In developing a preliminary audit strategy, an auditor should consider

September 08, 2022 September 08, 2022/ Steven Bragg

An audit strategy sets the direction, timing, and scope of an audit. The strategy is then used as a guideline when developing an audit plan. By developing an audit strategy, it is easier to create a more targeted audit plan, thereby wasting less time in total during the planning phase of an audit. The strategy document usually includes a statement of the key decisions needed to properly plan the audit. The audit strategy is based on the following considerations:

The scope of the engagement
The characteristics of the engagement
Reporting objectives
Timing of the audit
Nature of communications
Significant factors in directing engagement team efforts
The results of preliminary engagement activities
The knowledge gained on other engagements
The nature, timing, and extent of resources available for the engagement

The audit strategy could be relatively short for the audit of a smaller entity, perhaps in the form of a brief memo. If there are unexpected changes in conditions or the outcome of audit procedures, it may be necessary to alter the audit strategy. If there is an alteration, the reasons for the alteration should be stated in the accompanying documentation.

The Difference Between an Audit Strategy and Audit Plan

An audit plan states the detailed steps to be followed in the conduct of an audit. The plan includes risk assessment procedures, as well as additional procedures to be followed based on the outcome of the risk assessment. The audit plan is much more detailed than the strategy document, since the plan states the nature, timing, and extent of the specific audit procedures to be conducted.

September 08, 2022/ Steven Bragg/

Cards Return to Set Details

Term

Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor's:

a. opinion of any subsequent events occuring since the predecessor's audit report was issued

b. understanding as to the reasons for the change of auditors

c. awarness of the consistency in the application of GAAP between periods

d. evaluation of all matters of continuing accounting significance

Definition

Understanding as to the reasons for the change of auditors

Term

A successor auditor most likely would make specific inquiries of the predecessor auditor regarding:

a. specialized accounting principles of the client's industry

b. the competency of the client's internal audit staff

c. the uncertainty inherent in applying sampling procedures

d. disagreements with management as to auditing procedures

Definition

Disagreements with management as to auditing procedures

Term

Before accepting an engagement to audit a new client, a CPA is required to obtain:

a. an understanding of the prospective client's industry and business

b. a management representation letter

c. the uncertainty inherent in applying sampling procedures

d. the prospective client's consent to make inquiries of the predecessor auditor, if any

Definition

The prospective client's consent to make inquiries of the predecessor auditor, if any

Term

Which of the following statements would appear in an auditor's engagement letter?

a. fees for our services are based on our regular per diem rates, plus travel and other out-of pocket expenses

b during the course of our audit we may observe opportunities for economy in, or improved controls over, your operations

c. our engagement is subject to the risk that material errors or irregularities, including fraud and defalcastions, if they exist, will not be dected

d. after performing our preliminary analytical procedures we will discuss with you the other procedures we consider necessary to complete the engagement.

Definition

after performing our preliminary analytical procedures we will discuss with you the other procedures we consider necessary to complete the engagement.

Term

5. An auditor is required to establish an understanding with a client regarding the services to be performed for each engagement. This understanding generally includes:A. Management's responsibility for errors and the illegal activities of employees that may cause material misstatementB. The auditor's responsibility for ensuring that the audit committee is aware of any significant deficiencies that come to the auditor's attentionC. Management's responsibility for providing the auditor with an assessment of the risk of material misstatement due to fraud
D. The auditor's responsibility for determining preliminary judgments about materiality and audit risk factors

Definition

B. The auditor's responsibility for ensuring that the audit committee is aware of any significant deficiencies that come to the auditor's attention

Term

6. Which of the following matters generally is included in an auditor's engagement letter?A. Management's responsibility for the entity's compliance with laws and regulationsB. The factors to be considered in settling preliminary judgments about materialityC. Management's vicarious liability for illegal acts committed by its employees
D. The auditor's responsibility to search for significant internal control deficiencies

Definition

A. Management's responsibility for the entity's compliance with laws and regulations

Term

7. An auditor's engagement letter should include:A. Management's acknowledgment of its responsibility for maintaining effective internal controlB. The auditor's preliminary assessment of the risk factors relating to misstatements arising from fraudulent financial reportingC. A reminder that management is responsible for illegal acts committed by employees
D. A request for permission to contact the client's lawyer for assistance in identifying litigation, claims, and assessments

Definition

A. Management's acknowledgment of its responsibility for maintaining effective internal control

Term

8. A document in an auditor's working papers includes the following statement: "Our audit is subject to the inherent risk that material errors and fraud, including defalcations, if they exist, will not be detected. However, we will inform you of fraud that comes to our attention, unless it is inconsequential." This passage is most likely from a(an)?A. Comfort letterB. Engagement letterC. Letter of audit inquiry
D. Representation Letter

Definition

1. A document in an auditor's working papers includes the following statement: "Our audit is subject to the inherent risk that material errors and fraud, including defalcations, if they exist, will not be detected. However, we will inform you of fraud that comes to our attention, unless it is inconsequential." This passage is most likely from a(an)?
B. Engagement letter

Term

9. An auditor's engagement letter most likely would include a statement regarding:A. Management's responsibility to provide certain written representations to the auditorB. Conditions under which the auditor may modify the preliminary judgment about materialityC. Internal control activities that would reduce the auditor's assessment of control risk
D. Materiality matters that could modify the auditor's preliminary assessment of fraud risk

Definition

A. Management's responsibility to provide certain written representations to the auditor

Term

10. In developing a preliminary audit strategy, an auditor should considerA. Whether the allowance for sampling risk exceeds the achieved upper precision limitB. Findings from substantive tests performed at interim datesC. Whether the inquiry of the client's attorney identifies any litigation, claims, or assessments not disclosed in the financial statements
D. Potential risks of material misstatement

Definition

D. Potential risks of material misstatement

Term

11. In designing written audit programs, an auditor should establish specific audit objectives that relate primarily to the A. Timing of audit proceduresB. Cost-benefit of gathering evidenceC. Selected audit techniques
D. Financial statement assertions

Definition

D. Financial statement assertions

Term

12. Which of the following procedures would an auditor most likely include in the initial planning of a financial statement audit?A. Obtaining a written representation letter from the client's managementB. Examining documents to detect illegal acts having a material effect on the financial statementsC. Considering whether the client's accounting estimates are reasonable in the circumstances
D. Determining the extent of involvement of the client's internal auditors

Definition

D. Determining the extent of involvement of the client's internal auditors

Term

13. Audit programs should be designed so thatA. Most of the required procedures can be performed as interim work.B. Inherent risk is assessed at a sufficiently low level.C. The auditor can make constructive suggestions to management.
D. The audit evidence gathered supports the auditor's conclusions.

Definition

D. The audit evidence gathered supports the auditor's conclusions.

Term

14. The element of the audit planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of theA. Evidence to be gathered to provide a sufficient basis for the auditor's opinionB. Procedures to be undertaken to discover litigation, claims, and assessmentsC. Pending legal matters to be included in the inquiry of the client's attorney
D. Timing of inventory observation procedures to be performed

Definition

D. Timing of inventory observation procedures to be performed

Term

15. A difference of opinion regarding the results of a sample cannot be resolved between the assistant who performed the auditing procedures and the in-charge auditor. The assistant shouldA. Accept the judgment of the more experienced in-charge auditorB. Refuse to perform any further work on the engagementC. Document the disagreement and ask to be disassociated from the resolution of the matter
D. Notify the client that a serious audit problem exists

Definition

C. Document the disagreement and ask to be disassociated from the resolution of the matter

Term

16. The audit work performed by each assistant should be reviewed to determine whether it was adequately performed and to evaluate whether theA. Auditor's system of quality control has been maintained at a high level.B. Results are consistent with the conclusions to be presented in the auditor's report.C. Audit procedures performed are approved in the professional standards.
D. Audit has been performed by persons having adequate technical training and proficiency as auditors.

Definition

B. Results are consistent with the conclusions to be presented in the auditor's report.

Term

17. Because of the risk of material misstatement, an audit of financial statements in accordance with generally accepted auditing standards should be planned and performed with an attitude ofA. Objective judgmentB. Independent integrityC. Professional skepticism
D. Impartial conservatism

Definition

C. Professional skepticism

Term

18. The senior auditor responsible for coordinating the fieldwork usually schedules a pre-audit conference with the audit team primarily to 1. Give guidance to the staff regarding both technical and personnel aspects of the audit2. Provide an opportunity to document staff disagreements regarding technical issues3. Establish the need for using the work of specialists and internal auditors
4. Discuss staff suggestions concerning the establishment and maintenance of time budgets

Definition

1. Give guidance to the staff regarding both technical and personnel aspects of the audit

Term

19. In considering materiality for planning purposes, an auditor believes that misstatements aggregating $10,000 would have a material effect on an entity's income statement, but that misstatements would have to aggregate $20,000 to materially affect the balance sheet. Ordinarily, it would be appropriate to design auditing procedures that would be expected to detect misstatements that aggregateA. $10,000B. $15,000C. $20,000
D. $30,000

Definition

Term

20. Inherent risk and control risk differ from detection risk in that theyA. Arise from the misapplication of auditing proceduresB. May be assessed in either quantitative or nonquantitative termsC. Exist independently of the financial statement audit
D. Can be changed at the auditor's discretion

Definition

C. Exist independently of the financial statement audit

Term

21. The acceptable level of detection risk is inversely related to theA. Assurance provided by substantive testsB. Risk of misapplying auditing proceduresC. Preliminary judgment about materiality levels
D. Risk of failing to discover material misstatements

Definition

A. Assurance provided by substantive tests

Term

22. Which of the following audit risk components may be assessed in nonquantitative terms? Control Risk Detection Risk Inherent RiskA. Yes Yes NoB. Yes No YesC. Yes Yes Yes
D. No Yes Yes

Definition

Term

23. Which of the following would an auditor most likely use in determining the auditor's preliminary judgment about materiality?A. The results of the initial assessment of control riskB. The anticipated sample size for planned substantive testsC. The entity's financial statements of the prior year
D. The assertions that are embodied in the financial statements

Definition

C. The entity's financial statements of the prior year

Term

24. In planning an audit of a new client, an auditor most likely would consider the methods used to process accounting information because such methodsA. Influence the design of internal controlB. Affect the auditor's preliminary judgment about materiality levelsC. Assist in evaluating the planned audit objectives
D. Determine the auditor's acceptable level of audit risk

Definition

A. Influence the design of internal control

Term

25. Which of the following procedures would an auditor most likely perform in planning a financial statement audit?A. Inquiring of the client's legal counsel concerning pending litigationB. Comparing the financial statements to anticipated resultsC. Searching for unauthorized transactions that may aid in detecting unrecorded liabilities
D. Examining computer generated exception reports to verify the effectiveness of internal controls

Definition

B. Comparing the financial statements to anticipated results

Term

26. The primary objective of procedure performed to obtain an understanding of the entity and its environment, including its internal control, is to provide an auditor withA. Knowledge necessary to assess the risk of material misstatement and design further audit proceduresB. An evaluation of the consistency of application of management's policiesC. A basis for modifying tests of controls
D. Audit evidence to use in assessing inherent risk

Definition

A. Knowledge necessary to assess the risk of material misstatement and design further audit procedures

Term

27. When obtaining an understanding of the entity and its environment, including its internal control, the auditor is required to document:I. The discussion concerning the susceptibility of the financial statements to material misstatementII. The risk assessment procedures performedA. I onlyB. II onlyC. Both I & II
D. Neither I nor II

Definition

I. The discussion concerning the susceptibility of the financial statements to material misstatement
II. The risk assessment procedures performed

Term

28. Which of the following statements describes why a properly designed and executed audit may not detect a material misstatement in the financial statements resulting from fraud?A. Audit procedures that are effective for detecting an unintentional misstatement may be ineffective for an intentional misstatement that is concealed through collusion.B. An audit is designed to provide reasonable assurance of detecting material errors, but there is no similar responsibility concerning fraud.C. The factors considered in assessing control risk indicated an increased risk of intentional misstatements, but only a low risk of unintentional errors in the financial statements.
D. The auditor did not consider factors influencing audit risk for account balances that have effects pervasive to the financial statements taken as a whole.

Definition

A. Audit procedures that are effective for detecting an unintentional misstatement may be ineffective for an intentional misstatement that is concealed through collusion.

Term

29. Which of the following statements reflects an auditor's responsibility for detecting errors and fraud?A. An auditor is responsible for detecting employee errors and simple fraud, but not for discovering fraud involving employee collusion or management override.B. An auditor should plan the audit to detect errors and fraud that are caused by departures from GAAP.C. An auditor is not responsible for detecting errors and fraud unless the application of GAAS would result in such detection.
D. An auditor should design the audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements.

Definition

D. An auditor should design the audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements.

Term

30. Which of the following characteristics most likely would heighten an auditor's concern about the risk of material misstatements in an entity's financial statements?A. The entity's industry is experiencing declining customer demand.B. Employees who handle cash receipts are not bonded.C. Bank reconciliations usually include in-transit deposits.
D. Equipment is often sold at a loss before being fully depreciated.

Definition

A. The entity's industry is experiencing declining customer demand.

Term

31. Which of the following factors would most likely heighten the auditor's concern about the risk of fraudulent financial reporting?A. Inability to generate cash flows from operations while reporting substantial earnings growthB. Management's lack of interest in increasing the entity's stock trendC. Large amounts of liquid assets that are easily convertible into cash
D. In ability to borrow necessary capital without granting debt covenants

Definition

A. Inability to generate cash flows from operations while reporting substantial earnings growth

Term

32. Which of the following procedures would an auditor most likely perform during an audit engagement's overall review stage in formulating an opinion on an entity's financial statements?A. Obtain assurance from the entity's attorney that all material litigation has been disclosed in the financial statementsB. Verify the clerical accuracy of the entity's proof of cash and its bank cutoff statementC. Determine whether inadequate provisions for the safeguarding of assets have been corrected
D. Consider whether the results of audit procedures affect the assessment of the risk of material misstatement due to fraud

Definition

D. Consider whether the results of audit procedures affect the assessment of the risk of material misstatement due to fraud

Term

33. Which of the following statements is correct concerning an auditor's responsibility to report fraud?A. The auditor is required to communicate to the client's audit committee all minor fraudulent acts perpetrated by low-level employees, even if the amounts involved are inconsequential.B. The disclosure of material management fraud to principle stockholders is when senior management and the board of directors fail to acknowledge the fraudulent activities.C. Fraudulent activities involving senior management of which the auditor becomes aware should be reported directly to the SEC.
D. The disclosure of fraudulent activities to parties other than the client's senior management and its audit committee is not ordinarily part of the auditor's responsibility.

Definition

D. The disclosure of fraudulent activities to parties other than the client's senior management and its audit committee is not ordinarily part of the auditor's responsibility.

Term

34. When assessing the risk of material misstatement, an auditor is required to document:I. The basis for the assessmentII. Significant risks identified and the related controls that were evaluatedA. I onlyB. II onlyC. Both I & II
D. Neither I nor II

Definition

I. The basis for the assessment
II. Significant risks identified and the related controls that were evaluated

Term

35. As the acceptable level of detection risk increases, the auditor may:A. Increase the assessed level of control riskB. Change the assurance provided by tests of controls by using a larger sample size than plannedC. Change the timing of substantive tests from year-end to an interim date
D. Change the nature of substantive tests from a less effective to a more effective procedure

Definition

C. Change the timing of substantive tests from year-end to an interim date

Term

36. An auditor may decide to perform only substantive procedures for specific assertions because the auditor believes:A. Control policies and procedures are unlikely to pertain to the assertions.B. The entity's control environment, monitoring, and control activities are interrelated.C. Sufficient audit evidence to support the assertions is likely to be available.
D. More emphasis on tests of control than substantive tests is warranted.

Definition

A. Control policies and procedures are unlikely to pertain to the assertions.

Term

37. Regardless of the assessed level of control risk, an auditor would perform someA. Tests of controls to determine the effectiveness of internal control policiesB. Analytical procedures to verify the design of internal control proceduresC. Substantive tests to restrict detection risk for significant transactions classes
D. Dual-purpose tests to evaluate both the risk of monetary misstatement and preliminary control risk

Definition

C. Substantive tests to restrict detection risk for significant transactions classes

Term

38. Which of the following matters is an auditor required to communicate to an entity's audit committee:I. Disagreements with management about matters significant to the entity's financial statements that have been satisfactorily resolvedII. Initial selection of significant accounting policies in emerging areas that lack authoritative guidanceA. I onlyB. II onlyC. Both I & II
D. Neither I nor II

Definition

I. Disagreements with management about matters significant to the entity's financial statements that have been satisfactorily resolved
II. Initial selection of significant accounting policies in emerging areas that lack authoritative guidance

Term

39. An auditor is obligated to communicate a proposed audit adjustment to an entity's audit committee only if the adjustment:A. Has not been recorded before the end of the auditor's field workB. Has a significant effect on the entity's financial reporting processC. Is a recurring matter that was proposed to management the prior year
D. Results from the correction of a prior period's departure from GAAP

Definition

B. Has a significant effect on the entity's financial reporting process

Term

40. Which of the following matters would an auditor most likely communicate to an entity's audit committee?A. A list of negative trends that may lead to working capital deficiencies and adverse financial ratiosB. The level of responsibility assumed by management for the preparation of the financial statementsC. Difficulties encountered in achieving a satisfactory response rate from the entity's customers in confirming accounts receivables
D. The effects of significant accounting policies adopted by management in emerging areas for which there is no authoritative guidance

Definition

D. The effects of significant accounting policies adopted by management in emerging areas for which there is no authoritative guidance

Term

41. Which of the following is an auditor not required to communicate to an entity's audit committee?A. Significant adjustments arising from the audit that were recorded by managementB. The basis for the auditor's conclusions about the reasonableness of management's sensitive accounting estimatesC. The level of responsibility assumed by the auditor under generally accepted auditing standards
D. The degree of reliance the auditor placed on the management representation letter

Definition

D. The degree of reliance the auditor placed on the management representation letter

Term

42. Which of the following types of audit evidence is the most persuasive?A. Prenumbered client purchase order formsB. Client work sheets supporting cost allocationsC. Bank statements obtained from the client
D. Management representation letter

Definition

C. Bank statements obtained from the client

Term

43. Which of the following procedures would yield the most appropriate evidence?A. A scanning of trial balancesB. An inquiry of client personnelC. A comparison of beginning and ending retained earnings
D. A recalculation of bad debt expense

Definition

D. A recalculation of bad debt expense

Term

44. Which of the following procedures would be most effective in reducing attestation risk?A. Discussion with responsible individualsB. Examination of evidenceC. Inquiries of senior management
D. Analytical procedures

Definition

B. Examination of evidence

Term

45. A client uses a suspense account for unresolved questions whose final accounting has not been determined. If a balance remain in the suspense account at year end, the auditor would be most concerned aboutA. Suspense debits that management believes will benefit future operationsB. Suspense debits that the auditor verifies will have realizable value to the clientC. Suspense credits that management believes should be classified as "Current liability"
D. Suspense credits that the auditor determines to be customer deposits

Definition

A. Suspense debits that management believes will benefit future operations

Term

46. An auditor scans a client's investment records for the period just before and just after the year end to determine that any transfers between categories of investments have been properly recorded. The primary purpose of this procedure is to obtain evidence about management's financial statement assertions ofA. Rights & Obligations, and Existence & OccurrenceB. Valuation & Allocation, and Rights & ObligationsC. Existence & Occurrence, and Classification
D. Classification, and Valuation & Allocation

Definition

D. Classification, and Valuation & Allocation

Term

47. The auditor's inventory observation test counts are traced to the client's inventory listing to test for which of the following financial statement assertions?A. CompletenessB. Rights & ObligationsC. Valuation or Allocation
D. Classification & Understandability

Definition

Term

48. An entity's income statements were misstated due to the recording of journal entries that involved debits and credits to an unusual combination of expense and revenue accounts. The auditor most likely could have detected this misstatement by:A. Tracing a sample of journal entries to the general ledgerB. Evaluating the effectiveness of internal control policies and proceduresC. Investigating the reconciliations between controlling accounts and subsidiary records
D. Performing analytical procedures designed to disclose differences from expectations

Definition

D. Performing analytical procedures designed to disclose differences from expectations

Term

49. An auditor may achieve audit objectives related to particular assertions byA. Performing analytical proceduresB. Adhering to a system of quality controlC. Preparing auditor working papers
D. Increasing the level of detection risk

Definition

A. Performing analytical procedures

Term

50. At the conclusion of an audit, an auditor is reviewing the evidence gathered in support of the financial statements. With regard to the valuation of inventory, the auditor concludes that the evidence obtained is not sufficient to support management's representations. Which of the following actions is the auditor most likely to take?A. Consult with the audit committee and issue a disclaimer of opinionB. Consult with the audit committee and issue a qualified opinionC. Obtain additional evidence regarding the valuation of inventory
D. Obtain a statement from management supporting their inventory valuation

Definition

C. Obtain additional evidence regarding the valuation of inventory

Term

51. Which of the following circumstances most likely would cause an auditor to consider whether material misstatements exist in an entity's financial statements?A. Management places little emphasis on meeting earnings projections.B. The board of directors makes all major financing decisions.C. Significant deficiencies previously communicated to management are not corrected.
D. Transactions selected for testing are not supported by proper documentation.

Definition

D. Transactions selected for testing are not supported by proper documentation.

Term

52. Which of the following circumstances most likely would cause an auditor to suspect that material misstatements exist in a client's financial statements?A. The assumptions used in developing the prior year's accounting estimates have changed.B. Differences between reconciliations of control accounts and subsidiary records are not investigated.C. Negative confirmation requests yield fewer responses than in the prior year's audit.
D. Management consults with another CPA firm about complex accounting matters.

Definition

B. Differences between reconciliations of control accounts and subsidiary records are not investigated.

Term

53. Miller Retailing, Inc. maintains a staff of three full-time internal auditors who report directly to the controller. In planning to use the internal auditors to provide assistance in performing the audit, the independent auditor most likely willA. Place limited reliance on the work performed by the internal auditorsB. Decrease the extent of the tests of control needed to support the assessed level of detection riskC. Increase the extent of the procedures needed to reduce control risk to an acceptable level
D. Avoid using the work performed by the internal auditors

Definition

A. Place limited reliance on the work performed by the internal auditors

Term

54. When assessing the internal auditors' competence, the independent CPA should obtain information about theA. Organizational level to which internal auditors reportB. Educational background and professional certification of internal auditorsC. Policies prohibiting internal auditors from auditing areas where relatives are employed in important or audit-sensitive positions
D. Policies prohibiting internal auditors from auditing areas where they were recently assigned or are scheduled to be assigned on completion of their responsibilities as internal auditors

Definition

B. Educational background and professional certification of internal auditors

Term

55. In assessing the competence of the internal auditor, an independent CPA most likely would obtain information about the: A. Quality of the internal auditor's working paper documentationB. Organization's commitment to integrity and ethical valuesC. Influence of management on the scope of the internal auditor's duties
D. Organizational level to which the internal auditor reports

Definition

A. Quality of the internal auditor's working paper documentation

Term

56. During an audit, an internal auditor may provide direct assistance to an independent CPA in Obtaining an understanding Performing tests Performing of internal control of controls substantive testsA. No No NoB. Yes No NoC. Yes Yes No
D. Yes Yes Yes

Definition

Term

57. When considering the use of management's written representations as audit evidence about the completeness assertion, an auditor should understand that such representations:A. Complement, but do not replace, substantive tests designed to support the assertionB. Constitute sufficient evidence to support the assertion when considered in combination with the assessment of control riskC. Replace the assessment of control risk as evidence to support the assertion
D. Are not part of the audit evidence considered to support the assertion

Definition

A. Complement, but do not replace, substantive tests designed to support the assertion

Term

58. A purpose of a management representation letter is to reduceA. Audit risk to an aggregate level of misstatement that could be considered materialB. An auditor's responsibility to detect material misstatements only to the extent that the letter is relied onC. The possibility of a misunderstanding concerning management's responsibility for the financial statements
D. The scope of an auditor's procedures concerning related party transactions and subsequent events

Definition

C. The possibility of a misunderstanding concerning management's responsibility for the financial statements

Term

59. An auditor who discovers that a client's employees have paid small bribes to public officials most likely would withdraw from the engagement if theA. Client receives financial assistance from a federal government agencyB. Audit evidence that is necessary to prove the illegal acts were committed does not existC. Employees' actions affect the auditor's ability to rely on management's representations
D. Notes to the financial statements fail to disclose the employees' actions

Definition

C. Employees' actions affect the auditor's ability to rely on management's representations

Term

60. The date of the management representation letter should be as of the date of theA. Balance sheetB. Latest interim financial informationC. Auditor's report
D. Latest related party transaction

Definition

Term

61. "There have been no communications from regulatory agencies concerning noncompliance with, or deficiencies in, financial reporting practices that could have a material effect on the financial statements." The forgoing passage is most likely from aA. Report on internal controlB. Special reportC. Management representation letter
D. Letter for underwriters

Definition

C. Management representation letter

Term

62. For which of the following matters should an auditor obtain written management representations?A. Management's cost-benefit justifications for not correcting internal control weaknessesB. Management's knowledge of future plans that may affect the price of the entity's stockC. Management's compliance with contractual agreements that may affect the financial statements
D. Management's acknowledgement of its responsibility for employees' violations of laws

Definition

C. Management's compliance with contractual agreements that may affect the financial statements

Term

63. To which of the following matters would materiality limits not apply in obtaining written management representations?A. The availability of minutes of stockholders' and directors' meetingsB. Losses from purchase commitments at prices in excess of market valueC. The disclosure of compensating balance arrangements involving related parties
D. Reductions of obsolete inventory to net realizable value

Definition

A. The availability of minutes of stockholders' and directors' meetings

Term

64. Which of the following expressions most likely would be included in a management representation letter?A. No events have occurred subsequent to the balance sheet date that require adjustment to, or disclosure in, the financial statements.B. There are no significant deficiencies identified during the prior-year's audit of which the audit committee of the board of directors is unaware.C. We do not intend to provide any information that may be construed to constitute a waiver of the attorney-client privilege
D. Certain computer files and other required evidential matter may exist only for a short period of time and only in computer-readable form.

Definition

A. No events have occurred subsequent to the balance sheet date that require adjustment to, or disclosure in, the financial statements.

Term

65. Which of the following statements ordinarily is not included among the written representations made by the chief executive officer and the chief financial officer?A. Sufficient audit evidence has been made available to the auditor to permit the issuance of an unqualified opinion.B. There are no unasserted claims or assessments that our lawyer has advised us are probable of assertion and must be disclosed.C. We have no plans or intentions that may materially affect the carrying value or classification of assets and liabilities.
D. No events have occurred subsequent to the balance sheet date that would require adjustment to, or disclosure in, the financial statements.

Definition

A. Sufficient audit evidence has been made available to the auditor to permit the issuance of an unqualified opinion.

Term

66. An auditor's working papers serve mainly to:A. Provide the principal support for the auditor's reportB. Satisfy the auditor's responsibilities concerning the Code of Professional ConductC. Monitor the effectiveness of the CPA firm's quality control procedures
D. Document the level of independence maintained by the auditor

Definition

A. Provide the principal support for the auditor's report

Term

67. The audit working paper that reflects the major components of an amount reported in the financial statements is the:A. Interbank transfer scheduleB. Carryforward scheduleC. Supporting schedule
D. Lead schedule

Definition

Term

68. Which of the following is not required documentation in an audit in accordance with GAAS?A. A written engagement letter formalizing the level of service to be renderedB. A flowchart depicting the segregation of duties and authorization of transactionsC. A written audit program describing the necessary procedures to be performed
D. Written representations from management

Definition

B. A flowchart depicting the segregation of duties and authorization of transactions

Term

69. "There are no violations or possible violations of laws or regulations whose effects should be considered for disclosure in the financial statements or as a basis for recording a loss contingency." The foregoing passage most likely is from a (an)A. Client engagement letterB. Report on compliance with laws and regulationsC. Management representation letter
D. Attestation report on an entity's internal control

Definition

C. Management representation letter

Term

70. Which of the following most likely would indicate the existence of related parties?A. Writing down obsolete inventory just before year-endB. Failing to correct previously identified internal control deficienciesC. Depending on a single product for the success of the entity
D. Borrowing money at an interest rate significantly below the market rate

Definition

D. Borrowing money at an interest rate significantly below the market rate

Term

71. Which of the following events most likely would indicate the existence of related parties?A. Granting stock options to key executives at favorable pricesB. High turnover of senior management and members of the board of directorsC. Failure to correct internal control weaknesses on a timely basis
D. Selling real estate at a price significantly different from appraised value

Definition

D. Selling real estate at a price significantly different from appraised value

Term

72. After determining that a related party transaction has, in fact, occurred, an auditor shouldA. Add a separate paragraph to the auditor's standard report to explain the transactionB. Perform analytical procedures to verify whether similar transactions occurred, but were not recordedC. Obtain an understanding of the business purpose of the transaction
D. Substantiate that the transaction was consummated on terms equivalent to an arm's-length transaction

Definition

C. Obtain an understanding of the business purpose of the transaction

Term

73. An auditor searching for related party transactions should obtain an understanding of each subsidiary's relationship to the total entity becauseA. The business structure may be deliberately designed to obscure related party transactions.B. Intercompany transactions may have been consummated on terms equivalent to arm's-length transactions.C. This may reveal whether particular transactions would have taken place if the parties had not been related.
D. This may permit the audit of intercompany balances to be performed as of concurrent dates.

Definition

A. The business structure may be deliberately designed to obscure related party transactions.

Term

74. Which of the following procedures most likely could assist an auditor in identifying related party transactions?A. Performing tests of controls concerning the segregation of dutiesB. Evaluating the reasonableness of management's accounting estimatesC. Reviewing confirmations of compensating balance arrangements
D. Scanning the accounting records of recurring transactions

Definition

C. Reviewing confirmations of compensating balance arrangements

Term

75. An auditor most likely would modify an unqualified opinion if the entity's notes to the financial statements include a not on related party transactionsA. Disclosing loans to related parties at interest rates significantly below prevailing market ratesB. Describing an exchange of real estate for similar property in a nonmonetary related party transaction
C. Stating that a particular related party transaction occurred on terms equivalent to those that would have prevailed in an arm's-length transaction

Definition

C. Stating that a particular related party transaction occurred on terms equivalent to those that would have prevailed in an arm's-length transaction

Term

76. Proper segregation of duties reduces the opportunities to allow persons to be in positions to bothA. Journalize entries and prepare financial statementsB. Record cash receipts and cash disbursementsC. Establish internal controls and authorize transactions
D. Perpetuate and conceal errors and fraud

Definition

D. Perpetuate and conceal errors and fraud

Term

77. In an audit of financial statements, an auditor's primary consideration regarding an internal control policy or procedure is whether the policy or procedureA. Reflects management's philosophy and operating styleB. Affects management's financial statement assertionsC. Provides adequate safeguards over access to assets
D. Enhances management's decision-making processes

Definition

B. Affects management's financial statement assertions

Term

78. The overall attitude and awareness of an entity's board of directors concerning the importance of internal control usually is reflected in itsA. Computer-based controlsB. System of segregation of dutiesC. Control environment
D. Safeguards over access to assets

Definition

Term

79. Management philosophy and operating style most likely would have a significant influence on an entity's control environment whenA. The internal auditor reports directly to managementB. Management is dominated by one individualC. Accurate management job descriptions delineate specific duties
D. The audit committee actively oversees the financial reporting process

Definition

B. Management is dominated by one individual

Term

80. Management's attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment whenA. External policies established by parties outside the entity affect its accounting practices.B. Management is dominated by on individual who is also a shareholder.C. Internal auditors have direct access to the board of directors and the entity's management.
D. The audit committee is active in overseeing the entity's financial reporting policies.

Definition

B. Management is dominated by on individual who is also a shareholder.

Term

81. Which of the following factors most likely would influence an auditor's determination of the auditability of an entity's financial statements?A. The complexity of the accounting systemB. The existence of related party transactionsC. The adequacy of the accounting records
D. The operating effectiveness of control procedures

Definition

C. The adequacy of the accounting records

Term

82. When considering internal control, an auditor should be aware of the concept of reasonable assurance, which recognizes thatA. Internal control policies and procedures may be ineffective due to mistakes in judgment and personal carelessness.B. Adequate safeguards over access to assets and records should permit an entity to maintain proper accountability.C. Establishing and maintaining internal control is an important responsibility of management.
D. The cost of an entity's internal control should not exceed the benefits expected to be derived

Definition

A. Internal control policies and procedures may be ineffective due to mistakes in judgment and personal carelessness.

Term

83. Which of the following auditor concerns most likely could be so serious that the auditor concludes that a financial statement audit cannot be conducted?A. The entity has no formal written code of conduct.B. The integrity of the entity's management is suspect.C. Procedures requiring segregation of duties are subject to management override.
D. Management fails to modify prescribed controls for changes in conditions.

Definition

B. The integrity of the entity's management is suspect.

Term

84. Which of the following events occurring in the year under audit would most likely indicate that internal controls utilized in previous years may be inadequate in the year under audit?A. The entity announced that the internal audit function would be eliminated after the balance sheet date.B. The audit committee chairperson unexpectedly resigned during the year under audit.C. The chief financial officer waived approvals on all checks to one vendor to expedite payment.
D. The frequency of accounts payable check runs was changed from biweekly to weekly.

Definition

C. The chief financial officer waived approvals on all checks to one vendor to expedite payment.

Term

85. An auditor would most likely be concerned with internal control policies and procedures that provide reasonable assurance about theA. Methods of assigning production tasks to employeesB. Appropriate prices the entity should charge for its productsC. Efficiency of management's decision-making process
D. Entity's ability to process and summarize financial data

Definition

D. Entity's ability to process and summarize financial data

Term

86. Which of the following factors would least likely affect the extent of the auditor's consideration of the client's internal controls?A. The amount of time budgeted to complete the engagementB. The size and complexity of the clientC. The nature of specific relevant controls
D. The auditor's prior experience with client operations

Definition

A. The amount of time budgeted to complete the engagement

Term

87. In obtaining an understanding of an entity's internal control in a financial statement audit, an auditor is not obligated toA. Determine whether control procedures have been placed in operationB. Perform procedures to understand the design of internal control policiesC. Document the understanding of the entity's internal control
D. Search for significant deficiencies in the operation of the entity's internal control

Definition

D. Search for significant deficiencies in the operation of the entity's internal control

Term

87. In obtaining an understanding of an entity's internal control in a financial statement audit, an auditor is obligated toA. Determine whether control procedures have been placed in operationB. Perform procedures to understand the design of internal control policiesC. Document the understanding of the entity's internal control
D. Search for significant deficiencies in the operation of the entity's internal control

Definition

A. Determine whether control procedures have been placed in operationB. Perform procedures to understand the design of internal control policies
C. Document the understanding of the entity's internal control

Term

88. In obtaining an understanding of an entity's internal control policies and procedures that are relevant to audit planning, and auditor is required to obtain knowledge about theA. Design of the policies and procedures pertaining to the internal control componentsB. Effectiveness of the policies and procedures that have been placed in operationC. Consistency with which the policies and procedures are currently being applied
D. Control procedures related to each principal transaction class and account balance

Definition

A. Design of the policies and procedures pertaining to the internal control components

Term

89. An auditor should obtain sufficient knowledge of an entity's accounting system to understand theA. Safeguards used to limit access to computer facilitiesB. Process used to prepare significant accounting estimatesC. Procedures used to assure proper authorization of transactions
D. Policies used to detect the concealment of fraud

Definition

B. Process used to prepare significant accounting estimates

Term

90. When obtaining an understanding of an entity's internal control, an auditor should concentrate on the implementation of the procedures becauseA. The procedures may be operating effectively but may not be documented.B. Management may implement procedures whose costs exceed their benefits.C. The procedures may be so inappropriate that no reliance is contemplated by the auditor.
D. Management may establish appropriate procedures but not enforce compliance with them.

Definition

D. Management may establish appropriate procedures but not enforce compliance with them.

Term

91. Which of the following techniques most likely would provide an auditor with the most assurance about the effectiveness of the operation of an internal control procedure?A. Confirmation with outside partiesB. Inquiry of client personnelC. Recomputation of account balance amounts
D. Observation of client personnel

Definition

D. Observation of client personnel

Term

92. The objective of tests of details of transactions performed as tests of controls is toA. Monitor the design and use of entity documents such as prenumbered shipping forms.B. Determine whether internal control policies and procedures have been placed in operation.C. Detect material misstatements in the account balances of the financial statements.
D. Evaluate whether internal control procedures operated effectively.

Definition

D. Evaluate whether internal control procedures operated effectively.

Term

93. Which of the following types of evidence would an auditor most likely examine to determine whether internal control policies and procedures are operating as designed?A. Gross margin information regarding the client's industryB. Confirmations of receivables verifying account balancesC. Client records documenting the use of computer programs
D. Anticipated results documented in budgets or forecasts

Definition

C. Client records documenting the use of computer programs

Term

94. Which of the following audit techniques ordinarily would provide an auditor with the least assurance about the operating effectiveness of an internal control activity?A. Inquiry of client personnelB. Inspection of documents and reportsC. Observation of client personnel
D. Preparation of system flowcharts

Definition

D. Preparation of system flowcharts

Term

95. Which of the following statements is correct concerning the use of prior audit evidence regarding the operating effectiveness of controls?A. If the auditor plans to rely on controls that have changed since they were last tested, the auditor should test those controls at least once every three years.B. If the auditor uses prior audit evidence for several controls, the auditor should test a sufficient portion of them in each audit so that each is tested every third audit.C. If the auditor plans to rely on controls that have not changed since they were last tested, the auditor should test those controls at least every other year.
D. If the auditor plans to rely on controls that mitigate a significant risk, those controls should be tested at least every other year.

Definition

B. If the auditor uses prior audit evidence for several controls, the auditor should test a sufficient portion of them in each audit so that each is tested every third audit.

Term

96. Which of the following statements describes an auditor's obligation to identify deficiencies in the design or operation of internal control?A. The auditor should design and apply tests of controls to discover deficiencies that could result in material misstatements.B. The auditor need not search for deficiencies unless management requests an attestation that "no significant deficiencies were identified in the audit."C. The auditor should search for deficiencies if the auditor expects to rely on controls.
D. The auditor need not search for deficiencies but should document and communicate any significant deficiencies and material weaknesses that are discovered.

Definition

D. The auditor need not search for deficiencies but should document and communicate any significant deficiencies and material weaknesses that are discovered.

Term

97. Which of the following statements is correct concerning deficiencies in internal control identified in an audit of financial statements?A. An auditor is required to search for control deficiencies during an audit.B. All significant deficiencies are also considered to be material weaknesses.C. An auditor may communicate some deficiencies during an audit in addition to after the audit's completion.
D. An auditor may report that no significant deficiencies were noted during an audit.

Definition

C. An auditor may communicate some deficiencies during an audit in addition to after the audit's completion.

Term

98. Which of the following matters would an auditor most likely consider to be a significant deficiency to be communicated to management and those charged with governance?A. Management's failure to renegotiate unfavorable long-term purchase commitmentsB. Recurring operating losses that may indicate going concern problemsC. Evidence of a lack of objectivity by those responsible for accounting decisions
D. Management's current plans to reduce its ownership equity in the entity

Definition

C. Evidence of a lack of objectivity by those responsible for accounting decisions

Term

99. After testing a client's internal control activities, an auditor discovers a material weakness in the operation of a client's internal controls. Under these circumstances the auditor most likely wouldA. Issue a disclaimer of opinion about the internal controls as part of the auditor's reportB. Increase the assessment of control risk and increase the extent of substantive testsC. Issue a qualified opinion of this finding as part of the auditor's report
D. Withdraw from audit because the internal controls are ineffective

Definition

B. Increase the assessment of control risk and increase the extent of substantive tests

Term

100. A previously communicated significant deficiency ordinarily should be communicated again ifA. The deficiency has a material effect on the auditor's assessment of control risk.B. The entity accepts that degree of risk because of cost-benefit considerations.C. The significant deficiency has not been corrected.
D. There has been major turnover in upper-level management and the board of directors.

Definition

C. The significant deficiency has not been corrected.

Term

101. Audit evidence concerning segregation of duties ordinarily is best obtained byA. Performing tests of transactions that corroborate management's financial statement assertionsB. Observing the employees as they apply control proceduresC. Obtaining a flowchart of activities performed by available personnel
D. Developing audit objectives that reduce control risk

Definition

B. Observing the employees as they apply control procedures

Term

102. Employers bond employees who handle cash receipts because fidelity bonds reduce the possibility of employing dishonest individuals andA. Protect employees who make unintentional errors from possible monetary damages resulting from their errorsB. Deter dishonestly by making employees aware that insurance companies may investigate and prosecute dishonest actsC. Facilitate an independent monitoring of the receiving and depositing of cash receipts
D. Force employees in position of trust to take periodic vacations and rotate their assigned duties

Definition

B. Deter dishonestly by making employees aware that insurance companies may investigate and prosecute dishonest acts

Term

103. An auditor who uses a transaction cycle approach to assessing control risk most likely would test control activities related to transactions involving the sale of goods to customers with theA. Collection of receivablesB. Purchase of merchandise inventoryC. Payment of accounts payable
D. Sale of long-term debt

Definition

A. Collection of receivables

Term

104. Holding other planning considerations equal, a decrease in the amount of misstatements in a class of transactions that an auditor could tolerate most likely would cause the auditor toA. Apply the planned substantive tests prior to the balance sheet dateB. Perform the planned auditing procedures closer to the balance sheet dateC. Increase the assessed level of control risk for relevant financial statement assertions
D. Decrease the extent of auditing procedures to be applied to the class of transactions

Definition

B. Perform the planned auditing procedures closer to the balance sheet date

Term

105. The expected population deviation rate of client billing misstatements is 2%. The auditor has established a tolerable rate of 3%. In the review of client invoices the auditor should useA. Stratified samplingB. Discovery samplingC. Variable sampling
D. Attribute sampling

Definition

Term

106. In performing tests of controls over authorization of cash disbursements, which of the following statistical sampling methods would be most appropriate?A. VariablesB. StratifiedC. Ratio
D. Attributes

Definition

Term

107. Which of the following sampling methods would be used to estimate a numerical estimate of a population, such as a dollar value?A. Attributes samplingB. Stop-or-go samplingC. Variable sampling
D. Random-number sampling

Definition

Term

108. For which of the following audit tests would an auditor most likely use attribute sampling?A. Selecting accounts receivable for confirmation of account balancesB. Inspecting employee time cards for proper approval by supervisorsC. Making an independent estimate of the amount of a LIFO inventory
D. Examining invoices in support of the valuation of fixed asset additions

Definition

B. Inspecting employee time cards for proper approval by supervisors

Term

109. In confirming a client's accounts receivable in prior years, an auditor found that there were many differences between the recorded account balances and the confirmation replies. These differences, which were not misstatements, required substantial time to resolve. In defining the sampling unit for the current year's audit, the auditor most likely would chooseA. Individual overdue balancesB. Individual invoicesC. Small account balances
D. Large account balances

Definition

Term

110. An auditor examining inventory most likely would use variables sampling rather than attributes sampling toA. Identify whether inventory items are properly pricedB. Estimate whether the dollar amount of inventory is reasonableC. Discover whether misstatements exist in inventory records
D. Determine whether discounts for inventory are properly recorded

Definition

B. Estimate whether the dollar amount of inventory is reasonable

Term

111. Samples to test internal control procedures are intended to provide a basis for an auditor to conclude whetherA. The control procedures are operating effectively.B. The financial statements are materially misstated.C. The risk of incorrect acceptance is too high.
D. Materiality for planning purposes is at a sufficiently low level.

Definition

A. The control procedures are operating effectively.

Term

112. An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide 1% risk of assessing control risk too low (99% confidence) that not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience that about 2.5% of the sales invoices lacked approval. A sample of 200 invoices was examined and 7 of them were lacking approval. The auditor then determined the achieved upper precision limit to be 8%. The allowance for sampling risk was:A. 5.5%B. 4.5%C. 3.5%
D. 1.0%

Definition

Term

113. An auditor may decide to increase the risk of incorrect rejection whenA. 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 is low.

Definition

D. The cost and effort of selecting additional sample items is low.

Term

114. The likelihood of assessing control risk too high is the risk that the sample selected to test controlsA. Does not support the auditor's planned assessed level of control risk when the true operating effectiveness of the internal control justifies such an assessmentB. Contains misstatement that could be material to the financial statements when aggregated with misstatements in other account balances or transactions classesC. Contains proportionately fewer monetary errors or deviations from prescribed internal control structure policies or procedures than exist in the balance or class as a whole
D. Does not support the tolerable error for some or all of management's assertions

Definition

A. Does not support the auditor's planned assessed level of control risk when the true operating effectiveness of the internal control justifies such an assessment

Term

115. 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 wasA. Less than the risk of assessing control risk too low, based on the auditor's sampleB. Less than the deviation rate in the auditor's sampleC. More than the risk of assessing control risk too low, based on the auditor's sample
D. More than the deviation rate in the auditor's sample

Definition

D. More than the deviation rate in the auditor's sample

Term

116. As a result of tests of controls, an auditor assesses control risk too high. This incorrect assessment most likely occurred becauseA. Control risk based on the auditor's sample is less than the true operating effectiveness of the client's control activity.B. The auditor believes that the control activity relates to the client's assertions when, in fact, it does not.C. The auditor believes that he control activity will reduce the extent of substantive testing when, in fact, it will not.
D. Control risk based on the auditor's sample is greater than the true operating effectiveness of the client's control activity.

Definition

D. Control risk based on the auditor's sample is greater than the true operating effectiveness of the client's control activity.

Term

117. An auditor should consider the tolerable rate of deviation when determining the number of check requests to select for a test to obtain assurance that all check requests have been properly authorized. The auditor should also consider The average dollar value The allowable risk of assessing of the check requests control risk too lowA. Yes YesB. Yes NoC. No Yes
D. No No

Definition

Term

118. The sampling unit in a test of controls pertaining to the existence of payroll transactions ordinarily is a(an)A. Clock card or time ticketB. Employee Form W-2C. Employee personnel record
D. Payroll register entry

Definition

D. Payroll register entry

Term

119. When planning a sample for a substantive test of details, an auditor should consider tolerable misstatement for the sample. This consideration shouldA. Be related to the auditor's business riskB. Not be adjusted for qualitative factorsC. Be related to preliminary judgments about materiality levels
D. Not be changed during the audit process

Definition

C. Be related to preliminary judgments about materiality levels

Term

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

Definition

B. Stratify the cash disbursements population so that the unusually large disbursements are selected.

Term

121. When using classical variables sampling for estimation, an auditor normally evaluates the sampling results by calculating the possible error in either direction. This statistical concept is known asA. PrecisionB. ReliabilityC. Projected error
D. Standard deviation

Definition

Term

122. A principal advantage of statistical methods of attribute sampling over nonstatistical methods is that they provide a scientific basis for planning theA. Risk of assessing control risk too lowB. Expected population deviation rateC. Tolerable rate
D. Sample size

Definition

Term

123. An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor to A. Eliminate the risk of nonsampling errorsB. Reduce the level of audit risk and materiality to a relatively low amountC. Measure the sufficiency of the audit evidence obtained
D. Minimize the failure to detect errors and fraud

Definition

C. Measure the sufficiency of the audit evidence obtained

Term

124. Given random selection, the same sample size, and the same precision requirement for the testing of two unequal populations, the risk of assessing control risk too low on the smaller population isA. Higher than assessing control risk too low for the larger populationB. Indeterminate relative to assessing control risk too low for the larger populationC. Lower than assessing control risk too low for the larger population
D. The same as assessing control risk too low for the larger population

Definition

C. Lower than assessing control risk too low for the larger population

Term

125. An auditor may use a systematic sampling technique with a start at any randomly selected item when performing a test of controls with respect to control over cash receipts. The biggest disadvantage of this type of sampling is that the items in the populationA. Must be systematically replaced in the population after samplingB. May occur in a systematic pattern, thus destroying the sample randomnessC. Must be recorded in a systematic pattern before the sample can be drawn
D. May systematically occur more than once in the sample

Definition

B. May occur in a systematic pattern, thus destroying the sample randomness

Term

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

Definition

B. The population has highly variable recorded amounts.

Term

127. An auditor is determining the sample size for an inventory observation using mean-per-unit estimation, which is a variables sampling plan. To calculate the required sample size, the auditor usually determines the Variability in the dollar amounts Risk of of inventory items incorrect acceptanceA. Yes YesB. Yes NoC. No Yes
D. No No

Definition

Term

128. To determine the sample size for a test of controls, an auditor should consider the tolerable deviation rate, the allowable risk of assessing control risk too low, and theA. Expected deviation rateB. Upper precision limitC. Risk of incorrect acceptance
D. Risk of incorrect rejection

Definition

A. Expected deviation rate

Term

129. An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide 1% risk of assessing control risk too low (99% confidence) that not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience that about 2.5% of the sales invoices lacked approval. A sample of 200 invoices was examined and 7 of them were lacking approval. The auditor then determined the achieved upper precision limit to be 8%. In the evaluation of this sample, the auditor decided to increase the level of preliminary assessment of control risk because theA. Tolerable rate (7%) was less than the achieved upper precision limit (8%).B. Expected deviation rate (7%) was more than the percentage of errors in the sample (3.5%).C. Achieved upper precision limit (8%) was more than the percentage of errors in the sample (3.5%).
D. Expected deviation rate (2.5%) was less than the tolerable rate (7%).

Definition

A. Tolerable rate (7%) was less than the achieved upper precision limit (8%).

Term

130. 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 voucherA. Constitutes a deviationB. Has been properly voidedC. Cannot be located
D. Represents an immaterial dollar amount

Definition

B. Has been properly voided

Term

131. What is an auditor's evaluation of a statistical sample for attributes when a test of 50 documents results in 3 deviations if the tolerable rate is 7%, the expected population deviation rate is 5%, and the allowance for sampling risk is 2%?A. Modify the planned assessed level of control risk because the tolerable rate plus the allowance for sampling risk exceeds the expected population deviation rate.B. Accept the sample results as support for the planned assessed level of control risk because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate.C. Accept the sample results as support for the planned assessed level of control risk because the tolerable rate less the allowance for sampling risk equals the expected population deviation rate.
D. Modify the planned assessed level of control risk because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate.

Definition

D. Modify the planned assessed level of control risk because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate.

Term

132. 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 plannedA. Tolerable rateB. Allowance for sampling riskC. Risk of assessing control risk too low
D. Sample size

Definition

Term

133. An auditor who uses statistical sampling for attributes in testing internal controls should reduce the planned reliance on a prescribed control when theA. Sample rate of deviation plus the allowance for sampling risk equals the tolerable rate.B. Sample rate of deviation is less than the expected rate of deviation used in planning the sample.C. Tolerable rate less the allowance for sampling risk exceeds the sample rate of deviation.
D. Sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate.

Definition

D. Sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate.

Term

134. 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 consider:I. The likely rate of deviationsII. The allowable risk of assessing control risk too highA. I onlyB. II onlyC. Both I & II
D. Neither I nor II

Definition

I. The likely rate of deviations

Term

135. Which of the following statements is correct concerning the auditor's use of statistical sampling?A. An auditor needs to estimate the dollar amount of the standard deviation of the population to use classical variables sampling.B. The selection of zero balances usually does not require special sample design considerations when using PPS sampling.C. A classical variables sample needs to be designed with special considerations to include negative balances in the sample.
D. An assumption of PPS sampling is that the underlying accounting population is normally distributed.

Definition

A. An auditor needs to estimate the dollar amount of the standard deviation of the population to use classical variables sampling.

Term

136. The use of the ratio estimation sampling technique is most effective whenA. The calculated audit amounts are approximately proportional to the client's book amounts.B. A relatively small number of differences exist in the population.C. Estimating populations whose records consist of quantities, but not book values.
D. Large overstatement differences and large understatement differences exist in the population.

Definition

A. The calculated audit amounts are approximately proportional to the client's book amounts.

Term

137. Which of the following sample planning factors would influence the sample size for a substantive test of details for a specific account? Expected amount of misstatement Measure of tolerable misstatementA. Yes YesB. Yes NoC. No Yes
D. No No

Definition

Term

138. Which of the following statements is correct concerning probability-proportional-to-size (PPS) sampling, also known as dollar-unit sampling?A. The sampling distribution should approximate the normal distribution.B. Overstated units have a lower probability of sample selection than units that are understated.C. The auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan.
D. The sampling interval is calculated by dividing the number of physical units in the population by the sample size.

Definition

C. The auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan.

Term

139. Which of the following would be an advantage in using classical variable sampling rather than 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.

Definition

C. Inclusion of zero and negative balances generally does not require special design considerations.

Term

140. In a PPS sample with a sampling interval of $5,000, an auditor discovered that a selected account receivable with a recorded amount of $10,000 has an audit amount of $8,000. If this were the only error discovered by the auditor, the projected error of this sample would beA. $1,000B. $2,000C. $4,000
D. $5,000

Definition

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