the audit committee unless they constitute a significant deficiency or a material weakness

d. The auditor is not required to communicate control deficiencies or significant deficiencies to management or the audit committee, but must communicate material weaknesses to both management and the audit committee

b. The auditor is required to communicate all deficiencies in internal control to management, and deficiencies that constitute a significant deficiency or a material weakness to management and the audit committee

If an auditor performing an integrated audit identifies one or more material weaknesses in a nonissuer's internal control, the auditor should:

a. Expand the audit of internal control to identify deficiencies less severe than material weaknesses

b. Conclude that the financial statements are materially misstated because of the material weakness in internal control

c. Disclaim an opinion on internal control

d. Express and adverse opinion on the entity’s internal control

d. Express and adverse opinion on the entity’s internal control

In an integrated audit of a nonissuer, an auditor should issue an adverse opinion on the effectiveness of an entity's internal control in which of the following situations?

a. The financial statements are misstated

b. A material weakness exists

c. The entity may not continue as a going concern

d. The auditor was asked by the client to provide the report to another practitioner

b. A material weakness exists

In an integrated audit of a nonissuer, if an auditor concludes that a material weakness exists as of the date specified in management’s assessment, the auditor should take which of the following actions?

a. Obtain written representations from management relating to such matters

b. Communicate, in writing, to the entity’s outside legal counsel that the material weakness exists

c. Issue an adverse opinion

d. Disclaim an opinion

c. Issue an adverse opinion

Designing substantive procedures responds to:

a. the risk of material misstatement at the entity level

b. the risk of material misstatement at the assertion level

c. the risk of all types of misstatements at the assertion level

d. the risk of all types of misstatements at the entity level

b. the risk of material misstatement at the assertion level

Which assertion is typically related to income statement accounts rather than balance sheet accounts or presentation and disclosure?

a. completeness

b. accuracy

c. rights and obligations

d. cutoff

d. cutoff

Which of the following would be the most likely to reason to include more unpredictability in the selection and performance of audit procedures?

a. client has a strong control environment

b. client was not audited in the previous year

c. there is heightened risk of fraud

d. unpredictability provides the audit team with more variety

c. there is heightened risk of fraud

The nature of an audit procedure refers to:

a. when the procedure is performed

b. the assessed level of detection risk

c. the sample size required to perform the procedure

d. its purpose and its type

d. its purpose and its type

All of the following are initial procedures performed on an account balance except:

a. agreeing the opening balance to the audited ending balance from the prior year’s working papers

b. footing a trial balance for mathematical accuracy

c. vouching items from the trial balance to supporting documentation

d. scanning account details for unusual items

c. vouching items from the trial balance to supporting documentation

Analytical procedures:

a. are required during the planning and completion phases of the audit

b. are substantive procedures and cannot be used at any other stage of the audit

c. are used to test controls and are not substantive procedures

d. can be used as substantive tests but cannot be used as primary tests of a balance

a. are required during the planning and completion phases of the audit

Which of the following situations increase the reliability of data being used for substantive analytical procedures?

a. The source of the data is the client’s internal budget reports

b. During the prior-year audit, the data were subjected to audit testing

c. Controls over the data have not been tested

d. Broad industry averages will be used in comparison with the client’s data

b. During the prior-year audit, the data were subjected to audit testing

When analyzing the results of substantive procedures, auditors should beware of:

a. professional skepticism

b. audit engagement deadlines

c. confirmation bias

d. weak internal controls

c. confirmation bias

Which of the following situations would most likely preclude an auditor from performing substantive procedures during an interim period?

a. internal controls are weak and the risk of material misstatement is high 

b. internal controls are weak and the risk of material misstatement is low

c. internal controls are strong and the risk of material misstatement is high

d. internal controls are strong and the risk of material misstatement is low

a. internal controls are weak and the risk of material misstatement is high 

Which of the following would not be reason to increase the extent of a substantive test?

a. The risk of material misstatement is high

b. Qualitative factors suggest there may be errors in the account

c. Internal controls are weak

d. Auditors have time to test more items

d. Auditors have time to test more items

Which of the following characteristics of an accounting estimate would lead to a lower assessment of inherent risk?

a. Estimate is related to routine transactions

b. Estimate is derived from a model developed by the client

c. Estimate is related to complex transactions

d. Estimate involves assumptions that cannot be observed in a public market

a. Estimate is related to routine transactions

All of the following are risk assessment procedures for the audit of accounting estimates except:

a. Gain an understanding of what is required by the applicable financial reporting framework

b. Developing an auditor’s estimate

c. Inquire about the outcome of prior-period estimates

d. Determine if an identified risk should be assessed as a significant risk

b. Developing an auditor’s estimate

The auditor’s best estimate of the misstatement in a population based on the misstatement found in a sample drawn from the population is called a:

a. factual misstatement

b. judgmental misstatement

c. confirmation misstatement

d. projected misstatement

d. projected misstatement

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

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. Substantive procedures and analytical procedures

b. Substantive analytical procedures and tests of controls

c. Tests of controls and tests of details

d. Tests of details and substantive procedures

c. Tests of controls and tests of details

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 substantive tests on inventory

d. Perform only tests of controls on inventory

c. Perform only substantive tests on inventory

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. Both audits require the performance of substantive auditing procedures

c. Substantive auditing procedures are required in the financial statements audit, but not in the audit of internal control

d. Neither audit requires the performance of substantive auditing procedures

c. Substantive auditing procedures are required in the financial statements audit, but not in the audit of internal control

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

Which of the following statements is correct regarding accounting estimates?

a. The auditor’s objective is to evaluate whether accounting estimates are reasonable in the circmstances

b. Accounting estimates should be used when data concerning past events can be accumulated in a timely, cost-effective manner

c. An important accounting estimate is management’s listing of accounts receivable greater than 90 days past due

d. Accounting estimates should not be used when the outcome of the future events related to the estimated item is unknown

a. The auditor’s objective is to evaluate whether accounting estimates are reasonable in the circmstances

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

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 bias by management existed

c. To indicate whether a significant deficiency existed

d. To indicate whether an adjustment should have been recorded

b. To indicate whether a bias by management existed

Which of the following is true about an auditor's responsibility with respect to accounting estimates?

a. The auditor is responsible for both preparing accounting estimates and evaluating their reasonableness

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 has no responsibility with respect to accounting estimates

c. The auditor is responsible for evaluating the reasonableness of accounting estimates

Which of the following factors would most likely cause an auditor to use audit sampling versus audit data analytics?

a. Evidence to support the audit test is not available in electronic form

b. The audit population is large, and the auditor’s tests are supported by reliable and relevant data in electronic form, making ADA efficient

c. Relevant data are reliable, and internal controls over the reliability of data are strong

d. Relevant data are clean or can be cleaned up easily

a. Evidence to support the audit test is not available in electronic form

Audit sampling is defined as a situation where:

a. the auditor tests a subset of the population to draw a conclusion about a subset of the population

b. the auditor screens 100% of the population to identify a subset with particular risk traits

c. the auditor tests a representative group that is less than 100% of the population for the purpose of drawing a conclusion about the entire population

d. the auditor screens less than 100% of the population to identify a subset with particular risk traits

c. the auditor tests a representative group that is less than 100% of the population for the purpose of drawing a conclusion about the entire population

Sampling risk:

a. is the risk that the sample chosen by the auditor is not representative of the population of transactions

b. is the risk that the results of the test will be misinterpreted by the auditor

c. can be eliminated by taking a random sample

d. applies only to samples for substantive procedures

a. is the risk that the sample chosen by the auditor is not representative of the population of transactions

Nonsampling risk:

a. only occurs if you test every item of the population

b. only applies to samples taken for the purpose of substantive procedures

c. does not occur if an auditor relies on unreliable evidence

d. is the risk that an auditor arrives at an inappropriate conclusion for a reason unrelated to sampling issues

d. is the risk that an auditor arrives at an inappropriate conclusion for a reason unrelated to sampling issues

the critical difference between statistical and nonstatistical sampling is:

a. the required use of judgment in nonstatistical sampling

b. the elimination of nonsampling risk with statistical sampling

c. the use of the laws of probability in statistical sampling to determine sample size and develop a confidence interval around the results of the sample

d. that more representative samples are attained with statistical sampling

c. the use of the laws of probability in statistical sampling to determine sample size and develop a confidence interval around the results of the sample

An auditor is testing accounts receivable for a client that has 1,000 customers with customer balances that range from $150 to $185,000. The auditor subdivided the receivables into three groups: group 1 has all customers with receivable balances between $185,000 and $100,000, group 2 has all customers with receivable balances between $100,000 and $25,000, and group 3 has all customers with receivable balances less then $25,000. The auditor then randomly selects customer out of each group. This is known as:

a. random selection

b. stratified sampling

c. haphazard selection

d. block selection

b. stratified sampling

Holding all other factors constant, which of the following factors results in an increase in sample size for substantive procedures?

a. A decrease in the amount of expected misstatement in the population to be tested

b. Stratifying the population when appropriate

c. An increase in the amount of tolerable misstatement

d. An increase in the desired level of assurance that the tolerable misstatement is not exceeded by the actual amount of misstatement in the population

d. An increase in the desired level of assurance that the tolerable misstatement is not exceeded by the actual amount of misstatement in the population

When defining the population and sampling unit, sometimes an auditor must look for a reciprocal population. a reciprocal population is:

a. a class of transactions of the account balance to be tested

b. a class of transactions related to the account balance being tested (e.g., sales to accounts receivable).

c. a subset of the population that is the basis for sapling

d. a population that is overstated if the population of interest is understated (or vice versa).

d. a population that is overstated if the population of interest is understated (or vice versa).

The auditor’s decision about the risk of incorrect acceptance affects which of the following factors in a statistical PPS sample?

a. Tolerable misstatement

b. Reliability factor

c. Book value of the population

d. Expected misstatement

b. Reliability factor

An auditor uses nonstatistical ratio estimation to evaluate the results of a sample. The population book value was $2,000,000 and contained 350 items. The auditor selected 100 items with a book value of $500,000. The audited value of the sample was $480,000. the estimated audited value of the population is:

a. $1,980,000

b. $1,930,000

c. $1,920,000

d. $1,900,000

c. $1,920,000

When planning a classical variables sample, the risk of incorrect acceptance and the risk of incorrect rejection are related to what general factor that influences sample size?

a. The desired level of assurance from the sample

b. tolerable misstatement

c. Expected misstatement

d. The use of stratification when sampling

a. The desired level of assurance from the sample

While performing a test of details during an audit, an auditor determined that the sample results supported the conclusion that the recorded account balance was materially misstated. It was, in fact, not materially misstated. This situation illustrates the risk of:

a. Assessing control risk too high

b. Assessing control risk too low

c. Incorrect rejection

d. Incorrect acceptance

c. Incorrect rejection

An auditor discovers that an account balance believed not to be materially misstated based on an audit sample was materially misstated based on the total population of the account balance. This is an example of which of the following sampling types of risks?

a. Incorrect rejection

b. Incorrect acceptance

c. Assessing control risk too low

d. Assessing control risk too high

b. Incorrect acceptance

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. $1,000

b. $2,000

c. $5,000

d. $10,000

b. $2,000

Which of the following conditions necessitates a larger sample size?

a. A high level of detection risk

b. A low frequency of misstatement

c. A low level of tolerable misstatement

d. A low assessed level of control risk

c. A low level of tolerable misstatement

Which of the following statements is correct concerning probability proportional to size (PPS) sampling, also known as dollar unit sampling?

a. The sampling distribution should approximate the normal distribution

b. Overstated units have a lower probability of sample selection than units that are understated

c. The auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan

d. The sampling interval is calculated by dividing the number of physical units in the population by the sample size

c. The auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan

Which of the following is the primary objective of probability proportional to sample size?

a. To identify overstatement errors

b. To increase the proportion of smaller-value items in the sample

c. To identify items where controls were not properly applied

d. to identify zero and negative balances

a. To identify overstatement errors

An auditor wants to determine that all sales adjustments are recorded. This relates to which of the following transaction-class assertions?

a. Occurrence

b. Completeness

c. Accuracy

d. Classification

b. Completeness

If a customer pays its receivable in full but a client fails to record cash received from the customer, which of the following accounting balance assertions related to accounts receivable is misstated?

a. Completeness

b. Rights and obligations

c. Valuation at net realizable value

d. Existence

d. Existence

Assume that an auditor is auditing a public company client that manufactures computer hardware and markets significant maintenance and consulting services. The auditor should be concerned about which of the following?

a. Appropriate accounting for commissions on sales

b. Significant revenue issues associated with bundling products and services

c. More than the usual concern about collection risk

d. Significant concerns about the completeness of revenues

b. Significant revenue issues associated with bundling products and services

An auditor is studying a ratio of accounts receivable growth rate to sales growth rate. Which of the following indicates a potential risk of a collection problem in accounts receivable?

a. Sales grew by 10% and receivables grew by 11% from year one to year two

b. sales declines by 2% and receivables declined by 7% from year one to year two

c. Sales grew by 10% and receivables declined by 2% from year one to year two

d. Sales grew by 5% and receivables grew by 17% from year one to year two

d. Sales grew by 5% and receivables grew by 17% from year one to year two

An audit client that manufactures and sells goods to a network of authorized dealers may create the equivalent of a consignment sale if the client: 

a. only allows goods to be returned if they are damanged

b. allows a cash discount if the receivable is paid within 30 days

c. allows an unconditional right of return at any time until the goods are sold by the dealer

d. ships goods only on a collect on deliver (C.O.D.) basis

c. allows an unconditional right of return at any time until the goods are sold by the dealer