Specific Audit Areas Flashcards
(136 cards)
1
Q
Confirmation procedures applicable to assets (e.g., accounts receivable) fundamentally address which assertion associated with account balances at the end of the period?
A
Existence.
2
Q
Audit Procedures Generally Applicable to the Four Assertions for Account Balances
A
Existence—Related to the validity of recorded items.
Completeness—Related to omissions of amounts that should have been recorded.
Rights and Obligations—Related to any restrictions to the entity’s rights to their assets or to the obligations for their liabilities.
Valuation and Allocation—Related to the appropriateness of dollar measurements.
3
Q
Existence—Related to the validity of recorded items.
A
- Confirmation—(Especially when concerned about overstatements.) For example, cash, accounts receivable, inventory held by others, and investments held by others.
- Observation—Especially for inventory or investment securities held by the entity.
- Agree (vouch) to underlying documents—Agree items from the accounting records to the supporting source documents to evaluate the appropriateness of recorded items
4
Q
Completeness—Related to omissions of amounts that should have been recorded.
A
- Cutoff tests—Trace from supporting source documents back to the accounting records looking for omissions. For example, trace from shipping documents to cost of goods sold or to the sales journal, or perform a “search for unrecorded liabilities.”
- Analytical procedures—These are applicable to every audit area, but be specific: calculate a particular ratio or compare something specific to another specific thing!
5
Q
Rights and Obligations—Related to any restrictions to the entity’s rights to their assets or to the obligations for their liabilities.
A
- Inquire of applicable client personnel—Inquire about compensating balances with banks, the use of specific assets as collateral for debts, review debt agreements for collateral, etc.; the management representation letter should document these inquiries regarding important matters.
- Examine authorization of transactions—to ascertain whether any unusual conditions apply.
6
Q
Valuation and Allocation—Related to the appropriateness of dollar measurements.
A
- Recalculate account balances—(Verify the client’s calculations), for example, for depreciation expense and prepaid insurance.
- Trace to subsequent cash receipts or disbursements—Includes tracing to cash receipts or cash disbursements journal and to the bank statement.
- Analytical procedures—review the aged trial balance for accounts receivable to evaluate the apparent reasonableness of the allowance for uncollectibles. (In connection with such analytical procedures, the auditor may also inspect underlying sales invoices or shipping documents to test the accuracy of the entity’s data underlying the analytical procedures.)
- Examine published price quotations for fair value measurements, when applicable
7
Q
Which of the following would be a consideration in planning a sample for a test of subsequent cash receipts?
A
Preliminary judgments about materiality levels.
In planning the sample, the auditor must determine how many and how much, i.e., how many cash receipts and what dollar cut-off. Both are affected by materiality levels.
8
Q
On receiving a client’s bank cut-off statement, an auditor most likely would trace
A
Prior-year checks listed in the cut-off statement to the year-end outstanding checklist as a means of verifying the completeness and accuracy of the outstanding check list.
9
Q
Which of the following procedures would an auditor most likely perform in auditing the statement of cash flows?
A
Reconcile the amounts included in the statement of cash flows to the other financial statements’ amounts.
Reconcile the amounts included in the statement of cash flows to the other financial statements’ amounts.
10
Q
The primary purpose of sending a standard confirmation request to financial institutions with which the client has done business during the year is to
A
Corroborate information regarding deposit and loan balances.
11
Q
The usefulness of the standard bank confirmation request may be limited because the bank employee who completes the form may
A
A standard bank confirmation request, particularly the standard bank confirmation request for loan guarantee information, must be completed by an individual who is knowledgeable about the financial relationships and transactions that the bank has with the client. Otherwise, the usefulness of the confirmation is limited.
12
Q
Which of the following characteristics most likely would be indicative of check kiting?
A
Check kiting occurs when cash is fraudulently created through the transfer of money between banks. Insufficient funds checks are written and deposited among a series of banks and the float is used to “create” cash.
Kiting would be evidenced by a low average balance compared to a high level of deposits because, although deposits are being made, checks are immediately written to remove the funds, resulting in a low average balance.
13
Q
Review the Client’s Bank Reconciliation for Each Cash Account
A
- Request a cutoff bank statement approximately 10 days after year-end, to test the reconciling items on the year-end bank reconciliation. Deposits in transit have been deposited and outstanding checks match checks processed on cut-off statements.
- Confirm directly with the bank the balance according to the bank statement (for any cash or liabilities)
14
Q
During a recent audit of the revenue cycle, a CPA found the client had $1 million in accounts receivable recorded for fictitious customers. Which of the following tests most likely facilitated identification of the fraud?
A
Sending positive confirmations to all of the client’s customers with balances on December 31
A nonresponse indicates a situation that should be followed up by the auditor.
15
Q
An auditor is required to confirm accounts receivable if the accounts receivable balances are
A
Material to the financial statements.
16
Q
Two assertions for which confirmation of accounts receivable balances provides primary evidence are
A
Rights and obligations and existence.
Confirmations of accounts receivable balances provide primary evidence for rights and obligations and existence. Direct responses from third parties provide proof that the accounts receivable are valid (that they exist) and that the amounts are properly owed to the entity.
17
Q
Which of the following most likely would be detected by an auditor’s review of a client’s sales cut-off?
A
Unrecorded sales at year-end
An auditor’s review of sales cut-off would reveal unrecorded sales at year-end as well as subsequent-year sales that were improperly included in the current year.
18
Q
The negative form of confirmation can only be used when four conditions are met
A
(1) the risk of material misstatement (i.e., the combined assessed level of inherent and control risk) is low
(2) a large number of small balances is involved
(3) a very low exception rate is expected
(4) the auditor has no reason to believe that the recipients of the requests are unlikely to give them consideration.
19
Q
In confirming accounts receivable, an auditor decided to confirm the customer’s account balances rather than individual invoices. Which of the following most likely would be included with the client’s confirmation?
A
A client-prepared statement of account showing the details of the customer’s account balance.
20
Q
Which of the following procedures would an auditor most likely perform to identify unusual sales transactions?
A
Performing a trend analysis of quarterly sales
21
Q
Accounts Receivable
A
- Related to the Existence/Occurrence Assertion- Verify that the subsidiary A/R ledger agrees or reconciles with the A/R general ledger balance. Confirm customer accounts (positive and negative confirmations),
- Related to the Valuation Assertion—Evaluate the reasonableness of management’s estimates of allowance for uncollectibles and the allowance for sales returns.
- Related to the Completeness Assertion-Perform a cutoff test of sales. Examine the shipping documents for the last few shipments before year-end and the first few shipments after year-end; compare these shipping documents with the related sales invoices to assess whether the sales were recorded in the appropriate period. Proper cutoff involves two assertions (existence/occurrence and completeness)
- Related to the Rights and Obligations Assertion—Inquire of management: receivables pledged as collateral
22
Q
If no response is received to a positive confirmation request, the auditor should send a second confirmation request, and perform alternate procedures if still no response is received.
A
- Subsequent cash receipts (the preferred alternate procedure)
- Vouch to (inspect) the underlying documents (the last resort if the account has not been collected)
23
Q
Lapping
A
Attempt to cover up a theft of receipts, where a clerk might try to apply a later receipt to the prior customer’s account (and so on) until the scam ends by writing off someone’s account as uncollectible (associated with an improper segregation of duties)
24
Q
The client asked the auditor to audit financial statements covering the current year. The auditor did not observe at the prior year’s physical inventory. Which of the following actions would the auditor most likely take?
A
Audit the prior year inventory using alternative substantive procedures.
25
Which of the following procedures would be most appropriate for testing the completeness assertion as it applies to inventory?
Performing cut-off procedures for shipping and receiving.
The completeness assertion pertains to transactions that have not been recorded or are missing. Performing cut-off procedures for shipping and receiving enables the auditor to detect late transactions that may not have been recorded in the proper period and may be missing from the current (audit) year.
26
Which of the following is necessary if the auditor plans to observe inventories at interim dates?
Perpetual inventory records are maintained.
If inventory is to be observed at an interim date, perpetual inventory records must be maintained. Such records will provide the book balances against which the physical count can be compared.
27
Which of the following auditing procedures most likely would provide assurance about a manufacturing entity's inventory valuation?
Testing the entity's computation of standard overhead rates
Gaining assurance about the valuation of inventory requires, among other things, determining that inventories have been properly priced at the lower of cost or market. The determination of cost is obtained by reviewing current production costs, which might include testing the entity's computation of standard overhead rates.
28
An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support management's financial statement assertion of
Valuation or allocation.
29
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?
Tests of controls and tests of details
A “dual-purpose” test involves gathering evidence in part to evaluate the effectiveness of internal control and in part to evaluate the fairness of the financial statements. “Tests of controls” address the internal control part of the dual-purpose test; and the inspection of underlying accounting documents constitutes a test of details, which addresses the substantive part of the dual-purpose test.
30
Inventory
1. Related to the Existence Assertion- The client counts the entire inventory and the auditor observes the client's taking of the inventory (while taking independent test counts ). The auditor participates in this process for two primary reasons, referred to as dual purpose tests.
2. Related to the Valuation Assertion- price tests based on underlying invoices for merchandise or job order cost records in manufacturing
3. Related to the Completeness Assertion- Test inventory cutoff and analytical procedures (Compare the current year to the prior year and inquire about any significant differences)
4. Related to the Rights and Obligations Assertion- Inquire of management about any inventory that might be held on consignment or pledged as collateral
31
Dual purpose tests
1. Internal control objectives—The auditor should study the client's written procedures and instructions given to the employees or others counting the inventory to assess the adequacy of the design of these procedures
2. Substantive audit objectives—The auditor should take a sample of inventory items and verify the physical existence of quantities reflected in the client's detailed records supporting the ending inventory
32
To test existence for inventory
The auditor should select items from the client's (final) inventory listing, which is essentially the subsidiary ledger for the adjusted general ledger balance. The auditor should agree those selected items to the underlying inventory count tags (and the auditor's own count sheets) that serve as source documents.
33
To test completeness for inventory
The auditor should select items from the underlying inventory count tags (including the auditor's own count sheets) and agree those to the client's inventory listing to establish that there were no omissions from the client's inventory listing.
34
How should an auditor verify the valuation of marketable securities at the balance sheet date?
Compare the prices of the securities to published closing prices at the balance sheet date.
35
In establishing the existence and ownership of long-term investments in the form of publicly traded stock, an auditor most likely would inspect the securities or
Confirm the number of shares owned that are held by an independent custodian.
36
To satisfy the valuation assertion when auditing an investment accounted for by the equity method, an auditor most likely would
Examine the audited financial statements of the investee company.
37
A client has a large and active investment portfolio that is kept in a bank safe deposit box. If the auditor is unable to count the securities at the balance sheet date, the auditor most likely will
Request the client to have the bank seal the safe deposit box until the auditor can count the securities at a subsequent date.
38
Investments in Securities and Derivative Instruments
The standard states that the auditor's objective is to obtain sufficient appropriate audit evidence about the valuation of investments in securities and derivative instruments. Determine fair value based on active market. If no active market, gain understanding of valuation model used.
39
Investments in Securities When Valuations Are Based on Cost
The usual auditing procedures may include inspection of documentation of the purchase price, confirmation with outside parties, and testing the amortization of any discount or premium.
40
Investments in Securities When Valuations Are Based on the Investee's Financial Results
Reading the Audited Financial Statements of the Investee May Provide Sufficient Appropriate Audit Evidence
41
Summary of Procedures with Emphasis on Four Balance-Sheet-Related Assertions for Investments:
1. Related to the Existence Assertion—The auditor mainly uses inspection and confirmation.Physically inspect any securities in the possession of the client entity. Confirm any stocks and bonds held by an independent custodian.
2. Related to the Completeness Assertion—The auditor primarily uses analytical procedures to address the risk of omissions.
3. Related to the Valuation Assertion- verify interest, carrying value and dividends
4. Related to the Valuation Assertion
42
An auditor's principal objective in analyzing repairs and maintenance expense accounts is to
Discover expenditures that were expensed, but should have been capitalized.
43
Which of the following procedures would an auditor most likely complete to test the existence assertion of property, plant and equipment?
Obtaining a listing of all current-year additions, vouching significant additions to original invoices, and determining that they have been placed in service.
Agreeing the recorded additions of fixed assets to the underlying invoices and verifying that the assets have actually been placed in service (perhaps by inspecting the assets) establishes that the recorded assets are properly recorded, which is the essence of the existence assertion.
44
When auditing prepaid insurance, an auditor discovers that the original insurance policy on plant equipment is not available for inspection.
The policy's absence most likely indicates the possibility of a(n)
Lien on the plant equipment.
45
Which of the following explanations most likely would satisfy an auditor who questions management about significant debits to accumulated depreciation accounts in the current year?
Plant assets were retired during the current year.
The retirement of plant assets would result in a debit to accumulated depreciation, along with a credit to the plant assets account for the acquisition cost.
46
In performing a search for unrecorded retirements of fixed assets, an auditor most likely would
Inspecting the property ledger and the insurance and tax records would allow the auditor to identify old assets likely to have been retired. Touring the client's facilities would then allow the auditor to determine whether the assets are still present.
47
Fixed Assets
1. Related to the Existence Assertion- For Additions—Vouch to (inspect) the underlying documents. For Disposals—Trace any proceeds received to the cash receipts journal and bank statement; review for appropriate approval.
2. Valuation Assertion- depreciation expense and impairements
3. Completeness Assertion- repairs and maintenance properly expensed or capitalized
4. Rights and Obligations Assertion
Inquire of management about any fixed assets pledged as security
48
Which of the following procedures would an auditor most likely perform in searching for unrecorded payables?
Compare cash payments occurring after the balance sheet date with the accounts payable trial balance.
49
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 management's assertions about
Presentation and disclosure.
A note payable that is renewed after the balance sheet date would be examined by the auditor in order to ensure that it was properly presented at the balance sheet date and that related disclosures were adequate. This would provide the auditor with evidence for the presentation and disclosure assertions.
50
In auditing accounts payable, an auditor's procedures most likely would focus primarily on management's assertion of
Completeness.
In auditing accounts payable, the auditor is more concerned that the balance may be understated. As a result, the primary assertion of interest is completeness.
51
Current Liabilities
1. Completeness Assertion- Perform a search for unrecorded liabilities. This is done toward the end of fieldwork. Review cash disbursements subsequent to year-end and, for all disbursements over some specified dollar amount (>$X), examine the related vendors’ invoices and the entity's related receiving documents to identify transactions that should have been reported as liabilities as of year-end
2. Existence and Valuation Assertions- Vouch selected items to the underlying vendor's invoices. Usually valuation is not an audit issue.
3. Rights and obligations assertion-Inspect the specific terms of the payables and inquire about any related party transactions
52
The tickmark € is consistently used with respect to payments.
Tracing those payments to the cash disbursements journal and then to the relevant bank statement is a relevant audit procedure to gather evidence as to the validity of identified payments of this debt.
53
An auditor's program to examine long-term debt most likely would include steps that require
Correlating interest expense recorded for the period with outstanding debt.
54
The tickmark ¥ is consistently used with respect to 20X1 "expense."
Calculating the interest expense (presumably using the effective interest method) is a relevant audit procedure to gather evidence as to the reasonableness of such recorded expense.
55
Long-term Liabilities
1. Completeness Assertion—Use substantive tests of transactions (to address decreases in debt. Trace cash disbursements, verify due dates for payments.
2. Existence/Occurrence Assertion—Use substantive tests of transactions (to address increases in debt). Copies of loan agreements, trace receipts from accounting records to bank statements.
3. Valuation Assertion- based on PV, trace cash, recalculate amortization or premium/discount, apply analytical procedures to interest expense
4. Rights and Obligations Assertion- look at debt covenants (if not met, loan could be immediately payable) and collateral pledged
56
In performing tests concerning the granting of stock options, an auditor should
An auditor would trace the authorization for stock options to a vote of the board of directors. This procedure would provide evidence supporting the existence of the stock options.
57
An auditor usually obtains evidence of stockholders' equity transactions by reviewing the entity's
Minutes of board of directors' meetings.
58
When a client company does not maintain its own stock records, the auditor should obtain written confirmation from the transfer agent and registrar concerning
The number of shares issued and outstanding.
59
In auditing a client's retained earnings account, an auditor should determine whether there are any restrictions on retained earnings that result from loans, agreements, or state law.
This procedure is designed to corroborate management's financial statement assertion of
Rights and obligations
AND
Presentation and Disclosure since the restricted RE must be disclosed
60
An auditor reviews the reconciliation of payroll tax forms that a client is responsible for filing in order to
Identify potential liabilities for unpaid payroll taxes.
The salaries and wages on which the payroll taxes are based are typically reconciled to gross salaries and wages per the general ledger. If the amounts differ, it may indicate additional payroll tax liabilities.
61
In auditing payroll, an auditor most likely would
Compare payroll costs with entity standards or budgets.
This comparison would enable the auditor to detect unusual fluctuations or amounts that might indicate a material misstatement is present.
62
Which of the following circumstances most likely would cause an auditor to suspect an employee payroll fraud scheme?
There are significant unexplained variances between standard and actual labor costs
63
When control risk is assessed as low for assertions related to payroll, substantive tests of payroll balances most likely would be limited to applying analytical procedures and
Recalculating payroll accruals.
When control risk is assessed as low, substantive procedures in this area are typically limited to analytical procedures and recalculating year-end accruals.
64
Payroll
1. Accuracy and Occurrence Assertions- Examine personnel records on a test basis, to determine that the levels of compensation and support for all deductions exist for all employees, recalculate and trace select transactions
2. Completeness Assertion-Review time reports and time cards. Apply analytical procedures (and recalculation) to verify that the payroll-related accruals at year-end are reasonable.
3. Cutoff Assertion-effectively addressed when occurrence and completeness have been addressed
4. Classification Assertion-Verify payroll deductions and taxes
65
Use of analytical procedures
Note that ordinarily, income statement elements (including revenue and expense items) are primarily audited by analytical procedures. Typically, tests of details will be performed only when the analytical procedures suggest that a risk of material misstatement exists and that a more detailed investigation is warranted. Payroll-related expenses would normally be subject to such analytical procedures, too.
66
In confirming a client's accounts receivable in prior years, an auditor discovered many differences between recorded account balances and confirmation replies. These differences were resolved and were not misstatements. In defining the sampling unit for the current year's audit, the auditor most likely would choose
Individual invoices.
When there are "many differences" at the account-balance level for accounts receivable, the auditor may choose to focus on specific transactions represented by individual invoices for audit sampling purposes. That may make it easier for customers to respond accurately.
67
An auditor observes the mailing of monthly statements to a client's customers and reviews evidence of follow-up on errors reported by the customers. This test of controls most likely is performed to support management's financial statement assertions of
Existence or occurrence
68
Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests?
Alternative procedures for non-responding accounts receivable would include verification of the sales transactions included in accounts receivable through the examination of shipping records and sales invoices.
69
An auditor selected items for test counts while observing a client's physical inventory. The auditor then traced the test counts to the client's inventory listing. This procedure most likely obtained evidence concerning management's assertion of
Completeness.
70
A weakness in internal control over recording retirements of equipment may cause an auditor to
Select certain items of equipment from the accounting records and locate them in the plant.
71
An auditor may decide to increase the risk of incorrect rejection when
The cost and effort of selecting additional sample items are low.
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.
72
Which of the following statements about audit sampling risks is correct for a nonissuer?
Nonsampling risk can arise because an auditor failed to recognize misstatements.
Nonsampling risk refers to any error unrelated to sampling risk that the auditor might commit when performing an audit sampling task, such as failing to recognize a misstatement or otherwise misinterpreting the audit evidence.
73
An advantage that using statistical sampling has over nonstatistical sampling is that statistical sampling helps an auditor to
1) design an efficient sample;
2) measure the sufficiency of the evidential matter obtained; and
3) evaluate the sample results.
74
There Are Two General Approaches to Sampling
1. Nonstatistical Sampling—Also called judgmental sampling
2. Statistical—The benefits relate to objectivity:
Relates to the sufficiency of the evidence—The determination of the sample size in a statistical sampling application establishes how much evidence is required.
The results may seem more defensible to others (such as the courts).
75
Attributes Sampling:
Sampling for purposes of deciding whether internal controls are working as designed (tests of controls).
Attribute sampling is used to reach a conclusion about a population in terms of a rate of occurrence (quantifiable). Quantifies sampling risk.
76
Variables Sampling:
Sampling for purposes of deciding whether account balances (such as inventory or receivables) are fairly stated (substantive tests of details).
Relies Heavily on the Classic Normal Distribution—(With the bell-shaped curve.)
77
Sampling Risk
1. Type 1 Errors (False Rejection)-Tests of controls => the risk of underreliance on internal controls (also known as risk of assessing control risk too high). Substantive testing => the risk of incorrect rejection.
2. Type 2 Errors (False Acceptance) Tests of controls => the risk of overreliance on internal controls (also known as the risk of assessing control risk too low). Substantive testing => the risk of incorrect acceptance.
78
In attribute sampling, a 25% change in which of the following factors will have the smallest effect on the size of the sample?
Number of items in the population.
Population size is not considered in determining the sample size for an attributes sampling application. The tables that are used to determine the sample size for attributes sampling are based upon an assumption that the population is very, very large. Hence, an increase in the population size would have a negligible effect.
79
To determine the sample size for a test of controls, an auditor should consider the
Expected deviation rate
Tolerable deviation rate
Allowable risk of assessing control risk too low
80
In a test of controls, the auditor compares the tolerable rate (the maximum rate of deviations that the auditor would be willing to accept without altering the planned assessment of control risk) to the achieved upper precision limit (the maximum deviation rate per the sample).
If the achieved upper precision limit is greater than the tolerable rate, the control cannot be relied upon and the control risk assessment will be increased.
81
The allowance for sampling risk was
The allowance for sampling risk is the margin added to the actual sample error rate to obtain the achieved upper precision limit. Thus, the allowance for sampling risk will be equal to the achieved upper precision limit (8%) less the sample error rate (3.5%) or 4.5%.
82
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%?
Modify the planned assessed level of control risk because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate.
If a test of 50 documents results in 3 deviations, the upper error limit will be 8%, which exceeds the tolerable rate of 7%. The upper error limit consists of the sample error rate of 6% (3/50) plus the allowance for sampling risk of 2%.
83
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
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.
84
Attribute Sample size varies inversely with:
Tolerable deviation rate
Risk of overreliance
Risk of underreliance
85
Attribute Sample size varies directly with:
Expected error rate
| Population size
86
tolerable rate
The auditor can only rely on the internal control procedure if the error rate, based on the upper bound of the confidence interval (the achieved upper precision limit from the tables) is less than or equal to the stated tolerable rate.
87
The use of the ratio estimation sampling technique is most effective when
The calculated audit amounts are approximately proportional to the client's book amounts.
If the calculated audit amounts are approximately proportional to the book amounts, a correlation exists between book values and the individual differences, and ratio estimation will be effective.
88
Which of the following sampling methods would be used to estimate a numerical measurement of a population, such as a dollar value?
Sampling for variables.
Variables sampling, which includes such methods as mean per unit, would be used to provide a numerical estimate of a population.
89
Which of the following most likely would be an advantage in using classical variables sampling rather than probability-proportional-to-size (PPS) sampling?
Inclusion of zero and negative balances generally does not require special design considerations.
90
Stratified mean per unit (MPU) sampling is a statistical technique that may be more efficient than unstratified MPU because it usually
Produces an estimate that has a desired level of precision with a smaller sample size.
Stratification of the population enables the auditor to separate the population into size-related classes. For example, all transactions over $50,000 may be grouped into a class.
91
How would increases in tolerable misstatement and assessed level of control risk affect the sample size in a substantive test of details?
Increasing tolerable misstatement decreases sample size, while increasing the assessed level of control risk increases sample size.
92
In an audit of a nonissuer's financial statements, projected misstatement is
An auditor's best estimate of misstatements in a population extrapolated from misstatements identified in an audit sample.
93
Direct relationship to sample size in variable sampling:
Estimated population standard deviation
| Population size
94
Inverse relationship to sample size in variable sampling:
Allowance for sampling risk (tolerable misstatement)
Risk of incorrect acceptance (Type II)
Risk of incorrect rejection (Type I error)
95
Difference Estimation in variable sampling
This approach involves identifying the average dollar differences between the sample's audit values and applicable book values.
Extend that average difference to the population by multiplying it by the number of items in the population
96
Ratio Estimation in variable sampling
This approach involves identifying the ratio of the audit values and book values for the sampled items.
Note that this approach is useful when the dollar amount of the differences between the audit and the book values is expected to be proportional to the book values.
97
Mean-per-Unit Estimation (MPU)
Useful when difference or ratio estimation cannot be used—for example, for inventory when perpetual records do not exist (i.e., there is no “book” value for each individual sample item).
Estimate the population's implied audit value.
98
In a probability-proportional-to-size sample with a sampling interval of $5,000, an auditor discovered that a selected account receivable with a recorded amount of $10,000 had an audit amount of $8,000.
If this were the only error discovered by the auditor, the projected error of this sample would be
$2000
In a probability-proportional-to-size application, the projected error of the sample is the amount of the difference between the book value and the audit value when the amount of the account examined is greater than the sampling interval.
As the selected account receivable was $10,000 and the sampling interval was $5,000, the projected error was $2,000 (the actual difference between the recorded amount and the audit value).
99
Which of the following statements is correct concerning probability-proportional-to-size (PPS) sampling, also known as dollar unit sampling?
PPS sampling enables the auditor to directly control for the risk of incorrect acceptance by requiring the auditor to specify the desired level of that risk.
100
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?
$4800
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.
101
PPS sampling table calculation:
sample size (n) = (Reliability factor (from table) x book value)/ tolerable mistatement
102
Which of the following is the primary objective of probability proportional to sample size?
To identify overstatement errors.
PPS sampling is most effective in detecting overstatements, since the likelihood of an item's selection increases with the recorded magnitude of the item.
103
PPS “Sampling Unit”
PPS sampling defines the “sampling unit” to be an individual dollar associated with the financial statement element involved.
suppose accounts receivable consists of 7500 customer accounts having a total balance of $3,000,000. The population is viewed as consisting of 3,000,000 individual items (dollars) rather than 7500 accounts.
104
Determine the Sample Size in PPS
1. The “reliability factor” (from an AICPA table based on the risk of incorrect acceptance and the number of overstatements permitted);
2. The population book value;
3. The tolerable misstatement (net of any expected misstatements).
105
Which of the following procedures would an entity most likely include in its disaster recovery plan?
Store duplicate copies of files in a location away from the computer center.
106
In building an electronic data interchange (EDI) system, what process is used to determine which elements in the entity's computer system correspond to the standard data elements?
Mapping.
107
Which of the following most likely represents a significant deficiency in the internal control structure?
The systems programmer designs systems for computerized applications and maintains output controls.
In a well-designed system of internal control, the following duties must be segregated: systems analysis, programming, computer operations, transaction authorization, library functions, and data control. If the systems programmer is both designing systems for computerized applications and maintaining output controls, the duties of programming and data control have not been adequately segregated.
108
Which of the following are essential elements of the audit trail in an electronic data interchange (EDI) system?
Network and sender/recipient acknowledgments document the trail of accounting data (and transactions) through the system.
109
An auditor most likely would test for the presence of unauthorized EDP program changes by running a
Source code comparison program.
110
AICPA Professional Standards (Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement) point out that general IT controls include controls over the following:
(1) data center and network operations;
(2) system software acquisition, change, and maintenance;
(3) program change;
(4) access security; and
(5) application system acquisition, development, and maintenance
111
Which of the following tasks can be achieved using generalized audit software?
Filtering data based on accounts receivable data recording.
112
Which of the following is an example of a validity check?
The computer flags any transmission for which the control field value did not match that of an existing file record.
113
Able Co. uses an online sales order processing system to process its sales transactions. Able's sales data are electronically sorted and subjected to edit checks.
A direct output of the edit checks most likely would be a
File of all rejected sales transactions.
File of all rejected sales transactions.
114
Mill Co. uses a batch processing method to process its sales transactions.
Data on Mill's sales transaction tape are electronically sorted by customer number and are subjected to programmed edit checks in preparing its invoices, sales journals, and updated customer account balances.
One of the direct outputs of the creation of this tape most likely would be a
The results of a programmed edit check of sales transactions would include a report showing exceptions and control totals for each batch processed.
115
If a control total were computed on each of the following data items, which would best be identified as a hash total for a payroll EDP application?
Department numbers.
A hash total is a meaningless total computed to verify the accuracy and completeness of input.
116
As part of a fraud audit, a CPA wishes to identify employees with invalid Social Security numbers in the client's payroll-transaction data. Which of the following audit tests of controls using computer-assisted audit techniques would best meet the objective?
Comparing Social Security numbers paid in the payroll transaction file to a file of government- authorized Social Security numbers.
117
An auditor who wishes to capture an entity's data as transactions are processed and continuously test the entity's computerized information system most likely would use which of the following techniques?
Embedded audit module.
118
Which of the following computer-assisted auditing techniques processes client input data on a controlled program under the auditor's control to test controls in the computer system?
Parallel simulation.
119
Which of the following is the primary reason that many auditors hesitate to use embedded audit modules?
They must be inserted into the client's system and thus would require that the auditor be involved with the system design of the application to be monitored.
120
Integrated test facility.
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.
121
An auditor would least likely use computer software to
Computer software would aid an auditor in accessing client data files, preparing spreadsheets, and constructing parallel simulations. It would NOT help the auditor to assess EDP control risk. Assessment of control risk is a matter of auditor judgment.
122
When an auditor tests a computerized accounting system, which of the following is true of the test data approach?
Test data are processed by the client's computer programs under the auditor's control.
The auditor will not test every control, but will focus on those important to the application being evaluated.
123
A primary advantage of using generalized audit software packages to audit the financial statements of a client that uses an EDP system is that the auditor may
Access information stored on computer files while having a limited understanding of the client's hardware and software features.
Generalized audit software programs perform common audit tasks, such as footing a file, sorting, extracting, and summarizing. They allow an auditor to access information stored on computer files even with only a limited understanding of the client's hardware and software.
124
Audit Software (Focus is on Substantive Test Work)
1. Generalized Software—Canned audit programs to access and test client's files; initially expensive to develop, but can be efficient if used on numerous engagements
2. Customized Software—Programs specifically written to access the files of a particular client; may be cheaper in the short run, but more expensive in the long run if such costs are incurred for many clients
3. Data Mining Software—Commercially available software (such as ACL or Idea) can be easily used to access client's electronic data and perform a broad range of substantive audit tasks (such as performing analytical procedures and sampling for confirmation work)
125
Which of the following factors is/are considered in determining the sample size for a test of controls?
Sample size for a test of controls is based upon expected deviation rate, tolerable deviation rate, and the allowable risk of assessing control risk too low.
126
In planning a statistical sample for a test of controls, an auditor increased the expected population deviation rate from the prior year's rate because of the results of the prior year's tests of controls and the overall control environment.
The auditor most likely would then increase the planned
An increase in the expected population deviation rate would result in an increase in the planned sample size. The more errors expected in the population, the bigger the sample has to be to try to detect them.
127
Which of the following statements is correct concerning statistical sampling in tests of controls?
Deviations from specific control activities at a given rate ordinarily result in misstatements at a lower rate because each failure to apply a control does not necessarily result in a misstatement.
128
An auditor who uses statistical sampling for attributes in testing internal controls should reduce the planned reliance on a prescribed control when the
Sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate.
129
An auditor is testing internal control procedures that are evidenced on an entity's vouchers by matching random numbers with voucher numbers.
If a random number matches the number of a voided voucher, that voucher ordinarily should be replaced by another voucher in the random sample if the voucher
Has been properly voided.
130
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
More than the deviation rate in the auditor's sample.
131
Which of the following characteristics distinguishes electronic data interchange (EDI) from other forms of electronic commerce?
EDI transactions are formatted using standards that are uniform worldwide.
By adopting EDI, a company can electronically transfer information from one system into another. The elimination of manual re-entry of data and paperwork reduces costs and increases accuracy.
132
Which of the following is usually a benefit of transmitting transactions in an electronic data interchange (EDI) environment?
A compressed business cycle with lower year-end receivables balances.
An electronic data interchange environment enables the business cycle to be reduced (or compressed). For example, sales may be invoiced immediately, with the resultant speed-up of cash collections and reduction of receivable balances.
133
Which of the following is an engagement attribute for an audit of an entity that processes most of its financial data in electronic form, without any paper documentation?
Performance of audit tests on a continuous basis.
134
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?
Perform only substantive tests on inventory.
135
When an auditor tests the internal controls of a computerized accounting system, which of the following is true of the test data approach?
Test data are processed with the client's computer and the results are compared with the auditor's predetermined results.
Test data are a means of testing a client program using fake (test) data. The test data are created to include both valid and invalid conditions.
136
Which of the following is a computer-assisted audit technique that permits an auditor to insert the auditor's version of a client's program to process data and compare the output with the client's output?
Parallel Simulation
In parallel simulation, a program is created by the auditor to process data that can then be compared to the same data processed by the client's program.
