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Flashcards in Test #4 Deck (82):
1

Substantive tests for Accounts Receivable

- Correctly added up and agree with master file
- All existing AR are included
- All recorded AR exist
- All AR are accurate
- Properly classified
- Cutoff is correct
- Stated at net realizable value
- Client has rights to collect
- Proper presentation and disclosure

2

Ways to make sure the AR is correctly added up and agrees with master file

- All about the math
- Foot the AR, trace a sample to supporting documents
- Check the aging

3

Ways to make sure all existing AR are included

- Make sure everything included is real
- Test for shipments made and not recorded
- Analytical procedures

4

Ways to make sure all recorded AR exist

- Recorded accounts actually exist
- Confirmations

5

Ways to make sure AR is properly classified

- Current vs. non-current
- Are there any notes receivables mixed in?
- Credit balances?
- Related party transactions - look for them

6

Ways to make sure the cutoff for AR is correct

- Examine numbered shipping documents

7

Ways to make sure AR is stated at net realizable value

- Need both AR to be correct and AFDA to be correct
- Policy for AFDA should be reasonable

8

Ways to make sure client has rights to collect AR

- Review with the client
- Discuss with banks
- Review meeting minutes (Board of Directors, etc.)
- Examine debt contracts

9

Ways to make sure AR is properly presented and disclosed

- FASB requires irrelevant accounts to be combined
- Properly present material relevant accounts

10

Confirmations confirm:

- Existence
- Accuracy
- Cutoff

11

Facts about confirmations:

- Expensive
- Reliable
- Required if possible during planning and completion
- International standards only suggest use
- CPA must maintain control

12

Confirmations may not be appropriate when:

- Response rates are expected to be low
- Inherent risk, control risk, and other substantive tests are expected to be adequate

13

Types of confirmations:

- Positive
- Negative

14

Positive confirmations

- Confirm the balance
- Better than negative confirmations
- State expected balance
- Blank
- Tied to a specific invoice

15

Negative confirmations

- Confirm if disagree
- Cost less because there is no follow up

16

Sampling decisions:

- Sample size
- Selection of items (use some type of stratification)

17

Follow up on non-responses

- Required with positive confirmations
- Use alternative procedures:
- Subsequent cash receipts
- Shipping documents
- Review correspondence

18

Causes for differences between customer and client

- Goods never received
- Clerical errors
- Goods have been returned
- Payment has been made

19

Substantive tests for Cash

- Completeness
- Accuracy
- Valuation and allocation
- Existence
- Cutoff
- Rights and obligations to cash
- Occurrence
- Classification and disclosure

20

Ways to test for completeness in cash

- Compare daily collections to deposits
- Compare cash disbursements to last check written
- Determine outstanding checks

21

Ways to test for accuracy in cash

- Compare ledger with financial statements

22

Ways to test for valuation and allocation in cash

- Be careful with foreign currency

23

Which substantive test for cash is the largest?

Test for existence

24

What are the tests for existence in cash?

- Count cash on hand
- Bank confirmation
- Bank reconciliation
- Examine cutoff bank statement
- Prepare schedule of interbank transfers
- Proof of cash

25

Ways to count cash on hand

- Determine if all received checks are payable to client
- Determine checks received are marked "for deposit only"

26

Bank confirmations:

- Use AICPA standard
- Authorized by the client
- Sent by the auditor
- Sent ASAP after the end of the year
- Form includes: account number, balance, interest rate, etc.
- Form gathers other information: exceptions and/or comments

27

Ways to examine cutoff bank statement

- Statement 7-10 days after year end
- Will help discover kiting (fraud resulting from improper bank transfers)
- Look at the number of returned checks for window dressing (write and record checks during one accounting period, but don't mail them until the next accounting period)

28

How do we obtain a proof of cash?

Create a schedule or spreadsheet that lists all cash accounts and check them off and prove that the cash exists

29

Ways to determine classification and disclosure of cash

- Properly classify restricted cash as a non-current asset
- Assess the statement of cash flows
- Evaluate financial statement note disclosures

30

Which of the following comparisons would be most useful to an auditor in evaluating the results of an entity's operations?

a) Prior-year accounts payable to current-year accounts payable
b) Prior-year payroll expense to budgeted current-year payroll expense
c) Current-year revenue to budgeted current-year revenue
d) Current-year warranty expense to current-year contingent liabilities

c) Current-year revenue to budgeted current-year revenue

31

An auditor most likely would limit substantive audit tests of sales transactions when the risks of material misstatement are assessed as low for the existence and occurrence assertions concerning sales transactions and the auditor has already gathered evidence supporting

a) Opening and closing inventory balances
b) Cash receipts and accounts receivable
c) Shipping and receiving activities
d) Cutoffs of sales and purchases

b) Cash receipts and accounts receivable

32

If the objective of a test of details is to detect overstatements of sales, the auditor should compare transactions in the

a) Cash receipts journal with the sales journal
b) Sales journal with the cash receipts journal
c) Source documents with the accounting records
d) Accounting records with the source documents

d) Accounting records with the source documents

33

Tracing shipping documents to pre-numbered sales invoices provides evidence that

a) No duplicate shipments or billings occurred
b) Shipments to customers were properly invoiced
c) All goods ordered by customers were shipped
d) All pre-numbered sales invoices were accounted for

b) Shipments to customers were properly invoiced

34

An auditor most likely would review an entity's periodic accounting for the numerical sequence of shipping documents and invoices to support management's financial statement assertion of

a) Occurrence
b) Rights and obligations
c) Valuation and allocation
d) Completeness

d) Completeness

35

An entity's financial statements were misstated over a period of years because large amounts of revenue were recorded in journal entries that involved debits and credits to an illogical combination of accounts. The auditor could most likely have been alerted to this fraud by:

a) Scanning the general journal for unusual entries
b) Performing a revenue cutoff test at year end
c) Tracing a sample of journal entries to the general ledger
d) Examining documentary evidence of sales returns and allowances recorded after year end

a) Scanning the general journal for unusual entries

36

Which of the following might be detected by an auditor's review of the client's sales cutoff?

a) Excessive goods returned for credit
b) Unrecorded sales discounts
c) Lapping of year-end accounts receivable
d) Inflated sales for the year

d) Inflated sales for the year

37

An audit client sells 15 to 20 units of product annually. A large portion of the annual sales occur in the last month of the fiscal year. Annual sales have not materially changed over the past 5 years. Which of the following approaches would be most effective concerning the timing of audit procedures for revenue?

a) The auditor should perform analytical procedures at an interim date and discuss any changes in the level of sales with senior management
b) The auditor should inspect transactions occurring in the last month of the fiscal year and review the related sale contracts to determine that revenue was posted in the proper period
c) The auditor should perform tests of controls at an interim date to obtain audit evidence about the operational effectiveness of internal controls over sales
d) The auditor should review period-end compensation to determine if bonuses were paid to meet earnings goals

b) The auditor should inspect transactions occurring in the last month of the fiscal year and review the related sale contracts to determine that revenue was posted in the proper period

38

Which of the following most likely would give the most assurance concerning the valuation assertion about accounts receivable?

a) Vouching amounts in the subsidiary ledger to details on shipping documents
b) Comparing receivables turnover ratios with industry statistics for reasonableness
c) Inquiring about receivables pledged under loan agreements
d) Assessing the allowance for uncollectible accounts for reasonableness

d) Assessing the allowance for uncollectible accounts for reasonableness

39

An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning relevant assertions about

a) Classification and understandability
b) Existence
c) Rights and obligations
d) Valuation and allocation

d) Valuation and allocation

40

Definition of audit sample

- Fewer than 100% of the population
- Represents the population
- Provides basis for conclusions about population

41

Definition of population

- Entire data set
- Group from which sample is selected
- Group about which conclusions are drawn

42

Two types of audit sampling

- Non-statistical
- Statistical

43

Non-statistical sampling

- Uses auditor's judgment to determine size and select items
- Does not allow mathematical conclusions about population
- Conclusions without other work
- But, because the auditor can use their judgment, they can base their sampling on whatever they can

44

Is non-statistical sampling bad or good?

- Bad because it's not mathematically powerful
- Good because allows the auditor to creatively answer questions

45

When to use statistical vs. non-statistical?

- Statistical - when you are relying solely on the sample and need mathematical power
- Non-statistical - when you have multiple different types of samples and need to use your own judgment

46

Statistical sampling

- Random sampling
- Uses appropriate statistical analysis
- Quantitatively draws conclusions about population
- Gives you a confidence interval

47

Types of random samples

- Simple
- Stratified
- Probability weighted
- Systematic

48

The risk of an incorrect conclusion based on a sample

Sampling risk

49

The risk not caused by sampling

Non-sampling risk

50

What can the auditor do to reduce non-sampling risk?

- Gather more evidence
- Get clients with integrity
- Knowledgeable audit team
- Check internal controls
- Plan the audit correctly

51

Basic steps in statistical plan

- Determine objectives
- Define population
- Determine sampling risk
- Calculate sample size
- Select the sampling approach
- Take the sample
- Evaluate the results
- Document

52

Statistical sampling in test of controls

Use binary sampling (yes or no)

53

Activities subject to test of controls

- Billing
- Voucher processing
- Payroll
- Inventory pricing

54

To determine sample size for a test of controls

- Tolerable rate of deviation
- Expected rate of actual deviations
- Allowable risk of over-reliance

55

If tolerable rate of deviation goes up, sample size goes _____

Down

56

If expected rate of actual deviations goes up, sample size goes ____

Up

57

If allowable risk of over-reliance goes up, sample size goes ____

Down

58

Consider the following situation:

n = 100
Expected deviation = 5%
Tolerable rate of deviation = 8%
Sampling risk = 2%
What would we do if we found 5 deviations?

5 + 2 = 7, okay because still lower than the 8% tolerable rate

59

Consider the following situation:

n = 100
Expected deviation = 5%
Tolerable rate of deviation = 8%
Sampling risk = 2%
What would we do if we found 7 deviations?

Need to do something else because 7 + 2 = 9, which is greater than 8, so we have to modify the risk of material misstatement

60

Consider the following situation:

n = 100
Expected deviation = 5%
Tolerable rate of deviation = 8%
Sampling risk = 2%
What would we do if we found 2 deviations?

Okay, because 2 + 2 = 4, which is lower than 8

61

True or false?

Maximum deviation rate and actual deviation rate change in the same rate

True

62

Which of the following factors does an auditor usually need to consider in planning a particular audit sample for a test of controls?

a) Number of items in the population
b) Tolerable misstatement
c) Acceptable risk of over-reliance
d) Total dollar amount of the items to be sampled

c) Acceptable risk of over-reliance

63

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

a) A number of test items determined by the auditor to be sufficient under the circumstances.
b) A number of test items determined by the auditor’s reference to the appropriate sampling tables.
c) One transaction.
d) Approximately 1,000 test items.

c) One transaction

64

Statistical sampling may be used to test the effectiveness of controls. The auditor’s procedures should result in a statistical conclusion about

a) The relation of the population deviation rate to the tolerable rate.
b) The population value not being misstated by more than a fixed amount.
c) Population characteristics occurring at least once in the population.
d) Monetary precision exceeding a certain predetermined amount.

a) The relation of the population deviation rate to the tolerable rate

65

For which of the following audit tests would an auditor most likely use attribute sampling?

a) Examining invoices in support of the measurement of fixed asset additions.
b) Making an independent estimate of the amount of a LIFO inventory.
c) Inspecting employee time cards for proper approval by supervisors.
d) Selecting accounts receivable for confirmation of account balances.

c) Inspecting employee time cards for proper approval by supervisors

66

When using statistical sampling for testing the effectiveness of internal controls, an auditor’s evaluation would include a statistical conclusion concerning whether

a) Procedural deviations in the population were within an acceptable range.
b) Population characteristics occur at least once in the population.
c) Monetary precision is in excess of a certain predetermined amount.
d) The population total is not misstated by more than a fixed amount.

a) Procedural deviations in the population were within an acceptable range

67

In addition to evaluating the frequency of deviations in tests of controls, an auditor should also consider certain qualitative aspects of the deviations. The auditor most likely would give broader consideration to the implications of a deviation if it was

a) Identical to a deviation discovered during the prior year’s audit.
b) Initially concealed by a forged document.
c) Caused by an employee’s misunderstanding of instructions.
d) The only deviation discovered in the sample.

b) Initially concealed by a forged document

68

The risk of incorrect acceptance and the risk of over-reliance relate to the

a) Preliminary estimates of materiality levels.
b) Effectiveness of the audit.
c) Efficiency of the audit.
d) Tolerable misstatement.

b) Effectiveness of the audit

69

Which of the following is a true statement about statistical sampling in tests of controls?

a) The qualitative aspects of deviations are not considered by the auditor.
b) Deviations from controls at a given rate usually result in misstatements at a higher rate.
c) As the population size doubles, the sample size also should double.
d) The relationship between the sample size and the tolerable population deviation rate is inverse.

d) The relationship between the sample size and the tolerable population deviation rate is inverse

70

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

a) Sample rate of deviation plus the allowance for sampling risk exceeds the tolerable population deviation rate.
b) Sample rate of deviation is less than the expected population deviation rate used in planning the sample.
c) Tolerable population deviation rate minus the allowance for sampling risk exceeds the sample rate of deviation.
d) Sample rate of deviation plus the allowance for sampling risk equals the tolerable population deviation rate.

a) Sample rate of deviation plus the allowance for sampling risk exceeds the tolerable population deviation rate

71

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

a) Risk of over-reliance.
b) Allowance for sampling risk.
c) Sample size.
d) Tolerable deviation rate.

c) Sample size

72

An auditor suspects that the invoices from a small number of vendors contain serious misstatements and therefore limits the sample to those vendors only. A major disadvantage of selecting such a directed sample of items to examine is the

a) Inability to quantify the sampling error related to the total population of vendor invoices.
b) Absence of a normal distribution.
c) Tendency to sample a greater number of units.
d) Difficulty in obtaining sample items.

a) Inability to quantify the sampling error related to the total population of vendor invoices

73

An auditor initially planned to use unrestricted random sampling with replacement in the audit of accounts receivable. Later, the auditor decided to use unrestricted random sampling without replacement. As a result of this decision, the sample size should

a) Remain the same.
b) Decrease.
c) Either increase or decrease, but the direction cannot be determined.
d) Increase.

b) Decrease

74

An auditor may decide to increase the risk of incorrect rejection when

a) Many differences (audit amount minus recorded amount) are expected.
b) The cost and effort of selecting additional sample items are low.
c) Initial sample results do not support the assessed risk of material misstatement.
d) Increased reliability from the sample is desired.

b) The cost and effort of selecting additional sample items are low

75

An advantage of using statistical over non-statistical sampling methods in tests of controls is that the statistical methods

a) Provide greater assurance than a non-statistical sample of equal size.
b) Can more easily convert the sample into a dual-purpose test useful for substantive testing.
c) Eliminate the need to use judgment in determining appropriate sample sizes.
d) Provide an objective basis for quantitatively evaluating sample risk.

d) Provide an objective basis for quantitatively evaluating sample risk

76

An auditor established a $60,000 tolerable misstatement for an asset with an account balance of $1,000,000. The auditor selected a sample of every twentieth item from the population that represented the asset account balance and discovered overstatements of $3,700 and understatements of $200. Under these circumstances, the auditor most likely would conclude that

a) The asset account is fairly stated because the tolerable misstatement exceeds the net of projected actual overstatements and understatements.
b) There is an unacceptably high risk that the actual misstatements in the population exceed the tolerable misstatement because the total projected misstatement is more than the tolerable misstatement.
c) The asset account is fairly stated because the total projected misstatement is less than the tolerable misstatement.
d) There is an unacceptably high risk that the tolerable misstatement exceeds the sum of actual overstatements and understatements.

b) There is an unacceptably high risk that the actual misstatements in the population exceed the tolerable misstatement because the total projected misstatement is more than the tolerable misstatement

77

In statistical sampling methods used in substantive testing, an auditor most likely would stratify a population into meaningful groups if

a) Monetary-unit sampling (MUS) is used.
b) The population has highly variable recorded amounts.
c) The standard deviation of recorded amounts is relatively small.
d) The auditor’s estimated tolerable misstatement is extremely small.

b) The population has highly variable recorded amounts

78

While performing a test of details during an audit, the 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) Incorrect rejection.
b) Over-reliance.
c) Incorrect acceptance.
d) Under-reliance.

a) Incorrect rejection

79

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

a) Determine the tolerable misstatement.
b) Compute the sample standard deviation.
c) Select a representative sample.
d) Project sample misstatement results to the population.

b) Compute the sample standard deviation

80

While performing a substantive test of details during an audit, the 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) Incorrect rejection.
b) Incorrect acceptance.
c) Under-reliance.
d) Over-reliance.

a) Incorrect rejection

81

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?

a) Continue to draw new samples until all the unusually large disbursements appear in the sample.
b) Set the tolerable rate of deviation at a lower level than originally planned.
c) Increase the sample size to reduce the effect of the unusually large disbursements.
d) Stratify the cash disbursements population so that the unusually large disbursements are selected.

d) Stratify the cash disbursements population so that the unusually large disbursements are selected

82

Procedures designed to test for dollar misstatements that directly affect the correctness of financial statement balances

Substantive tests