2.13.19 Flashcards
An auditor performs a test to determine whether all merchandise for which the client was billed was received. The population for this test consists of all
Vendors’ invoices.
Vendors’ invoices are the billing documents received by the client. They describe the items purchased, the amounts due, and the payment terms. The auditor should trace these invoices to the related receiving reports.
Which of the following factors most likely would cause an auditor to question the integrity of management?
Audit tests detect material fraud that was known to management, but not disclosed to the auditor.
The auditors request written representations from management. These include disclosures of fraud or suspected fraud affecting the entity involving (1) management, (2) employees who participate significantly in internal control, and (3) others if the fraud is material. If management fails to provide written representations about such matters, the auditor should (1) reevaluate management’s integrity, (2) determine the possible effect on the opinion, and (3) withdraw from the engagement in appropriate circumstances (AU-C 580).
To check the accuracy of hours worked, an auditor would ordinarily compare clock cards with
Shop job time tickets.
The auditor should compare shop job time tickets with the clock cards to determine the accuracy of the hours worked. The job tickets, which contain the total hours worked on each job, should not vary significantly from the employee time cards used to compute payroll.
When performing tests of controls with respect to the effectiveness of internal controls related to cash receipts, an auditor may use a systematic sampling technique with a start at any randomly selected item. The biggest disadvantage of this type of sampling is that the items in the population
May occur in a systematic pattern, thus destroying the sample randomness.
Systematic sampling is accomplished by selecting a random start and taking every nth item in the population. The value of n is computed by dividing the population by the size of the sample. The random start should be in the first interval. Because the sampling technique only requires counting in the population, no correspondence between random numbers and the items in the population is necessary as in random number sampling. A systematic sampling plan assumes the items are arranged randomly in the population. If the auditor discovers that this is not true, a random selection method should be used.
Which of the following matters will an auditor most likely include in a management representation letter?
Management’s acknowledgment of its responsibility to detect employee fraud.
Management should make specific representations about (1) acknowledgment of its responsibility for designing, implementing, and maintaining internal control to prevent and detect fraud; (2) knowledge of fraud or suspected fraud affecting the entity involving management, employees with significant roles in internal control, or others if the fraud could materially affect the financial statements; and (3) knowledge of allegations of fraud or suspected fraud affecting the entity obtained in communications from employees or others.
Which of the following courses of action would an auditor most likely follow in planning a sample of cash disbursements if the auditor is aware of several unusually large cash disbursements?
Stratify the cash disbursements population so that the unusually large disbursements are selected.
Stratifying a population means dividing it into subpopulations, thereby permitting application of different sampling techniques to each subpopulation or stratum. Stratifying allows for greater emphasis on larger or more important items.
Which of the following payroll control activities would most effectively ensure that payment is made only for work performed?
Require employees to have their direct supervisors approve their time cards.
An employee’s supervisor is in the best position to determine that the employee was present and did the assigned work. Thus, the supervisor approves (authorizes) the work performed (executed) by the employee.
After considering management’s plans, an auditor concludes that there is substantial doubt about a client’s ability to continue as a going concern for a reasonable period of time. The auditor’s responsibility includes
Considering the adequacy of disclosure about the client’s possible inability to continue as a going concern.
The auditor considers (1) identified conditions and events in the aggregate that raise going-concern issues, (2) management’s written representations, and (3) management’s plans for coping with their adverse effects. The auditor then may conclude that a substantial doubt exists about the entity’s ability to continue as a going concern for a reasonable period of time. In that case, the auditor should consider the possible effects on the financial statements and the adequacy of disclosure. The auditor also should include an emphasis-of-matter paragraph in the report.
The sample size of a test of controls varies inversely with
Expected population of deviation rate:
Tolerable population deviation rate:
No
Yes
The expected population deviation rate directly affects the sample size. As it increases, the sample size increases. However, the tolerable population deviation rate varies inversely with sample size. As it decreases, the sample size increases.
An advantage of statistical over nonstatistical sampling methods in tests of controls is that the statistical methods
Provide an objective basis for quantitatively evaluating sample risks.
The results of statistical (probability) sampling are objective and subject to the laws of probability. Hence, sampling risk can be quantified and controlled, and the degree of reliability desired (the confidence level) can be specified. Sampling risk is the risk that the sample selected does not represent the population.
The adverse effects of events causing an auditor to believe there is substantial doubt about an entity’s ability to continue as a going concern would most likely be mitigated by evidence relating to the
Marketability of assets that management plans to sell.
Once an auditor identifies conditions and events indicating that a substantial doubt exists about an entity’s ability to continue as a going concern, (s)he should consider management’s plans to mitigate their adverse effects. With regard to plans to sell assets, the auditor’s considerations may include restrictions on disposal, marketability of the assets, and the possible direct and indirect effects of the disposal. Thus, the greater the marketability of the assets, the greater the potential mitigation.
Assume that an auditor estimates that 10,000 checks were issued during the accounting period. If a computer application control that performs a limit check for each check request is to be subjected to the auditor’s test-data approach, the sample should include
one transaction.
A limit check compares an input with a limit (e.g., the number of the month cannot exceed 12). If the limit is exceeded, an error message is printed. Because this is a mechanical check (done by the computer), only one transaction need be in the sample. The transaction should exceed the limit to verify that the limit check is operating correctly.
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 directly consider the
I. Likely rate of deviations
II. Allowable risk of underreliance
I only.
The factors necessary to determine sample size in an attribute sampling plan for a large population include (1) the tolerable deviation rate, (2) the acceptable risk of overreliance, and (3) the expected deviation rate.
A CPA firm is completing the field work 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?
recurring working capital shortages.
AU-C 570 requires auditors to evaluate whether substantial doubt exists about an entity’s ability to continue as a going concern, based on procedures planned and performed to obtain evidence about management assertions in the financial statements. An auditor should examine (1) negative trends, (2) indications of financial difficulties, (3) internal problems, and (4) external problems. Recurring working capital shortages indicate financial difficulty.
An auditor ordinarily uses a working trial balance resembling the financial statements without notes, but containing columns for
reclassification and adjustments.
A working trial balance is ordinarily used to record the year-end ledger balances prior to audit in the audit documentation. Reclassifications and adjustments are accumulated on the trial balance to reflect the final audited balances.
