CPA AUDIT REVIEW #4

Question 1

An auditor randomly samples 50 out of 1,000 items and discovers an overstatement of $3,000. What is the projected misstatement for the entire population?

Answer 1

$60,000

An auditor generally extrapolates the misstatement identified for the audit sample to the total population from which the audit sample was selected. The 50 items sampled had a total overstatement of $3,000 or an average overstatement of $60 per item ($3,000 ÷ 50). Projecting to the population results in an estimated misstatement of $60,000 (1,000 × $60).

Question 2

In determining the sample size for a test of controls, an auditor should consider the likely rate of deviations, the allowable risk of overreliance, and the

Answer 2

Tolerable population deviation rate

Question 3

The initial sample size of an attribute sample is based on which (4) factors?

Answer 3

(1) The desired assurance (complement of the risk of overreliance) that the tolerable population deviation rate is not exceeded by the actual rate.

(2) the tolerable population deviation rate

(3) the expected population deviation rate

(4) The population size.

Question 4

Subsequent events that provide evidence of conditions that arose SUBSEQUENT to the date of the financial statements

Answer 4

May require disclosure in notes to the financial statements.

Question 5

200 Invoices were examined
7 Lacked approval
The auditor determined the achieved upper deviation limit to be 8%
What is the allowance for sampling risk?

Answer 5

Allowance for sampling risk = Upper deviation limit - Sample deviation rate ( 7/200 = 3.5%)

8 - 3.5%= 4.5%

Question 6

Sampling Interval - 10,000
A/C Receivable recorded amount - $5.000
Audited amount -$4,000
This was the only misstatement discovered.
What is the projected misstatement?

Answer 6

1. Calculate the tainted percentage - 5,000-4,000/5,000 = 20%
2. Multiple by sampling interval - 10,000 x 20% = $2,000

Question 7

The tick mark Ø most likely indicates that the amount was traced to the

Answer 7

Deposits in transit of the applicable bank reconciliation.

Question 8

The two requirements crucial to achieving audit efficiency and effectiveness with a personal computer are selecting

Answer 8

The appropriate audit tasks for personal computer applications and the appropriate software to perform the selected audit tasks.

Question 9

Purchase cutoff procedures should be designed to test whether all inventory

Answer 9

Purchased and whose title has passed before year end was recorded.

Question 10

An adverse opinion most likely should be expressed when

Answer 10

Management uses an accounting policy not in accordance with the applicable reporting framework.

Question 11

If the possible effects of a scope limitation are material and pervasive

Answer 11

A disclaimer of opinion is expressed.

Question 12

Tracing shipping documents to sales invoices

Answer 12

Detects understatements in sales.

Question 13

Tracing sales invoices to shipping documents

Answer 13

Detects overstatements in sales.

Question 14

When using sampling for substantive tests of details, the auditor is required to do all but which of the following?

Answer 14

Compute the sample standard deviation.

Question 15

When using sampling for substantive tests of details, the auditor is required to do all of the following?

Answer 15

1. Select a representative sample.
2. Project sample misstatement results to the population.
3. Determine the tolerable misstatement.

Question 16

Proper authorization of WRITE-OFFS of uncollectible accounts should be approved in which department?

Answer 16

CFO

Question 17

What are the different types of special purpose frameworks?

Answer 17

(1) the tax basis
(2) the cash basis
(3) a regulatory basis
(4) a contractual basis
(5) a definite set of logical and reasonable criteria applied to all material items in the statements.

Question 18

Management’s discussion and analysis (MD&A) must be in accordance with the rules and regulations adopted by the

Answer 18

SEC

Question 19

Which of the following is usually a benefit of using electronic funds transfer for international cash transactions?

Answer 19

Reduction of the frequency of data entry errors.

Question 20

MD&A most often is presented as

Answer 20

Further explanation of activities of management.

Question 21

An auditor’s purpose in reviewing the renewal of a note payable shortly after the balance sheet date most likely is to obtain evidence concerning relevant assertions about

Answer 21

Classification

Question 22

What determines the sample size for a test of attributes?

Answer 22

(1) The allowable risk of overreliance
(2) The tolerable deviation rate
(3) The expected population deviation rate
(4) The size of the population.

Question 23

An audit of owner’s equity of the balance sheet includes:

Answer 23

1.) Determining that the declared dividend amount was closed into retained earnings.

2.) Tracing the authorization of the dividend from the directors’ minutes.

3.) Determining that dividend declarations have been in compliance with debt agreements.

Question 24

In an audit of a nonissuer, an auditor should evaluate and report on a change in accounting estimate that is inseparable from a related change in principle as a change in

Answer 24

Principle, prospectively, and include an emphasis-of-matter paragraph.

Question 25

When an auditor tests a client’s cost accounting system, the auditor’s tests are primarily designed to determine that

Answer 25

Costs have been properly assigned to finished goods, work-in-process, and cost of goods sold. The cost accounting system assigns costs. It does not reconcile quantities.

Question 26

A primary advantage of using generalized audit software packages to audit the financial statements of a client that uses a computer system is that the auditor may

Answer 26

Access information stored on computer files while having a limited understanding of the client’s hardware and software features.

Question 27

What are the types of computer-assisted auditing techniques?

Answer 27

1. Parallel Simulation (an Auditor's developed program - processes actual client data) 2. Integrated Test Facility - (Dummy transactions entered into client's program.) 3. Test Data Approach (processed with the client's computer program under Auditor's control)

Question 28

As a result of tests of controls, an auditor overrelied on controls and decreased substantive testing. This assessment occurred because the true deviation rate in the population was

Answer 28

More than the deviation rate in the auditor’s sample.

Question 29

What causes an overreliance?

Answer 29

Overreliance occurs if the sample has fewer observed deviations than the true deviation rate in the population.

Question 30

What are the ethical principles for an Auditor under GAS?

Answer 30

1. Public Interest 2. Integrity 3. Objectivity 4. Proper use of government information, resources, and positions (5) Professional behavior

Question 31

When testing the effectiveness of controls, the factor the auditor considers to determine the acceptable sample size is

Answer 31

The tolerable rate of deviation within the population, the expected population deviation rate, the allowable risk of overreliance and the size of a small population.

Question 32

What is a factor used to determine the sample size for a test of details (not controls)?

Answer 32

The desired level of assurance (complement of the risk of incorrect acceptance)

Question 33

What's the difference between attribute and variable sampling?

Answer 33

Attribute sampling is used for test of controls and variables sampling is used for substantive tests.

Question 34

The auditor is most likely to verify accrued commissions payable in conjunction with the

Answer 34

Sales cutoff test

Question 35

A portion of a client’s inventory is in public warehouses. Evidence of the existence of this merchandise can most efficiently be acquired through which of the following methods?

Answer 35

Confirmation

Question 36

In assessing the tolerable rate of deviations of a test of controls that was performed using statistical sampling, an auditor should consider that

Answer 36

Deviations from pertinent controls at a given rate ordinarily result in misstatements at a lower rate.

Question 37

What is the monetary unit sampling formula?

Answer 37

n = RM × RF /TM – (AM × EF) n= Sample Size RM = Recorded or carrying amount RF = Appropriate reliability factor (always from table 1.) TM = Tolerable Misstatement AM = Anticipated Misstatement EF = Expansion Factor (from table 2)

Question 38

The use of the ratio estimation sampling technique is most effective when

Answer 38

The calculated audit amounts are approximately proportional to the client’s carrying amounts.

Question 39

Audit procedures relevant to payments of DEFINED BENEFIT PENSION amounts include

Answer 39

(1) Inquiries of management about pension benefit agreements. (2) Comparison of general ledger and financial statement balances (3) Recalculation of pension costs.

Question 40

What determines the sample size under the mean-per-unit sampling method for inventory?

Answer 40

(1.) Both the variability in the dollar amounts of inventory items (2.) The risk of incorrect rejection (its confidence level) (3.) Population size (4.) An estimate of population variation (the standard deviation) (5.) the tolerable misstatement (the desired allowance for sampling risk is a percentage thereof, and this percentage is a function of the risk of incorrect rejection and the allowable risk of incorrect acceptance).

Question 41

The auditor can best verify a client’s bond sinking-fund transactions and year-end balance by

Answer 41

Confirmation with bond trustee

Question 42

What is a record count?

Answer 42

Is a batch total that compares the items inputted with those processed. For. e.g. comparing inputted time cards with outputted payroll checks.

Question 43

What is a hash total?

Answer 43

A hash total is the sum of a numeric field that has no meaning by itself. It can be used to test that authorized transactions are processed.

Question 44

What is a sequence test?

Answer 44

This test can be used to test for missing documents.

Question 45

What is a field check?

Answer 45

A field check tests for the correct data type in each field.

Question 46

What is a reasonableness test?

Answer 46

A reasonableness test determines whether amount fields appear to be within an acceptable range.

Question 47

What is a validity check

Answer 47

Validity checks are used to compare input with known information from a master file.