AUD 7 Flashcards
Which of the following most likely would be an advantage in using classical variables sampling rather than probability-proportional-to-size (PPS) sampling?
A. An estimate of the standard deviation of the population’s recorded amounts is not required.
B. The auditor rarely needs the assistance of a computer program to design an efficient sample.
C. Inclusion of zero and negative balances generally does not require special design considerations.
D. Any amount that is individually significant is automatically identified and selected.
C. Inclusion of zero and negative balances generally does not require special design considerations. Explanation - Because PPS sampling utilizes dollar units for sampling, the inclusion of zero and negative balances requires special design considerations. This would be an advantage for classical variables sampling, rather than PPS sampling.
Which of the following sampling methods would be used to estimate a numerical measurement of a population, such as a dollar value? A. Discovery sampling. B. Numerical sampling. C. Sampling for attributes. D. Sampling for variables.
D. Sampling for variables. Explanation - Variables sampling, which includes such methods as mean per unit, would be used to provide a numerical estimate of a population.
Which of the following most likely would be an advantage in using classical variables sampling rather than probability-proportional-to-size (PPS) sampling?
A. An estimate of the standard deviation of the population’s recorded amounts is not required.
B. The auditor rarely needs the assistance of a computer program to design an efficient sample.
C. Inclusion of zero and negative balances generally does not require special design considerations.
D. Any amount that is individually significant is automatically identified and selected.
C. Inclusion of zero and negative balances generally does not require special design considerations. Explanation - Because PPS sampling utilizes dollar units for sampling, the inclusion of zero and negative balances requires special design considerations. This would be an advantage for classical variables sampling, rather than PPS sampling.
In statistical sampling methods used in substantive testing, an auditor most likely would stratify a population into meaningful groups if
A. Probability proportional to size (PPS) sampling is used.
B. The population has highly variable recorded amounts.
C. The auditor’s estimated tolerable misstatement is extremely small.
D. The standard deviation of recorded amounts is relatively small.
B. The population has highly variable recorded amounts. Explanation - A population with highly variable recorded amounts will have amounts that cover a wide range. Stratifying such a population would involve separating the population into homogeneous groups based on size or other factors. In this manner, the auditor could select transactions to meet specific audit objectives and perform substantive procedures more efficiently. For example, the auditor could select all of the larger transactions over a specific dollar amount and a portion of the smaller transactions.
To solve a problem for how big your sample size should beusing PPS Sampling you would…..
Reliability factor (from tables) × Book value/ Tolerable misstatement, net of expected misstatements
Example - Reliability factor of 3 from the table, Book value of the account is $240K, Toerable misstatement is $24K.
You would get an answer of 30.
In a PPS sampling application, the sampling interval was $6,000. The auditor discovered that a selected account receivable having a recorded amount of $5,000 had an audit amount of $1,000. What was the projected error associated with this sample?
A. $ 4,000
B. $ 1,200
C. $ 4,800
D. $ 3,200
C. $ 4,800
Explanation - When the recorded balance of the account involved is less than the sampling interval, the auditor must determine the “tainting” percentage and apply that percentage to the sampling interval. In this case the tainting percentage = [($5,000 − $1,000)/$5,000] = 80%. Accordingly, the projected misstatement is $6,000 × 80% = $4,800.
An auditor may decide to increase the risk of incorrect rejection when
A. Increased reliability from the sample is desired.
B. Many differences (audit value minus recorded value) are expected.
C. Initial sample results do not support the planned level of control risk.
D. The cost and effort of selecting additional sample items are low
D. The cost and effort of selecting additional sample items are low.
Explanation - The risk of incorrect rejection relates to the efficiency of the audit. If the auditor incorrectly believes that a material misstatement exists, the auditor will perform extra auditing procedures to try to find the material misstatement. After performing the extra work, the auditor will then reach the correct conclusion that the balance is fairly stated.
When the auditor decides to increase the risk of incorrect rejection, the auditor is increasing the risk of audit inefficiency, i.e., of doing too much work. This decision might seem appropriate if the cost and effort of selecting additional sample items are low.
An auditor most likely would test for the presence of unauthorized EDP program changes by running a
A. Program with test data.
B. Check digit verification program.
C. Source code comparison program.
D. Program that computes control totals.
C. Source code comparison program.
Explanation - A comparison of the compiled object program code with the original program would reveal unauthorized program changes.
When evaluating internal control of an entity that processes sales transactions on the Internet, an auditor would be most concerned about the
A. Lack of sales invoice documents as an audit trail.
B. Potential for computer disruptions in recording sales.
C. Inability to establish an integrated test facility.
D. Frequency of archiving and data retention.
B. Potential for computer disruptions in recording sales.
Explanation - The Internet is a large and growing communications media that provides advantages in terms of speed and ready access. The size and complexity of the Internet, however, present many challenges and potential difficulties. In an Internet sales system, the auditor would be most concerned about the potential for computer disruptions. The recording of sales via the Internet is subject to internal and external system failures, virus and hacker attacks, power fluctuations, etc.
Which of the following are essential elements of the audit trail in an electronic data interchange (EDI) system?
A. Network and sender/recipient acknowledgments.
B. Message directories and header segments.
C. Contingency and disaster recovery plans.
D. Trading partner security and mailbox codes.
A. Network and sender/recipient acknowledgments.
Explanation - Network and sender/recipient acknowledgments document the trail of accounting data (and transactions) through the system. In doing so, they serve as essential elements of the audit trail in an EDI system.
Which of the following is an example of a validity check?
A. The computer ensures that a numerical amount in a record does not exceed some predetermined amount.
B. As the computer corrects errors and data are successfully resubmitted to the system, the causes of the errors are printed out.
C. The computer flags any transmission for which the control field value did not match that of an existing file record.
D. After data for a transaction are entered, the computer sends certain data back to the terminal for comparison with data originally sent.
C. The computer flags any transmission for which the control field value did not match that of an existing file record.
Explanation - A validity check is a check to see if the data carry valid values. Of the items listed, this item is the only validity check. The computer matches a control field value to an existing file record and highlights those which do not match.
Which of the following controls would most likely help ensure that all credit sales transactions of an entity are recorded?
A. The billing department supervisor sends copies of approved sales orders to the credit department for comparison to authorized credit limits and current customer account balances.
B. The accounting department supervisor independently reconciles the accounts receivable subsidiary ledger to the accounts receivable control account monthly.
C. The accounting department supervisor controls the mailing of monthly statements to customers and investigates any differences reported by customers.
D. The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.
D. The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.
Prenumbering is the standard cure for completeness. Having the billing department supervisor match prenumbered shipping documents with entries in the sales journal will help ensure that all credit sales transactions are recorded.
Processing data through the use of simulated files provides an auditor with information about the operating effectiveness of control policies and procedures.
One of the techniques involved in this approach makes use of
A. Input validation.
B. Program code checking.
C. Controlled re-processing.
D. Integrated test facility.
D. Integrated test facility.
Explanation - An integrated test facility is a concurrent audit technique that processes data through the use of simulated files. It involves the creation of a dummy company against which transactions are submitted for processing concurrently with “live” transactions. The auditor is able to determine whether controls are working properly and whether processing is correct.
Which of the following statements is not true of the test data approach to testing an accounting system?
A. Test data are processed by the client’s computer programs under the auditor’s control.
B. The test data need consist of only those valid and invalid conditions that interest the auditor.
C. Only one transaction of each type need be tested.
D. The test data must consist of all possible valid and invalid conditions.
D. The test data must consist of all possible valid and invalid conditions.
Explanation - Test data could not possibly consist of ALL POSSIBLE valid and invalid conditions.
An auditor using audit software probably would be least interested in which of the following fields in a computerized perpetual inventory file?
A. Economic order quantity.
B. Warehouse location.
C. Date of last purchase.
D. Quantity sold.
A. Economic order quantity.
Explanation - The auditor’s primary objective in reviewing the perpetual inventory file is to verify the financial statement assertions pertaining to inventory. As a result, the auditor would focus on such fields as warehouse location, date of last purchase, and quantity sold. The auditor would be LEAST interested in economic order quantity, which is not relevant to verifying the year-end inventory.
