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Bundle of Auditing exam ,Graded A+.
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Topic 14 - Multiple Choice, questions and answers with verified content, all correct
If the client and auditor agree that a contingent liability resulting from a shareholder lawsuit is reasonably possible and a range of possible damages is ... [Show More] known, what is the most appropriate management action that the auditor would support? a. Disclose the details of the lawsuit and the possible outcomes in a footnote to the financial statements b. Include a liability and a charge to income on the financial statements to recognize the contingent liability c. Neither of the above Answer: a. Disclose the details of the lawsuit and the possible outcomes in a footnote to the financial statements If the likelihood is reasonably possible and damages are estimable, the company should disclose the contingency as a footnote to the financial statements. Auditors generally search for contingent liabilities during the planning phase of the audit. a. true b. false Answer: False This statement is false. Auditors generally search for contingent liabilities during the final review phase of the audit. Which of the following is most likely to result in a contingent liability disclosure as a footnote to the financial statements? a. An accounts payable balance owed by your client to a vendor that is on the verge of bankruptcy b. An accrual of sales tax throughout the year by a client in the retail industry c. A civil judgment against your client resulting in a non-appealable damages penalty d. An impending safety recall following a federal safety regulator's adverse report on a vehicle manufactured by your audit client Answer: d. An impending safety recall following a federal safety regulator's adverse report on a vehicle manufactured by your audit client Three of the answers represent known liabilities (they are booked already); the impending safety recall represents an event that is at least reasonably likely (not reasonably estimable). At a minimum, the client should disclose the contingency as a footnote to the financial statements. If the client and auditor agree that a contingent liability resulting from a shareholder lawsuit is probable and a damage amount is reasonably estimable, what is the most appropriate management action that the auditor would support? a. Disclose the details of the lawsuit and the possible outcomes in a footnote to the financial statements b. Include a liability and a charge to income on the financial statements to recognize the contingent liability c. Neither of the above Answer: b. Include a liability and a charge to income on the financial statements to recognize the contingent liability If a liability is probable and the loss is reasonably estimable, GAAP requires the company to recognize the liability in the financial statements. If an auditor identifies a contingent liability, the client is required to include the liability and associated expense on the financial statements. a. true b. false Answer: False This statement is false. If a contingent liability is not BOTH probable and reasonably estimable, then the client is not required to include the liability and associated expense on the financial statements. If the client and auditor agree that a contingent liability resulting from a shareholder lawsuit is remote in its likelihood, what is the most appropriate management action that the auditor would support? a. Disclose the details of the lawsuit and the possible outcomes in a footnote to the financial statements b. Include a liability and a charge to income on the financial statements to recognize the contingent liability c. Neither of the above Answer: Neither of the above Contingencies that are deemed remote in likelihood require neither disclosure nor adjustments of the financial statements. Which of the following audit procedures would be appropriate when searching for contingent liabilities? a. Sampling sales invoices to determine whether credit sales were properly authorized b. Reviewing board minutes and other committee meeting minutes c. Inquiries of management and other key personnel d. Performing a physical inventory count at year-end e. Reviewing legal expense accounts and documentation f. Communication with the client's legal counsel through a letter of inquiry prepared by the client Answer: Inquiries of management and other key personnel; Reviewing board minutes and other committee meeting minutes; Reviewing legal expense accounts and documentation ; Communication with the client's legal counsel through a letter of inquiry prepared by the client All but the physical inventory count and sampling of sales invoices are common audit procedures used to identify potential contingent liabilities. If the client and auditor agree that a contingent liability resulting from a shareholder lawsuit is probable but that the amount of damages is not reasonably estimable, what is the most appropriate management action that the auditor would support? a. Disclose the details of the lawsuit and the possible outcomes in a footnote to the financial statements b. Include a liability and a charge to income on the financial statements to recognize the contingent liability c. Neither of the above Answer: a. Disclose the details of the lawsuit and the possible outcomes in a footnote to the financial statements Although a probable likelihood would suggest the need to recognize the liability in the financial statements, the fact that the expected loss is not reasonably estimable leads the client to disclose the liability as a footnote to the financial statements. Assume that an uncontrolled wildfire destroys a large stockyard of lumber, equipment, and a significant number of partially-built tract homes for a homebuilder client five weeks after year-end but prior to the company issuing its annual financial statements. Assuming the damages are material to the financial statements, what type of event is described and what is the most appropriate course of action? a. Type I Subsequent Event; Adjust the financial statements to reflect the losses b. Type II Subsequent Event; Adjust the financial statements to reflect the losses c. Type I Subsequent Event; Disclose the damage and losses, but do not adjust the financial statements d. Type II Subsequent Event; Disclose the damage and losses, but do not adjust the financial statements e. This is not considered a subsequent event for the current period Answer: d. Type II Subsequent Event; Disclose the damage and losses, but do not adjust the financial statements Because the event was not predicted and occurred after year end (but before the financial statements were issued), it is a Type II event requiring disclosure rather than an adjustment to the financial statements. In the event that the event was pervasively material, the client may choose to include pro forma financial statements (i.e., reflecting the losses) in addition to the GAAP-compliant statements (i.e., do not reflect the losses). A subsequent event occurs after year-end but prior to the client's issuance of the financial statements. a. true b. false a. true Type I subsequent events require an adjustment to the financial statements to reflect the effects of the event. a. true b. false a. true The auditor has a responsibility to actively search for subsequent events up until the client issues the financial statements. a. true b. false Answer: False This statement is false. The auditor's responsibility to actively search for subsequent events extends until the auditor's report date (i.e., end of work). Between the auditor's report date and the issue date on the financial statements, the auditor passively searches for subsequent events. Three weeks prior to the end of the fiscal year, an uncontrolled wildfire destroys a large stockyard of lumber, equipment, and a significant number of partially-built tract homes for a homebuilder client. Because of a lull in new home construction, the homebuilder was already struggling to earn a profit and pay its bills. The builder does not have fire insurance to cover the losses incurred. Is this a subsequent event? If so, is it a Type I or Type II event? a. Type I Subsequent Event b. Type II Subsequent Event c. Not a subsequent event Answer: c. Not a subsequent event Because the event occurs prior to the end of the fiscal year, this is not considered a subsequent event. The effects of the event should be appropriately reflected in the financial statements. If your audit client experiences a material Type I subsequent event, which of the following is the most appropriate for informing investors of the effects of that event? a. Adjust the year-end audited financial statements b. Do not adjust the year-end audited financial statements, but include a set of pro-forma financial statements showing the effects of the event Answer: a. Adjust the year-end audited financial statements Type I subsequent events should be reflected in the financial statements. As such, an adjustment to the financial statements is required to reflect the changes. Type II subsequent events require an adjustment to the financial statements to reflect the effects of the event. a. true b. false Answer: False This statement is false. Type II subsequent events require disclosure (i.e., footnote discussion accompanying the financial statements) rather than an adjustment to the actual financial statements. As part of your audit, you review the client's disclosures for contingencies. One contingent liability related to a patent infringement lawsuit with a reasonable possibility of a loss within a known range has been disclosed in the footnotes. After you have completed your audit work, but prior to your client issuing its financial statements, the client informs you of an adverse judgment in the patent infringement lawsuit. The decision cannot be appealed, and the damages have been determined. Because the client has already included a discussion of this lawsuit in a footnote, what other actions - if any - are required? a. Adjust the financial statements to include a loss and associated liability b. No additional action is necessary; the event is already disclosed in the footnotes c. Revise the footnote disclosure to indicate the loss is probable and the damage amount is known Answer: a. Adjust the financial statements to include a loss and associated liability Because this was a known issue leading to an event occurring after the end of the period (but before the financial statements were issued), this is a Type I Subsequent Event. The liability and associated expense should be recorded on the financial statements. Which of the following audit procedures would be most helpful for identifying subsequent events? a. Accounts receivable confirmations b. Performing a physical inventory count c. Reviewing minutes from board of directors meetings d. Bank confirmations of cash (note legal and official record meeting) c. Reviewing minutes from board of directors meetings Auditors are never responsible for subsequent events that occur after the date of the auditor's report. a. true b. false b. false Assume the auditor is performing a December 31st year-end audit. The auditor actively searches for subsequent events while performing his fieldwork, he issues the auditor's report on March 15th, and the financial statements are released to the public on March 19th. If an event occurs and is brought to the auditor's attention on March 20th, what is the auditor's responsibility with respect to the December 31st financial statements? a. The auditor should require management to revise the financial statements. b. The auditor should go back and dual date the auditor's report. c. The auditor is not responsible for revising the issued auditor's report. c. The auditor is not responsible for revising the issued auditor's report. Auditing standards require that the auditor "perform audit procedures designed to obtain sufficient appropriate audit evidence that all subsequent events that require adjustment of, or disclosure in, the financial statements have been identified." a. true b. false a. true What term refers to the practice wherein auditors issue their report with one date marking the end of their fieldwork and planned procedures and a separate, later date referring to a subsequent event they were made aware of after completing their work? a. Restating the opinion b. Revised reporting c. Dual dating d. Multi-dating c. dual dating The auditor has a responsibility to actively search for subsequent events up until the date when the financial statements are released to the public. a. true b. false b. false Which of the following is NOT an example of an audit procedure for identifying subsequent events? a. Obtaining an understanding of the client's procedures for identifying subsequent events b. Inquiries with management c. testing client's controls d. Reading the client's latest interim financial statements, if any c. testing client's controls From an investor's perspective, a for-profit company operating on a continual basis is assumed ________ a going concern. a. not to be b. to be Answer: b. to be The term "going concern" relates to an entity's ability to continue operating in future periods. Unless evidence indicates otherwise, most companies are assumed to be going concerns. Remember going concern is good; not bad like the word concern suggests Which of the following is NOT a likely consequence of a company receiving an adverse going concern opinion as part of the auditor's report? a. Inability to obtain additional financing b. Increase in interest rates on future loans c. Less favorable credit terms for inventory and materials purchases d. Credit rating downgrade e. Receiving a "sell" rating from stock analysts f. All of the above are likely consequences of receiving an adverse going concern opinion Answer: f. All of the above are likely consequences of receiving an adverse going concern opinion Each response is a likely result of receiving an adverse going concern opinion. Three weeks prior to the end of the fiscal year, an uncontrolled wildfire destroys a large stockyard of lumber, equipment, and a significant number of partially-built tract homes for a homebuilder client. Because of a lull in new home construction, the homebuilder was already struggling to earn a profit and pay its bills. The builder does not have fire insurance to cover the losses incurred. If this were your audit client, which of the following issues would you be most concerned about relating to this event? a. Contingent liabilities b. Subsequent events c. Going concern issues d. All of the above Answer: b. Going concern issues This is not a subsequent event, and no contingent liability exists. Because the client's ability to continue as a financially viable entity is in doubt, the going concern assumption is challenged. Generally speaking, a for-profit company would not want to be labeled as a "going concern." a. true b. false Answer: False The term "going concern" relates to an entity's ability to continue operating in future periods. Unless evidence indicates otherwise, most companies are assumed to be going concerns. Analytical procedures can be an effective audit procedure for identifying evidence if a substantial doubt exists about a company's ability to continue as a going concern. a. true b. false Answer: True This is a true statement. If the auditor determines that substantial doubt exists about the client's ability to continue as a going concern, standards require that the auditor obtain information about what? a. The client's legal counsel and their prediction of whether the company will go bankrupt b. The client's customer base and the likelihood of future sales c. Management's plans to mitigate or overcome the negative conditions that are casting doubt on the company's status as a going concern d. Other audit engagement possibilities Answer: c. Management's plans to mitigate or overcome the negative conditions that are casting doubt on the company's status as a going concern AU 570.02 indicates that the auditor "should obtain information about management's plans that are intended to mitigate the adverse effects of such conditions or events." According to recent research, the number of going concern issues disclosed by auditors has been steadily increasing over the past decade. a. true b. false Answer: False This statement is false. The number of adverse going concern opinions disclosed by auditors has steadily declined over the past decade. (to avoid lawsuits; has too much impact on their investors and company) The auditor is required to provide the same level of assurance for management's disclosure and analysis (MD&A) as for the financial statements. a. true b. false Answer: False Although the auditor reviews the MD&A section to ensure statements made by management are generally consistent with the audited information, the auditor does not provide the same level of assurance for MD&A as he does for the financial statements. Auditing standards explicitly require that the auditor obtain _________ , _________ evidence as a basis for forming his or her opinion. a. accurate; reliable b. sufficient; appropriate c. confirming; reliable d. relevant; disconfirming Answer: b. sufficient; appropriate Standards require auditors to obtain sufficient, appropriate evidence to support their opinion. Which of the following qualitative characteristics about an identified misstatement would cause the auditor the greatest concern? a. A known misstatement based on a detected transposition error b. A likely misstatement involving a difference of management/auditor opinions on a sophisticated estimation process c. An unintentional overstatement of sales revenue d. An intentional understatement of operating expenses Answer: d. An intentional understatement of operating expenses Intentional misstatements should cause auditors serious concern because they may be indicative of a systematic problem within the organization. Whose responsibility is it to ensure that the financial statements comply with the FASB's prescribed standards for presentation and disclosure? a. Management b. The auditor Answer: a. Management Management is ultimately responsible for the content and presentation of the financial statements. According to auditing standards, the auditor must review evidence that is both consistent and inconsistent with management's assertions. a. true b. false Answer: True This statement is true. Auditing standards require that auditors employ analytical procedures at which of the following stages? (check all that apply) a. Planning phase (i.e., risk assessment activities) b. Fieldwork (i.e., substantive testing) c. Review phase (i.e., final review activities) d. Analytical procedures are required to be used during all three phases Answer: Planning phase (i.e., risk assessment activities); Review phase (i.e., final review activities) Auditing standards require auditors to employ analytical procedures during the Planning and Review phases of the audit. Although many auditors use analytical procedures during the Fieldwork phase, it is not required. At which stages of an engagement are auditors required to consider fraud risk? a. Planning phase b. Fieldwork phase c. Review phase d. All of the above Answer: All of the above Auditors are required to consider fraud throughout all phases of the audit. If the auditor determines that substantial doubt exists about the entity's ability to continue as a going concern, to whom does the auditor have a responsibility to share his concerns? a. The auditor is required to discuss this issue with both management and the audit committee b. The auditor is only required to discuss this issue to the audit committee c. The auditor is only required to discuss this issue with management Answer: a. The auditor is required to discuss this issue with both management and the audit committee The auditor is required to discuss/report his concerns to both management and the audit committee. For publicly-traded companies, which of the following is charged with overseeing the auditor's role in the financial reporting process? a. The internal audit function b. The audit committee c. Human resources d. Management Answer: b. The audit committee The independent audit committee of the board of directors is charged with overseeing the auditor's role in the financial reporting process. The auditor's required communications with the audit committee must be completed prior to issuing the auditor's opinion. a. true b. false Answer: True This statement is true. The auditor is not required to report critical accounting estimates made by management to the independent audit committee. a. true b. false Answer: False The auditor is required to report critical accounting estimates made by management to the audit committee. The auditor is required to communicate to management any instances where the auditor or management sought help from a specialist consultant. a. true b. false Answer: True This statement is true. Facts that become known to the auditor after the auditor's report has been issued that, had they been known previously, may have caused the auditor to revise his report are known as subsequently discovered facts. a. true b. false Answer: True This statement is true. If management fails to take appropriate steps to inform third parties of subsequently discovered facts that cause a material adjustment of the financial statements, what should the auditor do? a. Inform management that the auditor will take steps to inform third parties b. Do nothing; management is the only one who can inform third parties Answer: a. Inform management that the auditor will take steps to inform third parties If management does not take appropriate steps to inform third parties, the auditor should inform the client that he will take necessary steps to inform those parties of the material changes to the financial statements and revisions to the auditor's report. If subsequently discovered facts cause management to make adjustments to the financial statements to which the auditor has already opined, should the auditor revise her opinion? a. Yes; revise the opinion to include a discussion of the subsequently discovered facts, management's changes to the financial statements, and any changes in the auditor's opinion. b. No; the issued opinion remains and cannot be adjusted. Answer: a. Yes; revise the opinion to include a discussion of the subsequently discovered facts, management's changes to the financial statements, and any changes in the auditor's opinion.. Facts that become known to the auditor after the auditor's report has been issued that, had they been known previously, may have caused the auditor to revise his report are known as subsequent events. a. true b. false Answer: False Subsequent events are events that occur after year end but prior to the issuance of the auditor's report. Subsequently discovered facts refer to information discovered after the auditor's report has been issued. Who has the primary responsibility to inform third parties if subsequently discovered facts compel management to revise the financial statements in a material manner? a. The SEC b. Management c. The auditor d. The audit committee Answer: b. Management Management has the primary responsibility for the financial statements and for informing known users of the financial statements regarding any material changes the occur after the statements have been issued. Auditing standards require that each audit engagement be reviewed to ensure the quality and appropriateness of the audit process and the auditor's opinion. a. true b. false Answer: True This is a true statement. Given the need for a quality control reviewer to be knowledgeable about the client and industry, best practices suggest that an engagement partner who rotated off of the engagement under review last year is an ideal quality control candidate. a. true b. false Answer: False A quality control member cannot have been a member of the audit team being reviewed during the previous two years. Which of the following is not one of the tasks completed during a quality control review of an audit engagement? a. Review assessments of and judgments related to materiality b. Determine whether audit documentation is clear and sufficient c. Determine whether information has been communicated to the appropriate parties d. Determine the appropriate opinion and issue the auditor's report Answer: d. Determine the appropriate opinion and issue the auditor's report The quality control reviewer does not assume the responsibility of the original audit team. It is the original audit team's responsibility to select an appropriate opinion and to issue the auditor's report. Auditing standards require that one out of every five audit engagements be reviewed to ensure the quality and appropriateness of the audit process and the auditor's opinion. a. true b. false Answer: False Auditing standards require that a quality control review be performed for each audit engagement. The audit engagement quality control review process focuses on each of the following except... a. Judgments and risk assessments made during the planning phase b. Assessments of and judgments related to materiality c. Determining whether sufficient appropriate evidence was collected to support the auditor's opinion d. Determine the firm's independence and whether appropriate steps were taken to ensure independence throughout the engagement e. All of the above are focused on in the engagement quality control review Answer: e. All of the above are focused on in the engagement quality control review Each of the items listed is a focus of the quality control review. If an auditor discovers an omitted audit procedure after the financial statements have been issued, but determines that additional compensating procedures were performed and sufficient appropriate audit evidence was obtained through those procedures, he may conclude that the omitted procedure does not impair his ability to continue to support the audit opinion. a. true b. false Answer: True This statement is true. When an auditor discovers an omitted audit procedure after the financial statements has been issued, he should first... a. perform the omitted audit procedure b. consider the effect of the omitted procedure on his ability to continue to support the audit opinion c. withdraw the audit report and announce to the public that they should not rely on the financial statements d. revise the audit report Answer: b. consider the effect of the omitted procedure on his ability to continue to support the audit opinion When he has discovered an omitted audit procedure, the auditor should first consider the effect of the omitted procedure on his ability to continue to support the audit opinion. Omitted audit procedures are those audit procedures that were not performed because the auditor felt they were not necessary. a. true b. false Answer: False This is false. Omitted audit procedures - are those procedures which were considered necessary, but ultimately were not performed. [Show Less]
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Audit Final Chapter 15, questions and answers with rated solutions
Auditing reporting standards for financial statement and integrated audits require auditors to provide which of the following? a. Positive assurance. b.... [Show More] Negative assurance. c. Materiality assurance. d. No assurance. A Which of the following is a change that is not being debated by auditing standard setters and investors? a. Adding disclosure about which engagement partner at the firm supervised the audit and who from outside the audit firm participated in the audit b. Adding commentary on areas of risk of material misstatement of the financial statements identified by the auditor. c. Adding commentary about the level of materiality applied by the auditor to perform the audit. d. All of the above are being debated. D According to the AICPA, the auditor needs to form an opinion on the financial statements based on an evaluation of the audit evidence obtained. This is stated in which AICPA principle governing an audit conducted in accordance with GAAS? a. Principle 1 b. Principle 4 c. Principle 5 d. Principle 7 A According to the AICPA, the auditor needs to clearly express an opinion based on audit evidence obtained in the form of a written report.This is stated in which AICPA principle governing an audit conducted in accordance with GAAS? a. Principle 1 b. Principle 4 c. Principle 5 d. Principle 7 D According to the AICPA principles, which of the following is incorrect? a. If the auditor has reservations about the fairness of financial statement presentation, the reason(s) must be stated in the auditor's report. b. If there is a material departure from GAAP in the financial statements, the auditor should explicitly state the nature of the departure and the dollar effects where determinable. c. Auditors should state the reasons why an unqualified opinion cannot be issued. d. Auditors should issue an unqualified opinion in all cases where companies have provided an entire set of financial statements and footnotes that include all years presented for comparative purposes. D Which one of the following is not a type of unqualified audit opinion issued by auditors? a. Standard with three paragraphs. b. Includes explanatory paragraph. c. Includes modifications. d. Does not include the opinion paragraph. D Which one of the following is an example of the contents of an opinion paragraph found in an audit report? a. "We have audited...." b. "Nothing came to our attention..." c. "The financial statements referred to above present fairly,..." d. "An audit includes examining, on a test basis..." C In which one of the following instances would an auditor most likely issue a standard unqualified opinion without explanatory language? a. Management's disclosures are missing or inadequate. b. There is substantial doubt about the entity's ability to continue as a going concern. c. There is a significant limitation on the scope of the engagement. d. There is an immaterial deviation from GAAP related to capitalizing repairs. D The division of responsibility between the reporting company's management and the audit firm is described in which one of the following? a. Scope paragraph. b. Introductory paragraph. c. Notes to the financial statements. d. Opinion paragraph. B If the auditor believes that there is a remote probability that resolution of an uncertainty will have a material effect on the financial statements, which of the following would the auditor issue? a. A disclaimer of opinion. b. A standard unqualified opinion. c. An adverse opinion. d. An unqualified opinion with explanatory paragraphs. B The scope paragraph of an unqualified opinion primarily gives information relating to which of the following? a. The division of responsibilities. b. The final assessment of a company's standings with the audit firm. c. The statements and dates under audit. d. Audit planning and procedure. D Audit reports are designed to promote clear communication between the auditor and the financial statement user. Which of the following is not delineated in the audit report? a. What was audited and the relative responsibilities of the client and the auditor. b. The experience level of the audit team. c. The nature of the audit opinion formulation process. d. The auditor's opinion on the fairness of the financial statements. B If the auditor decides to draw attention to large related party transactions occurring in the financial statements of the client, which report will most likely be issued? a. Qualified. b. Unqualified with an explanatory paragraph c. Adverse. d. Consolidation. B The use of another CPA firm by an audit firm to perform part of the engagement on a client's subsidiary will require the audit firm to do which of the following? a. Merge with the other CPA firm. b. Perform a peer review on the other CPA firm. c. Ensure the independence of the other CPA firm of the client. d. List the other firm in the footnotes to the client's financial statements. C When financial statements contain a material, unjustified departure from GAAP, which of the following is contained in the audit report? a. A Qualification: Yes; An Explanatory Paragraph After the Opinion Paragraph: No. b. A Qualification: Yes; An Explanatory Paragraph After the Opinion Paragraph: Yes. c. A Qualification: No; An Explanatory Paragraph After the Opinion Paragraph: Yes. d. A Qualification: No; An Explanatory Paragraph After the Opinion Paragraph: No. A When the financial statements contain a material departure from GAAP that the auditor believes is justified, where should the justification appear? a. In a footnote. b. In a paragraph added before the scope paragraph. c. In the opening paragraph. d. In a paragraph added before the opinion paragraph. D Which one of the following is an instance where the auditor would add a paragraph after the opinion paragraph? a. There is serious doubt that the client can continue as a going concern. b. Management's disclosures are not adequate. c. There are significant uncertainties that are not properly disclosed in the footnotes. d. There is a material dollar misstatement in the financial statements. A A client company has a history of negative cash flow trends and continuing losses. Which type of opinion will the auditor most likely issue? a. Adverse. b. Unqualified with explanatory language. c. Qualified. d. Disclaimer of opinion. B When the auditor wishes to emphasize a matter in the financial statements, which of the following would the audit report contain? a. A Qualification: Yes; An Explanatory Paragraph After the Opinion Paragraph: No. b. A Qualification: Yes; An Explanatory Paragraph After the Opinion Paragraph: Yes. c. A Qualification: No; An Explanatory Paragraph After the Opinion Paragraph: Yes. d. A Qualification: No; An Explanatory Paragraph After the Opinion Paragraph: No. C When the auditor is unable to obtain sufficient appropriate evidence because the client did not allow a procedure to be completed, which of the following would the report most likely contain? a. A Qualification: Yes; An Explanatory Paragraph After the Opinion Paragraph: No. b. A Qualification: Yes; An Explanatory Paragraph After the Opinion Paragraph: Yes. c. A Qualification: No; An Explanatory Paragraph After the Opinion Paragraph: Yes. d. A Qualification: No; An Explanatory Paragraph After the Opinion Paragraph: No. D In the audit of consolidated financial statements under U.S. auditing standards when more than one CPA firm is involved and the principal audit firm chooses to mention the other firm(s), the wording of which paragraph(s) is modified? a. Introductory Paragraph: No; Scope Paragraph: No; Opinion Paragraph: Yes. b. Introductory Paragraph: No; Scope Paragraph: Yes; Opinion Paragraph: Yes. c. Introductory Paragraph: Yes; Scope Paragraph: Yes; Opinion Paragraph: Yes. d. Introductory Paragraph: Yes; Scope Paragraph: Yes; Opinion Paragraph: No. C Which of the following would not result in an unqualified audit report with an explanatory paragraph? a. Going concern issue. b. Scope limitation. c. Emphasis of a matter. d. Consistency of presentation. B How would the auditor categorize a situation when the financial statements do not contain a footnote the auditor believes is necessary for fair presentation? a. A scope limitation. b. An uncertainty. c. A departure from GAAP. d. An act discreditable. C In which one of the following cases would an auditor most likely issue a qualified opinion? a. There is a highly material, and very pervasive departure from SFAS No. 141 and No. 142. b. There is a change in accounting principles promulgated by the FASB. c. There is an immaterial dollar misstatement on the financial statements. d. There is one material departure from GAAP that is affects only two accounts. D Qualified opinions can only be issued by auditors for which of the following? a. Violations of GAAP. b. Scope limitations. c. Going concern. d. Lack of independence. e. Either A and B. E Violations of GAAP resulting in qualified opinions affect the standard audit report through which of the following? a. Modifying the scope paragraph. b. Adding an explanatory paragraph before the opinion paragraph. c. Modifying the opinion paragraph to read "except for." d. Both B and C. e. All of the above. D Which of the following is an example of circumstances that would not limit the audit scope? a. An inadequacy in the accounting records. b. The inability to gather sufficient competent evidence. c. Emphasis of an important matter. d. The timing of the fieldwork. C Which of the following phrases should not be used when the auditor is qualifying the audit opinion? a. Except for. b. Subject to. c. With the exception of. d. With the qualification of. B If a client expensed the acquisition cost of some assets that should have been capitalized and depreciated them over their useful lives, which of the following would be incorrect? a. A qualified opinion would be appropriate. b. The opinion paragraph should be modified to include language such as: "except for the effects of not capitalizing the acquisition costs of some assets..." c. An explanatory paragraph should include the effects of the subject matter of the qualification, where practicable. d. An explanatory paragraph should be modified to include language such as: "subject to the qualified act..." D Adverse opinions can only be issued by auditors based on which of the following? a. Violations of GAAP. b. Scope limitations. c. Going concern. d. Lack of independence. e. Either B or D. A Adverse opinions affect the standard audit report in which of the following ways? a. Modifying the scope paragraph. b. Adding an explanatory paragraph before the opinion paragraph. c. Modifying the opinion paragraph to read " does not present fairly." d. Both B and C. e. All of the above. E The opinion paragraph of the audit report for Schnook Co. states that the financial statements "do not present fairly". Which type of audit report is this? a. Improper. b. Adverse. c. Disclaimer. d. Qualified. B An audit of the Flagler Company, a diamond mining company, brings to light the fact that its equipment has been marked up to the owners' expectation of market values. Such a situation will most likely result in which type of report? a. Disclaimer. b. Review. c. Adverse. d. Unqualified with explanatory language. C In which one of the following instances would an auditor most likely issue an adverse opinion? a. Management declines to present earnings per share in the income statement. b. There is substantial doubt about the entity's ability to continue as a going concern. c. There is a material dollar misstatement that overshadows the overall financial statements. d. The client does not allow the auditor to send confirmations to its three largest customers. C When an auditor is faced with a material departure from GAAP that is pervasive, which of the following should the audit report contain? a. An unqualified opinion. b. A qualified opinion with an explanatory paragraph. c. An adverse opinion. d. A disclaimer of opinion. C In which of the following circumstances would an auditor be most likely to express an adverse opinion on a company's financial statements? a. The client has had significant transactions with related entities that the auditor wants to emphasize. b. The financial statements are not in conformity with FASB requirements regarding the capitalization of leases. c. The auditor is not independent. d. There is substantial doubt about the entity's ability to continue as a going concern. B When an auditor issues an adverse opinion, which of the following should be included in the opinion paragraph? a. The financial statement effects of the departure from GAAP. b. A statement that indicates that the financial statements are fairly stated except for a reason that is described in the separate paragraph. c. A reference to a separate paragraph that describes the reason for the adverse opinion. d. The reasons that the financial statements are misleading. C In which one of the following instances would an auditor most likely issue a disclaimer of opinion? a. Management will not sign a management representation letter. b. Management declines to provide a statement of cash flow. c. The auditor is independent of the client. d. The auditor is unable to confirm receivables but performs alternative procedures. B In which one of the following instances would an auditor not issue a disclaimer of opinion? a. The auditors are not invited to the periodic inventory at year end. b. There are significant misstatements in the financial statements. c. There is a significant limitation on the scope of the engagement. d. There is insufficient evidence for the auditor to form an opinion on the fairness of the financial statements. B When an auditor lacks independence with respect to a client, which of the following should the auditor issue? a. A disclaimer of opinion. b. An adverse opinion. c. A qualified opinion with explanatory paragraph. d. An unqualified opinion. A When the auditor is not independent with respect to a client, what must the auditor do? a. Not accept an audit engagement. b. Include a separate paragraph in the audit report stating the lack of independence. c. Provide a review report. d. Report the non-compliance to the AICPA. A Disclaimers of opinion can only be issued by auditors based on which of the following? a. Violations of GAAP. b. Substantial scope limitations. c. Going concern. It is this one also... d. Lack of independence. e. Either B or D. E Scope limitations resulting in disclaimers under U.S. auditing standards affect the standard audit report through which of the following? a. Modifying the introductory paragraph b. Eliminating the scope paragraph. c. Adding an explanatory paragraph before the disclaimer paragraph. d. Both B and C. e. All of the above. E A justified departure from GAAP may result in which of the following? a. A disclaimer of an audit opinion. b. An unqualified audit opinion with an explanatory paragraph either before or after the opinion paragraph. c. An adverse opinion. d. A qualified opinion. B A justified departure from GAAP may result in which of the following? a. A disclaimer of an audit opinion. b. An adverse opinion. c. An unqualified audit opinion with an explanatory paragraph before the opinion paragraph or a qualified opinion. d. A standard unqualified opinion. C An emphasis of a matter may result in which of the following? a. A disclaimer of an audit opinion. b. A qualified audit opinion. c. An adverse opinion. d. An unqualified audit opinion with an explanatory paragraph either before or after the opinion paragraph. D A reference to another auditor under U.S. auditing standards may result in which of the following? a. A disclaimer of an audit opinion. b. A qualified audit opinion. c. An adverse opinion. d. An unqualified audit opinion with modified wording for all three paragraphs. D When might an auditor modify the introductory paragraph and replace the scope paragraph with explanatory paragraph? a. When a scope limitation exists. b. When there is substantial doubt about going-concern. c. When the auditor lacks independence. d. When there is an emphasis of a matter. A PCAOB Auditing Standard 5 does not identify which of the following situations as one in which the auditor will modify the audit report on ICFR effectiveness? a. When there is a restriction on the scope of the engagement. b. When there is other information contained in management's annual report on ICFR. c. When elements of management's annual report on internal control are incomplete or improperly presented. d. When the annual report includes a copy of the annual certification pursuant to Section 302 of the Sarbanes-Oxley Act. D When there is a restriction on the scope of the internal control over financial reporting (ICFR) engagement, what should the auditor do? a. The auditor will either withdraw from the engagement or disclaim an opinion. b. The auditor will issue an adverse opinion. c. The auditor will issue an opinion on the ICFR based on another audit firm's work. d. The auditor will report this directly to the Treadway Commission. A In which of the following situations would the auditor modify the audit report on ICFR? a. When the auditor relies on the work of other auditors but decides not to include a reference to the other auditors. b. When the auditor is unable to perform all procedures needed to evaluate the internal controls. c. When the auditor concludes that management's report on ICFR is not complete or is improperly presented. d. When the auditor identifies multiple unrelated significant deficiencies in ICFR. C When management chooses to include information in its report on ICFR that is in addition to the information required to be provided, what should the auditor do? a. The auditor must endorse the information. b. The auditor must include the information as part of the opinion. c. The auditor will disclaim an opinion on that additional information. d. The auditor will present the information in a separate schedule in the footnotes. C [Show Less]
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Auditing Chapter 12, questions and answers, 100% accurate answers
Explain the audit procedures performed as part of the engagement wrap-up 1. Review planned audit procedures for proper and complete execution 2. All nece... [Show More] ssary matters have been appropriately considered 3. Revisit open review notes, "to-do" items and any procedures not yet completed 4. All unnecessary docs removed from audit files 5. Multi-location engagements - all docs required obtained and reviewed 6. Consider amount used for materiality 7. Reconsider assessments of internal controls and risk of fraud 8. Perform analytical procedures, review subsequent events Why is the engagement wrap-up process important -ensures auditor considers all matters are relevant to finalizing documentation Considerations when assessing going concern assumption -Size and complexity of the entity -Nature and condition of business -The degree to which it is effected by external factors -material uncertainties (ability to pay debt) Contingent liabilities procedures 1. Inquire of management, in-house legal counsel about unreported liabilities 2. Review minutes of meetings of external legal counsel and BoD, management 3. Review correspondence with tax authorities 4. Review legal expense accounts for unexpected fluctuations 5. Include management representation letter with fact that all liabilities has been disclosed Subsequent event both events occurring between year-end and the date of the audit report, and facts discovered after date of audit report Type 1 Subsequent Event -Events that provide additional evidence with respect to the conditions that existed on the date of the FS E.g. Bankruptcy of a customer subsequent to year end, increase in ADFA Type 2 Subsequent Event - Events that provide evidence with respects to condition that AROSE subsequent to the date of financial statement E.g. Factory burnt now, loss of inventory Components of an Audit Report 1. Title 2. Addresse 3. Introductory paragraph 4. Management's responsibility 5. Auditor's responsibility 6. Auditor's opinion 7. Other reporting responsibilities 8. Auditors signature 9. Date of report 10. Auditor's address Unmodified Report with Emphasis of Matter is given under these conditions: -Going Concern -Litigation -early adoption of new accounting standard -major catastrophe that has happened -subsequent event Financial Statements are materially misstated but not pervasive What opinion will be given? Modified Opinion with qualification FS are materially misstated and is pervasive What opinion will be given? Modified and adverse Inability to obtain sufficient appropriate audit evidence but not pervasive Modified and qualification [Show Less]
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Chapter 15 Auditing, questions and answers with complete top solutions
All of the following phrases would be found in the standard unmodified audit report for a private company except: -in our opinion, the financial stateme... [Show More] nts referred to above are correct, in all material respects. -management is responsible for the preparation and fair presentation of the financial statements. -standards require that we plan and perform the audit to obtain reasonable assurance. -we believe the audit evidence we have obtained is sufficient and appropriate. in our opinion, the financial statements referred to above are correct, in all material respects. In a public company audit, the audit report is addressed to the: -the board of directors and shareholders. -audit committee -the SEC -the CEO and CFO the board of directors and shareholders If a client has a going concern issue that has been properly disclosed in the notes, the auditor should: -Issue an unmodified report and add an emphasis-of-matter paragraph after the opinion paragraph to highlight the going concern issue -Issue a qualified report and add an emphasis-of-matter paragraph before the opinion paragraph to highlight the going concern issue -Issue an unmodified report and add an emphasis-of-matter paragraph before the opinion paragraph to highlight the going concern issue -Issue a qualified report and add an emphasis-of-matter paragraph after the opinion paragraph to highlight the going concern issue Issue an unmodified report and add an emphasis-of-matter paragraph after the opinion paragraph to highlight the going concern issue All of the following are examples of a change in accounting principle except: -a change from an acceptable accounting method to a newly adopted accounting principle -a change in an accounting estimate -a change from one acceptable accounting principle to another acceptable accounting principle -a change in the method of application of an acceptable accounting principle a change in an accounting estimate An emphasis-of-matter paragraph is used with an unmodified opinion when: -there is a disagreement with those charge with governance regarding the selection of accounting policies -an extreme limitation of the scope of the audit exists -a significant uncertainty exists that should be brought to the financial statements user's attention -a client has an unjustified change in accounting principle a significant uncertainty exists that should be brought to the financial statements user's attention When the audit opinion is based in part on the work of another auditor, all of the following changes are made to the standard unmodified audit report except: -the portion of the audit conducted by the component auditor is stated in the report -an emphasis-of-matter paragraph is added after the opinion paragraph -the auditor's responsibility paragraph has added working stating the other auditors completed a portion of the audit -the opinion paragraph references the other auditors an emphasis-of-matter paragraph is added after the opinion paragraph Which of the following is an example of a modified opinion? -a going concern emphasis-of-matter paragraph -a consistency emphasis-of-matter paragraph -a qualified opinion -a reference to the audit of component auditors a qualified opinion If the auditor encounters a material scope limitation and cannot obtain sufficient appropriate audit evidence regarding the fair presentation of the financial statements, what type of report would be issued? -An unmodified opinion with an emphasis-of-matter paragraph -A qualified or adverse opinion -A qualified or disclaimer of opinion -No report can be issued a qualified or disclaimer of opinion If an auditor becomes aware after the date of the auditor's report but before the financial statements are issued, of a fact that may materially affect the financial statements, the first step the auditor should take is to: -determine if the financial statements need to be revised -discuss the matter with management and, if appropriate, those charged with governance -make the appropriate adjustments to the financial statements -alert the appropriate regulatory body discuss the matter with management and, if appropriate, those charged with governance The dual dating of an audit report means: -the release date of the financial statements was after the completion of fieldwork -a subsequent event occurred -the auditors extended their responsibility period to include the release date of the financial statements -the auditors performed audit procedures regarding a specific event that was after the end of fieldwork the auditors performed audit procedures regarding a specific event that was after the end of fieldwork If auditors identify only one material weakness in a client's internal control system, the appropriate report to issue is a(n): -unqualified opinion with an emphasis-of-matter paragraph -qualified opinion -disclaimer of opinion -adverse opinion adverse opinion An unqualified audit report must state that all of the following have been evaluated by the auditors, EXCEPT -likelihood of the occurrence of fraud in the financial statements -accounting principles used by management -significant estimates made by management -overall presentation of the financial statements likelihood of the occurrence of fraud in the financial statements What is the difference between an unmodified opinion and a modified opinion? -An unmodified opinion is also known as a qualified opinion whereas a modified opinion is also known as an adverse opinion -An unmodified opinion may include a pervasive scope limitation and a modified opinion may not -An unmodified opinion may include one or more material misstatements and a modified opinion may include one or more immaterial misstatements -An unmodified opinion states that the financial statements are presented fairly in accordance with the applicable financial framework, and a modified opinion finds they are not An unmodified opinion states that the financial statements are presented fairly in accordance with the applicable financial framework, and a modified opinion finds they are not Auditor Margarita concludes that the financial statements are presented fairly, in all material respects, and in accordance with the applicable financial reporting framework, though she did find an immaterial scope limitation that was not pervasive. What type of opinion has she rendered? -unaudited opinion -modified opinion -unmodified opinion -adverse opinion unmodified opinion Auditor Alfonso has gathered sufficient appropriate audit evidence, evaluated uncorrected misstatements, and completed the required communications with those charged with governance. His final step is to -schedule a meeting with the audit committee -file the financial statements with the SEC -prepare and issue the independent auditor's report -shred the audit documentation prepare and issue the independent auditor's report Downtown Stores Inc. intends to change from operating leases to capitalized leases to comply with changes in accounting standards. This would be considered a change in -accounting principle -lease estimate -accounting standard -accounting estimate accounting principle The private pharmaceutical Proforma Company is dependent on one recently developed drug for much of its current revenue. A new scientific study has identified previously unknown and dangerous side effects of the drug, and industry observers expect a court challenge to the drug's legal status. Proforma refuses to properly disclose a going concern issue in the notes as required. An auditor should do which of the following? -Modify the opinion -Report concerns to the independent audit committee of the board of directors -None of these answer choices are correct -Withdraw from the engagement Modify the opinion You are an auditor for Bigger Warehouses, who recently completed an acquisition of Smaller Group Inc. Smaller Group represents a material amount of the financial statements for Bigger. As the group engagement partner, you decide to reference the work done by the auditor for a Smaller Group. Because you referenced the work of this component audit, which of the following statements is correct? -You are assuming responsibility for the work of the component auditor and your opinion is based solely on the report of the component auditors. -You are not assuming responsibility for the work of the component auditor and your opinion is not based solely on the report of the component auditors. -You are assuming responsibility for the work of the component auditor and your opinion is not based solely on the report of the component auditors. -You are not assuming responsibility for the work of the component auditor and your opinion is based solely on the report of the component auditors. You are not assuming responsibility for the work of the component auditor and your opinion is not based solely on the report of the component auditors. (Wrong) Which of the following statements is INCORRECT regarding using the work of another auditor for the audits of private companies? A : If the subsidiary audited by the component auditor is an immaterial amount of the group financial statements, the group engagement partner typically decides to reference the work completed by the component auditor in the audit report. B : If more than one component auditor was used to audit multiple subsidiaries, then the portion audited by all component auditors can be aggregated together and expressed as a single dollar amount or percentage. C : The group engagement partner must decide whether to make reference to the audit of a component auditor in the auditor's report on the group financial statements. D : When reference is made to a component auditor, the auditor's responsibility paragraph is modified to include a portion of the group financial statements that were audited by the component auditor. If the subsidiary audited by the component auditor is an immaterial amount of the group financial statements, the group engagement partner typically decides to reference the work completed by the component auditor in the audit report. During the audit of Chesterfield Fine Wines, the auditors determine that the company has miscalculated the depreciation for some recently purchased major distillery equipment. The auditors find this to be a material, but not pervasive, departure from GAAP. Which type of audit opinion should be issued? A : disclaimer B : qualified C : unmodified D : adverse Disclaimer (Wrong) During the audit of Chesterfield Fine Wines, the auditors determine that the company is using an unacceptable inventory valuation method that amounts to a pervasively material departure from GAAP. Which type of audit opinion should be issued? -unmodified -qualified -adverse -disclaimer adverse During the audit of Chesterfield Fine Wines, the auditors determine that certain necessary accounting records were destroyed in a recent fire at Chesterfield's headquarters. The auditors find this to be a material, but not pervasive, scope limitation. Which type of audit opinion should be issued? A : unmodified B : qualified C : adverse D : disclaimer qualified During the audit of Chesterfield Fine Wines, the auditors determine that Chesterfield management will not give the auditors access necessary to confirm a completed inventory count. The auditors find this to be a pervasively material scope limitation. Which type of audit opinion should be issued? A : qualified B : unmodified C : adverse D : disclaimer disclaimer Which of the following statements is INCORRECT regarding subsequently discovered facts? A : Auditors must determine if the new information is reliable, material, and if it existed at the date of the auditor's report. B : If a revision of the financial statements is necessary, auditors should inquire of management as to how management will address the situation in the financial statements, either through adjustment and disclosure or only disclosure. C : If management revises the financial statements, auditors do not need to perform audit procedures on the changes made by management. D : AU-C 560 and AS 2905 state the first step is to discuss the matter with the appropriate level of management and, if appropriate, those charged with governance. If management revises the financial statements, auditors do not need to perform audit procedures on the changes made by management. What is the difference between a subsequent event and a subsequently discovered fact? A : A subsequent event does not require auditors to perform any audit procedures after the date of the financial statements, whereas a subsequently discovered fact does. B : A subsequent event occurs between the end of fieldwork date and the report release date, whereas a subsequently discovered fact occurs before the end of fieldwork date. C : A subsequent event is discovered after the report release date and a subsequently discovered fact is discovered before the report release date. D : A subsequent event is discovered before the report release date and a subsequently discovered fact is discovered after the report release date. A subsequent event is discovered before the report release date and a subsequently discovered fact is discovered after the report release date. What is an auditor's responsibility with regard to subsequently discovered facts? A : Auditors are responsible for subsequently discovered facts, both before and after the report release date. B : Auditors have no responsibility for subsequently discovered facts after the report release date unless the client determines that routine auditing procedures should have uncovered the facts during the period of the financial statement. C : Subsequently discovered facts become known only after the report release date so auditors have no responsibility to deal with them. D : Auditors are only responsible for subsequently discovered facts that become known before the end of fieldwork date. Auditors are responsible for subsequently discovered facts, both before and after the report release date. An audit that combines the financial statement audit with an audit of the effectiveness of ICFR is defined as A : dual B : integrated C : comprehensive D : concurrent integrated Auditor Candace has identified an internal control exception related to revenues during an audit of Flying Rug Company. What must Candace do to determine if this is a control deficiency, a significant deficiency, or a material weakness? A : consult management's legal counsel B : request an opinion from the AICPA C : consult the auditor's legal counsel D : use her professional judgment use her professional judgement Which statement is most correct regarding the opinion on internal controls over financial reporting (ICFR)? A : The opinion is only modified if one or more material weaknesses in ICFR are identified. B : The opinion is only modified if one or more material misstatements are identified. C : The opinion is modified if one or more material weaknesses in ICFR are identified or there is a restriction on the scope of the auditor's work. D : The opinion is only modified if there is a restriction on the scope of the auditor's work. The opinion is modified if one or more material weakness in ICFR are identified or there is a restriction on the scope of the auditor's work CPA Anya is considering whether to accept a compilation agreement. Which statement regarding the conditions she must meet is INCORRECT? A : The only requirement is for Anya to read the financial statements and determine whether they appear to be appropriate in form and free from obvious material misstatements based on her knowledge of the financial reporting framework. B : Anya is required to be independent. C : Anya does not perform any procedures to verify or corroborate the client's accounting records. D : If Anya is not independent, it must be disclosed in the compilation report. Anya is required to be independent CPA Hernandez is considering whether to accept a review engagement from a small private company that offers counseling services to high school students who are applying to colleges. Which statement is INCORRECT regarding the conditions he must meet? A : The financial reporting framework selected by management must be acceptable in the circumstances. B : Hernandez must obtain an agreement from management that it acknowledges its responsibility for the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework. C : Hernandez is required to be independent. D : Management must agree to provide a representation letter at the conclusion of the review engagement that confirms Hernandez's representations made during the review. Management must agree to provide a representation letter at the conclusion of the review engagement that confirms Hernandez's representations made during the review [Show Less]
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Internal Audit Chapter 1 MCQ, questions and answers. 100% accurate
1. Which of the following are components of the definition of internal auditing? a. Independence and Objectivity b. A systematic and disciplined approach... [Show More] c. Helping the organization accomplish its objectives d. All of the above d. All of the above 2. Assurance, Insight, and Objectivity comprise: a. The mission of internal auditing b. The three lines of defense model c. The objectives of internal auditing d. The value of proposition d. The value proposition 3. Independent outside auditors provide financial reporting assurance services primarily for: a. The benefit of third parties b. Management c. Board of directors d. The CEO a. The benefit of third parties 4. AVF Company's new CFO has asked the company's CAE to meet with him to discuss the role of the internal audit function. The CAE should inform the CFO that the overall responsibility of internal audit is to: a. Serve as an independent assurance and consulting activity designed to add value and improve the company's operations b. Assess the company's methods for safeguarding its assets, as appropriate, verify the existence of the assets c. Review the integrity of financial and operating information and the methods used to accumulate and report information d. Determine whether the company's system of internal controls provides reasonable assurance that information is effectively and efficiently communicated to management. a. Serve as an independent assurance and consulting activity designed to add value and improve the company's operations 5. Which of the following statements is not true about business objectives? a. Business objectives represent targets of performance b. Establishing meaningful business objectives is a prerequisite to effective internal controls c. Establishing meaningful business objectives is a key component of the management process d. Business objectives are management's means of employing resources and assigning responsibilities b. Establishing meaningful business objectives is a prerequisite to effective internal controls 6. Within the context of internal auditing, assurance services are best defined as: a. Objective examinations of evidence for the purpose of providing independent assessments b. Advisory services intended to add value and improve an organizations operation c. Professional activities that measure and communicate financial and business data d. Objective evaluations of compliance with policies, plans, procedures, laws, and regulations. a. Objective examinations of evidence for the purpose of providing independent assessments 7. Which of the following is mandatory guidance within the IPPF? a. Implementation guidance b. Supplemental guidance c. The value proposition d. The core principles d. The core principles 8. Which of the following is recommended guidance within the IPPF? a. The Definition of Internal Auditing b. The Standards c. Supplemental guidance d. None of the above c. Supplemental guidance 9. The Internal Audit Foundation exists to help audit leaders, practitioners, students, and academics experience continuous growth in their careers to propel them to become: a. Strong assurance providers b. Trusted advisors c. Independent Outside auditors d. CAEs b. Trusted advisors 10. Which of the following is one of the 5 Cs essential to success as an Internal Auditor? a. Courage b. Consistency c. Collaboration d. Candidness a. Courage 11. Which of the following is a framework that can help individual internal auditors and internal audit functions assess their current competency levels and identify areas for improvement? a. Internal Control - Integrated Framework b. International Professional Practices Framework c. The Global Internal Auditor Competency Framework d. Enterprise Risk Management Framework c. The Global Internal Auditor Competency Framework 12. Internal auditors must have competent interpersonal skills. Which of the following does not represent an attribute of interpersonal skills? a. Communication b. Leadership c. Project Management d. Team capabilities c. Project Management 13. While planning an internal audit, the internal auditor obtains knowledge about the auditee to, among other things: a. Develop an attitude of professional skepticism about management's assertions b. Develop an understanding of the auditee's objectives and risks c. Make constructive suggestions to management concerning internal control improvements d. Evaluate whether misstatements in the auditee's performance reports should be communicated to senior management and the audit committee b. Develop an understanding of the auditee's objectives and risks 14. Which of the following is the premier certification sponsored by the IIA? a. Certification in Control Self Assessment b. Certified Internal Auditor c. Certification in Risk Management Assessment d. Certified Information Systems Auditor b. Certified Internal Auditor 15. Which of the following is the ultimate position of a career internal auditor? a. CEO b. CFO c. CRO d. CAE d. CAE [Show Less]
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Internal Audit Chapter 1 MCQ, questions and answers with rated solutions
An audit of a nonissuer's internal control over financial reporting in an integrated audit will generally Be more extensive in scope than the assessment o... [Show More] f control risk made during the financial statement audit. Which of the following conditions is necessary for an auditor to accept an engagement to audit and report on an entity's internal control over financial reporting in an integrated audit for a nonissuer? Management presents its written assessment about the effectiveness of the entity's internal control over financial reporting. Before an auditor can accept an engagement to audit internal control over financial reporting in an integrated audit of a nonissuer, all of the following conditions must be met, except for Management must state in the engagement letter that any identified significant deficiencies will be corrected on a timely basis, not to exceed 60 days from the report release date. An auditor's report expressing an unmodified opinion on an entity's internal control over financial reporting in an integrated audit of a nonissuer should state that the Entity maintained effective internal control over financial reporting as of a specific date. Brown, CPA, has been engaged to audit and report on Crow Company's written assessment about the effectiveness of Crow's internal control over financial reporting in an integrated audit under AICPA standards. In what form may Crow appropriately present its written assessment? I. In a separate report that will accompany Brown's report. II. In a representation letter to Brown. I only. When engaged to express an opinion on an entity's internal accounting control over financial reporting in an integrated audit of a nonissuer, an auditor should Obtain management's written representations acknowledging responsibility for establishing and maintaining the system of internal control. Snow, CPA, was engaged by Master Co., a nonpublic company, to audit and report on the effectiveness of Master's internal control over financial reporting in an integrated audit. Snow's report should state that Because of the inherent limitations of internal control over financial reporting, misstatements may occur and not be detected. If an auditor performing an integrated audit identifies one or more material weaknesses in a nonissuer's internal control, the auditor should Express an adverse opinion on the entity's internal control. Which of the following statements correctly describes the "top-down approach" used during an audit of internal control over financial reporting? Begin by understanding the overall risks to internal control over financial reporting at the financial statement level. Which of the following best describes the earliest date for an auditor's report? The date the auditor has obtained sufficient appropriate audit evidence to support the opinion. In an integrated audit of a nonissuer, which of the following is the responsibility of an auditor with regard to testing controls at a company with multiple business units? Testing controls over specific risks at business units that are material to the company's consolidated financial statements. An auditing procedure that is applicable to "testing operating effectiveness" that is not associated with "testing design effectiveness" is Reperformance of the control procedure. Each of the following types of controls is considered to be an entity-level control, except those Regarding the company's annual stockholder meeting. PCAOB Auditing Standard No. 5 directs auditors to begin their study of internal control at the financial statement level and the overall risks to internal control over financial reporting, then consider "entity-level" controls, followed by focusing on the relevant assertions for significant accounts and disclosures. This approach is best described as a Top-down approach. According to PCAOB auditing standards, when the auditor issues separate reports on the financial statements and on internal control over financial reporting, Each report should include a paragraph that references the other related report. According to the PCAOB, each of the following statements is true with respect to the auditor's responsibility to communicate material weaknesses in internal control over financial reporting except All such weaknesses must be communicated in writing to all stockholders. PCAOB auditing standards apply when an issuer's auditor is engaged to report on whether a previously reported material weakness in internal control over financial reporting continues to exist as of a date specified by management. Which of the following statements is correct? PCAOB auditing standards do not require an auditor to report whether a previously reported material weakness continues to exist, so such an engagement is voluntary. According to PCAOB auditing standards, a "stated control objective" is best described as The specific control objective identified by management that, if achieved, would result in the material weakness no longer existing. According to PCAOB auditing standards, in evaluating whether a material weakness exists, an auditor should focus on materiality at the Financial statement level. Which legislation is most directly associated with pension and welfare plans? Employee Retirement Income Security Act of 1974 Under applicable pension laws, the age that an employee is eligible to enter a pension plan cannot be set above the age of 21. An employee benefit plan that provides healthcare benefits to participants is best characterized as a (an) Welfare plan. Which of the following pension plans is specifically associated with charitable organizations and public school entities? 403(b) plans When filing a Form 5500 with the Department of Labor, an audit normally is required for an employee benefit plan that is identified as a Large plan having at least 100 participants at the start of the plan year. What terminology does the AICPA's Audit and Accounting Guide, Employee Benefit Plans, use in commenting on the types of audits relevant to employee benefit plans? Full-scope and limited-scope audits A limited-scope audit of an employee benefit plan requires the auditor to evaluate each of the following, except for the plan investments and investment activities. A "qualified, regulated financial institution" associated with a limited-scope audit engagement of an employee benefit plan may include each of the following types of financial institutions, except for an investment company. To justify a limited-scope audit, the qualified financial institution holding the plan assets must furnish a certification stating that the investments and related investment activity are "Complete and accurate." A limited-scope audit report includes each of the following, except for An opinion that the employee benefit plan has complied with all applicable requirements of the Employee Retirement Income Security Act of 1974. Which financial statement is specifically mentioned in the first paragraph of the auditor's report on an employee benefit plan's comparative financial statements? Statements of net assets available for benefits. Which of the following services provides the least assurance regarding the fairness of financial statements? Compilation. A practitioner is engaged to express an opinion on management's assertion that the square footage of a warehouse offered for sale is 150,000 square feet. The practitioner should refer to which of the following sources for professional guidance? Statements on Standards for Attestation Engagements. Which of the following is a conceptual difference between the attestation standards and generally accepted auditing standards? The attestation standards provide a framework for the attest function beyond historical financial statements. A company engages a practitioner to assist the audit committee by performing specific procedures that were agreed to by the audit committee. Which of the following statements is correct regarding the procedures to be performed? The specific procedures performed should be listed in the practitioner's report to the audit committee. According to the AICPA Statements on Standards for Attestation Engagements, a public accounting firm should establish quality control policies to provide assurance about which of the following matters related to agreed-upon procedures engagements? The practitioner is independent from the client and other specified parties. An engagement letter for an examination should address all of the following matters, except for The dollar amount associated with the practitioner's materiality threshold. A CPA is engaged to examine management's assertion that the entity's schedule of investment returns is presented in accordance with specific criteria. In performing this engagement, the CPA should comply with the provisions of Statements on Standards for Attestation Engagements (SSAE). A CPA is engaged to examine management's assertion that the entity's schedule of investment returns is presented in accordance with specific criteria. In performing this engagement, the CPA should comply with the provisions of Statements on Standards for Attestation Engagements (SSAE). When the practitioner determines that the subject matter of an examination engagement has a misstatement that is both material and pervasive, the practitioner should express a (an) Adverse opinion. When the practitioner determines that the subject matter of an examination engagement is materially misstated, but that the misstatement is not pervasive, the practitioner should express a (an) Qualified opinion directly on the subject matter. What should the practitioner do when the responsible party (who is also the engaging party) declines to provide a written assertion for a review engagement? Withdraw from the engagement when that is permitted by applicable law. What should the practitioner do when the responsible party (who is also the engaging party) declines to provide the requested written representations for a review engagement? Withdraw from the engagement when that is permitted by applicable law Which of the following statements about a practitioner's review report for an attestation engagement is correct? The practitioner's review report should include a disclaimer of opinion. The practitioner's review report for an attestation engagement should include a restricted-use paragraph in all of the following circumstances, except for When the practitioner refers to an external specialist because the practitioner's conclusion is modified and reference to the specialist may be helpful to readers in understanding the reason for the modification. A practitioner's report on agreed-upon procedures should contain which of the following statements? The procedures performed were those agreed to by the specified parties identified in the report. Which of the following should a practitioner perform as part of an engagement for agreed-upon procedures in accordance with Statements on Standards for Attestation Engagements? Issue a report on findings based on specified procedures performed. Which of the following statements should be included in a practitioner's report on the application of agreed-upon procedures? A statement referring to standards established by the AICPA. In which of the following situations will a practitioner disclaim an opinion on an examination of prospective financial statements? The practitioner was not able to perform certain procedures deemed necessary. A CPA is engaged to examine an entity's financial forecast. The CPA believes that several significant assumptions do not provide a reasonable basis for the forecast. Under these circumstances, the CPA should issue a(an) Adverse opinion. Accepting an engagement to compile a financial projection for a publicly held company most likely would be inappropriate if the projection were to be distributed to All stockholders of record as of the report date. An accountant's compilation report on a financial projection that does not contain a range should include a statement that There will usually be differences between the projected and actual results because events and circumstances frequently do not occur as expected. A company hired a practitioner to perform an examination of prospective financial statements. The practitioner concluded that the assumptions did not provide a reasonable basis for the prospective financial statements. Which of the following types of opinion should the practitioner issue? Adverse. Which of the following standards should a CPA firm apply in a review of pro forma financial information? Statements on Standards for Attestation Engagements A practitioner reporting on pro forma financial information does not possess an understanding of the client's business and the industry in which the client operates. The practitioner should take which of the following actions? Review industry trade journals. Each of the following items should be included in a presentation of pro forma financial statements except All direct and indirect effects attributed to the related transaction. An accountant's report on a review of pro forma financial information should include a Reference to the financial statements from which the historical financial information is derived. An independent auditor is issuing an audit report for a governmental entity and plans to issue separate reports on internal control over financial reporting and compliance with laws and regulations. The auditor should do which of the following? State in the audit report that separate reports will be issued. A practitioner has examined a client's compliance with debt covenants associated with a bank loan and is ready to issue a report. Which of the following standards apply to the report? Compliance attestation standards. Mill, CPA, was engaged by a group of royalty recipients to apply agreed-upon procedures to financial data supplied by Modern Co. regarding Modern's written assertion about its compliance with contractual requirements to pay royalties. Mill's report on these agreed-upon procedures should contain a (an) List of the procedures performed (or reference thereto) and Mill's findings. Which of the following professional services would be subject to the Statements on Standards for Attestation Engagements (SSAEs)? An engagement to report on an entity's compliance with statutory requirements. A CPA's report on agreed-upon procedures related to management's assertion about an entity's compliance with specified requirements should contain A statement of limitations on the use of the report. Which of the following statements best serves as management's assertion of consistency in an MD&A presentation? Nonfinancial data have been accurately derived from related records. A CPA is required to comply with the provisions of Statements on Standards for Attestation Engagements (SSAE) when engaged to Review management's discussion and analysis (MD&A) prepared pursuant to rules and regulations adopted by the SEC. Which of the following forms of auditor association are possible relating to management's discussion and analysis (MD&A)? Review: Yes Examination: Yes Which of the following is not an assertion embodied in management's discussion and analysis (MD&A)? Rights and obligations. Which of the following is a term for an attest engagement in which a CPA assesses a client's commercial Internet site for predefined criteria that are designed to measure transaction integrity, information protection, and disclosure of business practices? WebTrust. [Show Less]
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Auditing and Assurance Services Chapter 8 - Audit Planning and Analytical Procedures, 100% correct
Three main reasons for audit planning 1. Enable auditor to obtain sufficient appropriate evidence 2. Help keep audit costs reasonable 3. Avoid misunders... [Show More] tandings with the client Eight major parts of audit planning: 1. Accept client and perform initial audit planning 2. Understand the client's business and industry 3. Perform preliminary analytical procedures 4. Set materiality and assess acceptable audit risk and inherent risk 5. Identify significant risks due to fraud and error 6. Assess Inherent risk 7. Understand internal control and assess risk 8. Develop overall audit strategy and audit program Client Business Risk the risk that the client will fail to achieve its objectives or execute its strategy Acceptable Audit Risk a measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued. (lower risk = more certainty) Inherent Risk a measure of the likelihood of material misstatement BEFORE considering internal control Audit risk and inherent risk influence the amount of evidence that will need to be collected and the experience level of staff assigned to the engagement risk of material misstatement the risk that the financial statements con tain a material misstatement due to fraud or error prior to the audit Initial audit planning involves 1. Auditor decides whether to accept or continue client 2. Auditor identifies why the client wants and needs an audit 3. To avoid misunderstandings the auditor obtains an understanding with the client about the terms of the engagement 4. Develop overall strategy for the audit Auditor decides whether to accept or continue client (New client investigation) -Successor auditor is required to communicate with predecessor -Successor initiates -Predecessor required to respond -Predecessor must obtain permission of client before responding (Rule 301)....What if this is not given? audit strategy sets the scope, timing, and direction of the audit and that guides the development of the audit plan risk assessment procedures obtain an understanding of the client's business and its environment to assess the risk of material misstatements in the financial statements, including inquiries of man- agement and analytical procedures Understand the Client's Business and Industry - Industry and External Environment -Business Operations and Procedures -Management and Governance -Objectives and Strategies -Measurement and Performance Three primary reasons for obtaining a good understanding of the client's industry and external environment are: 1. Risks associated with specific industries (like financial services or health care) 2. Inherent risks common in industries (like obsolescence of retail clothing inventory) 3. Unique industry accounting requirements (Revenue recognition, etc.) A few methods for gaining understanding of client's Business and Industry - Tour facilities - Identify related parties - Read the client's Code of Ethics - Read corporate minutes of meeting Related Party An affiliated company, a principal owner of the client company, or any other party with which the client deals, where one of the parties can influence the management or operating policies of the other Related Party Transaction any transaction between the client and a related party (not an "arms length" transaction) corporate minutes theofficialrecordofthemeetings of the board of directors and stockholders Related party transactions have high INHERENT RISK because of: 1. Disclosure requirements 2. Lack of independence between parties 3. Opportunities for fraudulent reporting Auditors should understand client objectives related to -Reliability of financial reporting -Effectiveness and efficiency of operations -Compliance with laws and regulations materiality the magnitude of misstatements that individually, or when aggregated with other misstatements, could reasonably be expected to influence the economic decisions of users made on the basis of the financial statements performance materiality which is materiality for segments of the audit (classes of transactions, account balances, or disclosures) preliminary judgment about materiality Auditing standards require auditors to decide on the combined amount of mis- statements in the financial statements that they would consider material early in the audit as they are developing the overall strategy for the audit Steps in applying materiality -Set materiality for the financial statements as a whole -Determine performance materiality -Estimate total misstatement in segment -Estimate the combined misstatement -Compare combined estimate with preliminary or revised judgment about materiality revised judgment about materiality During the audit, auditors may change the preliminary judgment about material- ity allocation of the preliminary judgment about materiality If auditors do not use a standard percentage and consider audit assurance and the cost of audit evidence in determining performance materiality, most practitioners allocate materiality to balance sheet rather than income statement accounts, because most income statement misstatements have an equal effect on the balance sheet due to the nature of double-entry accounting tolerable misstatement AICPA standards define this as the application of perfor- mance materiality to a particular sampling procedure Known misstatements are those where the auditor can determine the amount of the misstatement in the account likely misstatements There are two types: -The first are misstatements that arise from differences between management's and the auditor's judgment about estimates of account balances -The second are projections of misstatements based on the auditor's tests of a sample from a population sampling risk results because the auditor has sampled only a portion of the population and there is a risk that the sample does not accurately represent the population [Show Less]
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Audit Ch. 15, questions and answers with complete top solutions,100% accurate
Chapter 15 ... Audit Sampling for Tests of Controls and ... Substantive Tests of Transactions ... 15-1 Sampling risk is the risk t... [Show More] hat the auditor reaches the wrong conclusion because a sample is not representative of the population. Sampling risk is an inherent part of sampling because the auditor is not testing the entire population. To reduce sampling risk, the auditor could increase sample size or use a sampling method that increases the likelihood of having a representative sample. Nonsampling risk is the risk that an auditor reaches the wrong conclusion for any reason other than sampling risk. For example, the auditor may perform procedures incorrectly or fail to correctly interpret the audit evidence. To reduce nonsampling risk, the auditor can follow auditing standards related to careful design of audit procedures, and proper supervision and review of audit work performed. 15-2 For both statistical and nonstatistical methods, the three main phases of audit sampling are: ... 1. Plan the sample ... 2. Select the sample and perform the tests ... 3. Evaluate the results 15-3 In probabilistic sample selection, the auditor randomly selects items from a population such that each item has a known probability of being included in the sample. Three examples of probabilistic sample methods include simple random sample selection, systematic sample selection, and probability proportional to size sample selection. In nonprobabilistic sample selection methods, such as haphazard sample selection and block sample selection, the auditor uses nonprobabilistic methods that approximate a random sampling approach. 15-4 A block sample is the selection of several items in sequence. Once the first item in the block is selected, the remainder of the block is chosen automatically. Thus, to select 5 blocks of 20 sales invoices, one would select one invoice and the block would be that invoice plus the next 19 entries. This procedure would be repeated 4 other times. 15-5 In replacement sampling, an element in the population can be included in the sample more than once if the random number corresponding to that element is selected more than once. In nonreplacement sampling, an element can be included only once. If the random number corresponding to an element is selected more than once, it is simply treated as a discard the second time. Although both selection approaches are consistent with sound statistical theory, auditors rarely use replacement sampling; it seems more intuitively satisfying to auditors to include an item only once. 15-6 A simple random sample is one in which every possible combination of elements in the population has an equal chance of selection. Two methods of simple random selection are use of a random number table and use of the computer to generate random numbers. Auditors most often use the computer to generate random numbers because it saves time, reduces the likelihood of error, and provides automatic documentation of the sample selected. 15-7 In systematic sampling, the auditor calculates an interval and then methodically selects the items for the sample based on the size of the interval. The interval is set by dividing the population size by the number of sample items desired. ... To select 40 numbers from a population of 2,800, the auditor divides 40 into 2,800 and gets an interval of 70. He or she then selects a random number between 0 and 69. Assume the auditor chooses 17. The first item is the number 17. The next is 87, then 157, 227, and so on. ... The advantage of systematic sampling is its ease of use. In most populations a systematic sample can be drawn quickly, the approach automatically puts the numbers in sequential order, and documentation is easy. ... A major problem with the use of systematic sampling is the possibility of bias. Because of the way systematic samples are selected, once the first item in the sample is selected, other items are chosen automatically. This causes no problems if the characteristics of interest, such as control deviations, are distributed randomly throughout the population; however, in many cases they are not. If all items of a certain type are processed at certain times of the month or with the use of certain document numbers, a systematically drawn sample has a higher likelihood of failing to obtain a representative sample. This shortcoming is sufficiently serious that some CPA firms prohibit the use of systematic sampling. 15-8 Random (probabilistic) selection is a part of statistical sampling, but it is not, by itself, statistical measurement. To have statistical measurement, it is necessary to mathematically generalize from the sample to the population. ... Probabilistic selection must be used if the sample is to be evaluated statistically, although it is also acceptable to use probabilistic selection with a nonstatistical evaluation. If nonprobabilistic selection is used, nonstatistical evaluation must be used. 15-9 The purpose of using nonstatistical sampling for tests of controls and substantive tests of transactions is to estimate the proportion of items in a population containing a characteristic or attribute of interest. The auditor is ordinarily interested in determining internal control deviations or monetary misstatements for tests of controls and substantive tests of transactions. 15-10 An attribute is the definition of the characteristic being tested and the exception conditions whenever audit sampling is used. The attributes of interest are determined directly from the audit program. In a test of control, that attribute is evidence of the operation of the control consistent with the design. In a substantive test, the attribute is the absence of monetary misstatement. 15-11 An attribute is the characteristic being tested for in a population. An exception occurs when the attribute being tested for is absent. The exception for the audit procedure, the duplicate sales invoice has been initialed indicating the performance of internal verification, is the lack of initials on duplicate sales invoices. 15-12 The terms below are defined as follows: 15-13 The sampling unit is the population item from which the auditor selects sample items. The major consideration in defining the sampling unit is making it consistent with the objectives of the audit tests. Thus, the definition of the population and the planned audit procedures usually dictate the appropriate sampling unit. ... The sampling unit for verifying the occurrence of recorded sales would be the entries in the sales journal since this is the record the auditor wishes to validate. The sampling unit for testing the possibility of omitted sales is the shipping document from which sales are recorded, because the failure to bill a shipment is the exception condition of interest to the auditor. 15-14 The tolerable exception rate (TER) represents the exception rate that the auditor will permit in the population and still be willing to use the assessed control risk and/or the amount of monetary misstatements in the transactions established during planning. TER is determined by choice of the auditor on the basis of his or her professional judgment. ... The computed upper exception rate (CUER) is the highest estimated exception rate in the population, at a given ARO. For nonstatistical sampling, CUER is determined by adding an estimate of sampling risk to the SER (sample exception rate). For statistical sampling, CUER is determined by using a statistical sampling table after the auditor has completed the audit testing and therefore knows the number of exceptions in the sample. 15-15 Tolerable exception rate (TER) is the result of an auditor's judgment. The suitable TER is a question of materiality and is therefore affected by both the definition and the importance of the attribute in the audit plan. It represents the exception rate that the auditor will permit in the population and still be willing to conclude that the control is operating effectively and/or the amount of monetary misstatements in the transactions established during planning is acceptable. ... The sample size for a TER of 7% would be smaller than that for a TER of 4%, all other factors being equal. 15-16 The appropriate ARO is a decision the auditor must make using professional judgment. The degree to which the auditor wishes to reduce assessed control risk below the maximum is the major factor determining the auditor's ARO. ... The auditor will choose a smaller sample size for an ARO of 10% than would be used if the risk were 5%, all other factors being equal. 15-17 The relationship between sample size and the four factors determining sample size are as follows: ... a. As the ARO increases, the required sample size decreases. ... b. As the population size increases, the required sample size is normally unchanged, or may increase slightly. ... c. As the TER increases, the sample size decreases. ... d. As the EPER increases, the required sample size increases. 15-18 When the CUER exceeds the TER, the auditor may do one or more of the following: ... 1. Revise the TER or the ARO. This alternative should be followed only when the auditor has concluded that the original specifications were too conservative, and when he or she is willing to accept the risk associated with the higher specifications. ... 2. Expand the sample size. This alternative should be followed when the auditor expects the additional benefits to exceed the additional costs. That is, the auditor believes that the sample tested was not representative of the population and that exceptions are not expected in the expanded sample. ... 3. Revise assessed control risk upward. This is likely to increase substantive procedures. Revising assessed control risk may be done if 1 or 2 is not practical and additional substantive procedures are possible. ... 4. Write a letter to management. This action should be done in conjunction with each of the three alternatives above. Management should always be informed when its internal controls are not operating effectively. If a deficiency in internal control is considered to be a significant deficiency in the design or operation of internal control, professional standards require the auditor to communicate the significant deficiency to the audit committee or its equivalent in writing. If the client is an accelerated filer publicly traded company, the auditor must evaluate the deficiency to determine the impact on the auditor's report on internal control over financial reporting. If the deficiency is deemed to be a material weakness, the auditor's report on internal control would contain an adverse opinion. 15-19 Attributes sampling is a statistical, probabilistic sampling method that results in an estimate of the proportion of items in a population containing a characteristic or attribute of interest. Attributes sampling is commonly used for tests of controls and substantive tests of transactions. 15-20 In this situation, the sample exception rate (SER) is 4%, the sample size is 100 and the ARO is 10%. From the 10% ARO table (Table 15-9) then, the CUER is 7.9%. This means that the auditor can state with a 10% risk of being wrong that the true population exception rate does not exceed 7.9%. 15-21 The decisions the auditor must make in using attributes sampling are: What are the objectives of the audit test? ... Does audit sampling apply? ... What attributes are to be tested and what exception conditions are identified? ... What is the population? ... What is the sampling unit? ... 15-21 (continued) ... What should the TER be? ... What should the ARO be? ... What is the EPER? ... What generalizations can be made from the sample to the population? ... What are the causes of the individual exceptions? ... Is the population acceptable? ... ... In making the above decisions, the following should be considered: The individual situation. ... Time and budget constraints. ... The availability of additional substantive procedures. ... The professional judgment of the auditor. ... 15-28 (see text Web site for Excel solution for part c.- Filename P1528.xls) ... a. To test whether shipments have been billed, a sample of warehouse removal slips should be selected and examined to see if they have the proper sales invoice attached. The sampling unit will therefore be the warehouse removal slip. ... b. Attributes sampling method: Assuming the auditor is willing to accept a TER of 4% at a 5% ARO, expecting no exceptions in the sample, the appropriate sample size would be 74, determined from Table 15-8. ... Nonstatistical sampling method: There is no one right answer to this question because the sample size is determined using professional judgment. Due to the relatively small TER (4%), the sample size should not be small. It will most likely be similar in size to the sample chosen by the statistical method. ... c. Systematic sample selection: 22946 = Population size of warehouse removal slips (34687-11741). 74 = Sample size using statistical sampling (students' answers will vary if nonstatistical sampling was used in part b.) 310 = Interval (22946/74) if statistical sampling is used (students' answers will vary if nonstatistical sampling was used in part b.). 11878 = Random starting point. Select warehouse removal slip 11878 and every 310th warehouse removal slip after (12188, 12498, etc.) ... Computer generation of random numbers using Excel (P1528.xls): ... ... =RANDBETWEEN(11741,34687) ... The command for selecting the random number can be entered directly onto the spreadsheet, or can be selected from the formula (math & trig) tab. It may be necessary to add the analysis tool pack to access the RANDBETWEEN function. Once the formula is entered, it can be copied down to select additional random numbers. ... d. Other audit procedures that could be performed are: ... 1. Test extensions on attached sales invoices for clerical accuracy. (Accuracy) ... 2. Test time delay between warehouse removal slip date and billing date for timeliness of billing. (Timing) ... 3. Trace entries into perpetual inventory records to determine that inventory is properly relieved for shipments. (Posting and summarization) ... e. The test performed in part c. cannot be used to test for occurrence of sales because the auditor already knows that inventory was shipped for these sales. To test for occurrence of sales, the sales invoice entry in the sales journal is the sampling unit. Since the sales invoice numbers are not identical to the warehouse removal slips it would be improper to use the same sample. 15-31 a. * Students' answers as to whether the calculated allowance for sampling risk is sufficient will vary, depending on their judgment. However, they should recognize the effect that lower sample sizes have on the allowance for sampling risk in situations 2, 5, and 8. ... b. Using the attributes sampling table in Table 15-9, the CUERs for columns 1-8 are: ... 4.6% 2. 6.2% [Show Less]
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Auditing: A Risk Based Approach CH 1-5 MCQ, questions and answers, graded A+
Which of the following are the responsibilities of the external auditor in auditing financial statements? a. Maintaining internal controls and preparing... [Show More] financial reports. b. Providing internal assurance on internal control and financial reports. c. Providing internal oversight of the reporting process. d. Providing independent assurance on the financial statements. Providing independent assurance on the financial statements. Which of the following factors does not create a demand for external audit services? a. Potential bias by management in providing information. b. Requirements of the state boards of accountancy. c. Complexity of the accounting processing systems. d. Remoteness between a user and the organization. Requirements of the state boards of accountancy. Audit quality involves which of the following? a. Performing an audit in accordance with GAAS to provide reasonable assurance that the audited financial statements and related disclosures are presented in accordance with GAAP and providing assurance that those financial statements are not materially misstated whether due to errors or fraud. b. Performing an audit in accordance with GAAP to provide reasonable assurance that the audited financial statements and related disclosures are presented in accordance with GAAS and providing assurance that those financial statements are not materially misstated whether due to errors or fraud. c. Performing an audit in accordance with GAAS to provide absolute assurance that the audited financial statements and related disclosures are presented in accordance with GAAP and providing assurance that those financial statements are not materially misstated whether due to errors or fraud. d. Performing an audit in accordance with GAAS to provide reasonable assurance that the audited financial statements and related disclosures are presented in accordance with GAAP and providing assurance that those financial statements contain no misstatements due to errors or fraud. Performing an audit in accordance with GAAS to provide reasonable assurance that the audited financial statements and related disclosures are presented in accordance with GAAP and providing assurance that those financial statements are not materially misstated whether due to errors or fraud. Which of the following factors is not a driver of audit quality as discussed by the FRC? a. Audit firm culture. b. Skills and personal qualities of client management. c. Reliability and usefulness of audit reporting. d. Factors outside the control of auditors Skills and personal qualities of client management. Which of the following is not a threat to auditor independence? a. Self-review threat. b. Advocacy threat. c. Adverse interest threat. d. Regulatory interest threat. Regulatory interest threat. Which of the following statements is false? a. An auditor in public practice shall be independent in the performance of professional services. b. In performing audit services, the auditor shall maintain objectivity and integrity, be free of conflicts of interest, and not knowingly misrepresent facts or subordinate his or her judgment to others. c. In performing audit services, the auditor may accept only contingent fees for publicly traded audit clients. d. An auditor in public practice shall not seek to obtain clients by advertising or other forms of solicitation in a manner that is false, misleading, or deceptive. In performing audit services, the auditor may accept only contingent fees for publicly traded audit clients. Which of the following statements related to rights theory is false? a. The highest-order rights include the rights to life, autonomy, and human dignity. b. Second-order rights include rights granted by the government, such as civil rights and legal rights. c. Third-order rights include social rights, such as the right to higher education, to good health care, and to earning a living. d. Fourth-order rights include one's essential interests or personal tastes. Fourth-order rights include one's essential interests or personal tastes. Utilitarianism does not require which of the following actions when a person considers how to resolve an ethical dilemma? a. Identification of the potential problem and courses of action. b. Identification of the potential direct or indirect impact of actions on each affected party who has an interest in the outcome. c. Identification of the motivation of the person facing the ethical dilemma. d. Assessment of the desirability of each action for each affected party Identification of the motivation of the person facing the ethical dilemma. With regard to client acceptance/continuance decisions, which of the following is false? a. Client acceptance/continuance decisions are one part of the audit firm's overall portfolio management activities. b. The primary driver of the client acceptance/continuance decision is the level of audit fees that the audit firm can charge the client. c. One can view an individual audit client as analogous to an individual stock in an investment portfolio. d. Audit firms are not required to provide audit services for all organizations requesting an audit. The primary driver of the client acceptance/continuance decision is the level of audit fees that the audit firm can charge the client. Which of the following factors is not an example of a risk relevant to the client continuance decision? a. Client entity characteristics. b. Independence risk factors. c. Third-party/due diligence risk factors. d. Advocacy threat. Advocacy threat. What is the primary difference between fraud and error in financial statement reporting? a. The materiality of the misstatement. b. The intent to deceive. c. The level of management involved. d. The type of transaction effected. The intent to deceive. Which of the following examples best represents an example of fraudulent financial reporting? a. The transfer agent issues 40,000 shares of the company's stock to a friend without authorization by the board of directors. b. The controller of the company inappropriately records January sales in December so that year-end results will meet analysts' expectations. c. The in-house attorney receives payments from the French government for negotiating the development of a new plant in Paris. d. The accounts receivable clerk covers up the theft of cash receipts by writing off older receivables without authorization. The controller of the company inappropriately records January sales in December so that year-end results will meet analysts' expectations. Which of the following factors creates an opportunity for fraud to be committed in an organization? a. Management demands financial success. b. Poor internal control. c. Commitments tied to debt covenants. d. Management is aggressive in its application of accounting rules. Poor internal control. Which of the following is a common rationalization for fraudulent financial reporting? a. This is a one-time transaction and it will allow the company to get through the current financial crisis, but I'll never do it again. b. I am only borrowing the money; I will pay it back next year. c. Executives at other companies are getting paid more than I am, so I deserve the money. d. The accounting rules don't make sense for our company, and they make our financial results look weaker than is necessary. Therefore, we have good reason to record revenue using a non-GAAP method. e. Both (a) and (d). Both (a) and (d) Which of the following types of transactions did WorldCom management engage in as part of that company's fraudulent financial reporting scheme? a. Recorded barter transactions as sales. b. Used restructuring reserves from prior acquisitions to decrease expenses. c. Capitalizing line costs rather than expensing them. d. All of the above. e. None of the above. All of the above. Which of the following is an implication resulting from the results of the COSO studies? a. The most common frauds involve outright theft of assets. b. The individuals most often responsible for fraud include low-level accounting personnel, such as accounts payable clerks. c. The majority of frauds take place at smaller companies listed on the OTC market rather than at larger companies listed on the NYSE. d. All of the above. e. None of the above. The majority of frauds take place at smaller companies listed on the OTC market rather than at larger companies listed on the NYSE. Which of the following statements is true regarding the deterrence and detection of fraud in financial reporting? a. Preventing and detecting fraud is the job of the external auditor alone. b. An effective fraud risk management program can be expected to prevent virtually all frauds, especially those perpetrated by top management. c. Communication among those involved in the financial reporting process is critical. d. All of the above. e. None of the above. Communication among those involved in the financial reporting process is critical. Which of the following statements are true? a. Unless an independent audit can provide reasonable assurance that financial information has not been materially misstated because of fraud, it has little, if any, value to society. b. Repeated revelations of accounting scandals and audit failures related to undetected frauds have seriously damaged public confidence in external auditors. c. A strong ethical tone at the top of an organization that permeates corporate culture is essential in mitigating the risk of fraud. d. All of the above. e. None of the above All of the above The Sarbanes-Oxley Act enacted which of the following provisions relevant to auditors and the audit opinion formulation process? a. The PCAOB was established, and it has the power to conduct inspections of public company audits. b. The lead audit partner and reviewing partner must rotate off the audit of a publicly traded company at least every 10 years. c. In the annual report, management must acknowledge that they are required to have the company's internal audit function attest to the accuracy of the annual reports. d. All of the above. e. None of the above. The PCAOB was established, and it has the power to conduct inspections of public company audits. Which of the following statements is true regarding the PCAOB? a. The PCAOB is a nonprofit corporation, not an agency of the U.S. government. b. The PCAOB will have five financially literate members who are prominent individuals of integrity and reputation with a commitment to the interests of investors and the public. c. The PCAOB has authority to set standards related to public company audit reports and to conduct inspections of registered external audit firms. d. All of the above. e. None of the above. All of the above. Audit committee activities and responsibilities include which of the following? a. Selecting the external audit firm. b. Approving corporate strategy. c. Reviewing management performance and determining compensation. d. All of the above. e. None of the above. Selecting the external audit firm. Which of the following audit committee responsibilities has the NYSE mandated? a. Obtaining a report each year by the internal auditor that addresses the company's internal control procedures, any quality-control or regulatory problems, and any relationships that might threaten the independence of the internal auditor. b. Discussing in its meetings the company's earnings press releases as well as financial information and earnings guidance provided to analysts. c. Reviewing with the internal auditor any audit problems or difficulties that they have had with management. d. All of the above. e. None of the above. Discussing in its meetings the company's earnings press releases as well as financial information and earnings guidance provided to analysts. Which of the following are affected by the quality of an organization's internal controls? a. Reliability of financial data. b. Ability of management to make informed business decisions. c. Ability of the organization to remain in business. d. All of the above. e. Only a and c. All of the above. Which of the following creates an opportunity for committing fraudulent financial reporting in an organization? a. Management demands financial success. b. Poor internal control. c. Commitments tied to debt covenants. d. Management is aggressive in its application of accounting rules. Poor internal control. What are the components of internal control per COSO's Internal Control-Integrated Framework? a. Organizational structure, management philosophy, planning, risk assessment, and control activities. b. Control environment, risk assessment, control activities, information and communication, and monitoring. c. Risk assessment, control structure, backup facilities, responsibility accounting, and natural laws. d. Legal environment of the firm, management philosophy, organizational structure, control activities, and control assessment. Control environment, risk assessment, control activities, information and communication, and monitoring. Which of the following statements regarding internal control is false? a. Internal control is a process consisting of ongoing tasks and activities. b. Internal control is primarily about policy manuals, forms, and procedures. c. Internal control is geared toward the achievement of multiple objectives. d. A limitation of internal control is faulty human judgment. e. All of the above statements are true. Internal control is primarily about policy manuals, forms, and procedures. Which of the following principles would not be considered a principle of an organization's control environment? a. Independence and competence of the board. b. Competence of accounting personnel. c. Structures, reporting lines, and authorities and responsibilities. d. Commitment to integrity and ethical values. e. They would all be considered principles of the control environment. Competence of accounting personnel. Which one of the following components of internal control over financial reporting sets the tone for the organization? a. Risk assessment. b. Control environment. c. Information and communication. d. Monitoring Risk Assessment Organizations face risks of material misstatement in their financial reports. Control environment. Which of the following statements is false regarding the risk assessment component of internal control? a. Risk assessment includes assessing fraud risk. b. Risk assessment includes assessing internal and external sources of risk. c. Risk assessment includes the identification and analysis of significant changes. d. Economic changes would not be considered a risk that needs to be analyzed as part of the risk assessment process. Economic changes would not be considered a risk that needs to be analyzed as part of the risk assessment process. Which of the following is not part of management's fraud risk assessment process? a. The assessment considers ways the fraud could occur. b. The assessment considers the role of the external auditor in preventing fraud. c. Fraud risk assessments serve as an important basis for determining the control activities needed to mitigate fraud risks. d. The assessment considers pressures that might lead to fraud in the financial statements. The assessment considers the role of the external auditor in preventing fraud. Which of the following scenarios provides the best example of segregation of duties? a. Employees perform multiple jobs, and have access to related records. b. The internal audit function performs an independent test of transactions throughout the year and reports any errors to departmental managers. c. The person responsible for reconciling the bank account is responsible for cash disbursements but not for cash receipts. d. The payroll department cannot add employees to the payroll or change pay rates without the explicit authorization of the Human Resources Department. The payroll department cannot add employees to the payroll or change pay rates without the explicit authorization of the Human Resources Department. Which of the following statements about application controls is true? a. Organizations can have manual application controls or automated application controls, but not a combination of the two. b. Application controls are intended to mitigate risks associated with data input, data processing, and data output. c. Application controls are a part of the monitoring component of internal control. d. Self-checking digits are an output control. Application controls are intended to mitigate risks associated with data input, data processing, and data output. Which of the following is an effective implementation of the information and communication component of COSO's Internal Control-Integrated Framework? a. The organization has one-way communication with parties external to the organization. b. The organization has a whistleblower function that allows parties internal and external to the organization to communicate concerns about possible inappropriate actions in the organization's operations. c. The organization has a robust process for assessing risks internal and external to the organization. d. The organization builds in edit checks to determine whether all purchases are made from authorized vendors. e. All of the above. The organization has a whistleblower function that allows parties internal and external to the organization to communicate concerns about possible inappropriate actions in the organization's operations. Which of the following is not a principle of the information and communication component of COSO's Internal Control-Integrated Framework? a. The organization identifies, obtains, and uses relevant information. b. The organization communicates internally. c. The organization communicates externally. d. All of the above are principles of the information and communication component of COSO's Internal Control- Integrated Framework. All of the above are principles of the information and communication component of COSO's Internal Control- Integrated Framework. Which of the following is not an effective implementation of the monitoring component of COSO's Internal Control- Integrated Framework? a. Internal audit periodically works to improve internal controls. b. Management reviews current economic performance against expectations and investigates to determine causes of significant deviations from the expectations. c. The organization implements software that captures all instances in which the underlying program identifies processed transactions that exceed company-authorized limits. d. The organization builds in edit checks to determine whether all purchases are made from authorized vendors, and flags those that are not. The organization implements software that captures all instances in which the underlying program identifies processed transactions that exceed company-authorized limits. Which of the following is the most accurate statement related to the monitoring component of COSO's Internal Control-Integrated Framework? a. Monitoring is a process that is relevant only to the control activities component of COSO's Internal Control- Integrated Framework. b. Separate evaluations are more timely than ongoing evaluations in identifying control deficiencies. c. Monitoring is a process that provides feedback on the effectiveness of each component of internal control. d. Monitoring includes automated edit checks to determine whether all purchases are made from authorized vendors. Monitoring is a process that provides feedback on the effectiveness of each component of internal control. Which of the following statements is false regarding management's documentation of internal control over financial reporting? a. Management needs to maintain sufficient and appropriate documentation of the internal controls they have designed and implemented to achieve the objective of reliable financial reporting. b. Internal control documentation is useful in training new personnel or serving as a reference tool for all employees. c. Management only needs to maintain documentation if the company's auditors will be providing an opinion on internal control effectiveness. d. Documentation provides evidence that the controls are operating. Management only needs to maintain documentation if the company's auditors will be providing an opinion on internal control effectiveness. Which of the following is not included in management's report on internal control? a. A statement that management is responsible for internal control. b. A definition of internal control. c. A discussion of the limitations of internal control. d. The criteria used in assessing internal control. e. A description of the work that the internal auditors performed. A description of the work that the internal auditors performed. Assume that an organization sells software. The sales contracts with the customers often have nonstandard terms that impact the timing of revenue recognition. Thus, there is a risk that revenue may be recorded inappropriately. To mitigate that risk, the organization has implemented a policy that requires all nonstandard contracts greater than $1 million to be reviewed on a timely basis by an experienced and competent revenue accountant for appropriate accounting, prior to the recording of revenue. Management has classified this deficiency as a material weakness. Which of the following best describes the conclusion made by management? a. There is more than a remote possibility that a material misstatement could occur. b. The likelihood of misstatement is reasonably possible. c. There is more than a remote possibility that a misstatement could occur. d. There is a reasonable possibility that a material misstatement could occur. e. There is a reasonable possibility that a misstatement could occur There is a reasonable possibility that a material misstatement could occur. Which of the following scenarios represents a control deficiency? a. A missing control that is required for achieving objectives. b. A control that operates as designed. c. A control that provides reasonable, but not absolute assurance, about the reliability of financial reporting. d. An immaterial individual misstatement in internal. A missing control that is required for achieving objectives. Which of the following is a reason that the auditor obtains an understanding of the client's internal control over financial reporting? a. This understanding is required by professional auditing standards. b. Understanding of internal control is needed to properly plan the audit. c. This understanding helps an auditor assess a client's risk of material misstatement. d. All of the above are reasons why the auditor obtains an understanding of the client's internal control over financial reporting. All of the above. Which of the following statements is true regarding the auditor's assessment of a client's internal control over financial reporting? a. The auditor reviews management's documentation of its internal control and management's evaluation and findings related to internal control effectiveness. b. The auditor's assessments of control deficiencies will be the same as management's assessment of the same deficiencies. c. In testing controls, the auditor is only concerned about the client's control environment and risk assessment. d. All of the above are true. The auditor reviews management's documentation of its internal control and management's evaluation and findings related to internal control effectiveness. Which of the following factors is not a reason that audit firms experience litigation for business failures, rather than audit failures? a. Joint and several liability statutes. b. Class action lawsuits. c. Contingent-fee compensation for audit firms. d. A misunderstanding by some users that an unqualified audit opinion represents an insurance policy against investment losses. Contingent-fee compensation for audit firms. The shareholders of a bank sue Karen Frank, CPA, for malpractice due to an audit failure that preceded the bank's financial failure. The jury determines that Frank is 60% at fault and that management is 40% at fault. The bank has no financial resources, nor does its management. Under joint and several liability, what is the likely percentage of damages that Frank will? a. 100%. b. 50%. c. 40%. d. None of the above. 100% Which of the following statements is false? a. Breach of contract occurs when a person competently performs a contractual duty. b. Negligence is the failure to exercise reasonable care, thereby causing harm to another person or to property. c. Gross negligence is operating with a reckless disregard for the truth, or the failure to use even minimal care. d. Fraud is an intentional concealment or misrepresentation of a material fact with the intent to deceive another person, causing damage to the deceived person. Breach of contract occurs when a person competently performs a contractual duty. An audit client can sue the auditor under contract law for which of the following? a. Breach of contract. b. Negligence. c. Gross negligence. d. Fraud. e. All of the above. All of the above. The remedies for breach of contract include which of the following? a. Requiring specific performance of the contract agreement. b. Granting an injunction to prohibit the auditor from doing certain acts, such as disclosing confidential information. c. Providing for recovery of amounts lost as a result of the breach. d. All of the above. All of the above. Which of the following scenarios includes an example of a foreseen user? a. The auditor knows that the First National Bank wants audited financial statements as part of the client's application for a loan. b. The auditor knows that the client needs audited financial statements because it wants to obtain a loan from one of several possible banks. c. Current and prospective creditors and stockholders are likely to use the audited financial statements. d. None of the above. The auditor knows that the client needs audited financial statements because it wants to obtain a loan from one of several possible banks. Which of the following statements is true regarding auditing standard setting in the United States? a. The AICPA is responsible for setting auditing standards for audits of nonpublic entities. b. The PCAOB is responsible for setting auditing standards for audits of public companies. c. The AICPA is responsible for setting auditing standards for audits of both public and nonpublic companies. d. The SEC sets auditing standards for auditors of public and nonpublic companies. e. Both (a) and (b) are correct. Both (a) and (b) are correct. The following describes a situation in which an auditor has to determine the most appropriate standards to follow. The audited company is headquartered in Paris but has substantial operations within the United States (60% of all operations) and has securities registered with the SEC and is traded on the New York Stock Exchange (NYSE). The company uses International Financial Reporting Standards (IFRS) for its accounting framework. What would be the most appropriate set of auditing standards to follow? a. PCAOB. b. Either PCAOB or AICPA. c. Either IAASB or AICPA. d. Only the AICPA standards would be appropriate. PCAOB Which of the following statements is false? a. The purpose of an audit is to enhance the degree of confidence that managers can place in the financial statements, thereby facilitating their decision making. b. Auditors are responsible for having the appropriate competence and capabilities to perform the audit, should comply with ethical requirements, and maintain professional skepticism throughout the audit. c. The auditor needs to obtain reasonable assurance as to whether the financial statements are free from material misstatement. d. An audit has inherent limitations such that the auditor is not able to obtain absolute assurance about whether the financial statements are free from misstatement. The purpose of an audit is to enhance the degree of confidence that managers can place in the financial statements, thereby facilitating their decision making. Which of the following is included as part of the AICPA's principles governing an audit? a. Auditors need to obtain a high level of assurance that the financial statements are free of all misstatements. b. An audit has inherent limitations such that the auditor cannot provide absolute assurance about whether the financial statements are free of misstatement. c. Auditors need to maintain professional skepticism only on audits where there is a high risk of material misstatement. d. All of the above are included as part of the AICPA's principles governing an audit. An audit has inherent limitations such that the auditor cannot provide absolute assurance about whether the financial statements are free of misstatement. Which of the following statements is true about the audit opinion formulation process presented in this chapter? a. The audit opinion formulation process is different for the financial statement only audit and the integrated audit. b. The audit opinion formulation process is based on the premise that management has responsibility to prepare the financial statements and maintain internal control over financial reporting. c. The audit opinion formulation process is comprised of seven phases. d. All of the above are true statements regarding the audit opinion formulation process. The audit opinion formulation process is based on the premise that management has responsibility to prepare the financial statements and maintain internal control over financial reporting. Which of the following activities is not part of the activities within the audit opinion formulation process? a. The auditor develops a common understanding of the audit engagement with the client. b. The auditor determines the appropriate nonaudit consulting services to provide to the client. c. The auditor identifies and assesses risks of material misstatements and then responds to those identified risks. d. The auditor determines the appropriate audit opinion(s) to issue. The auditor determines the appropriate non audit consulting services to provide to the client. Which of the following is a reason that the auditor uses an accounting cycle approach when performing an audit? a. The accounting cycle approach allows the auditor to focus exclusively on either the balance sheet or the income statement. b. COSO internal control components are based on the accounting cycles. c. The accounting cycles provide a convenient way to break the audit up into manageable pieces. d. The auditor needs to be able to provide an opinion related to each accounting cycle. The accounting cycles provide a convenient way to break the audit up into manageable pieces. Which of the following accounts would not be included in the Acquisition and Payment for Long-Lived Assets Cycle? a. Revenue. b. Depreciation expense. c. Gain on disposal. d. Equipment. Revenue. Which of the following is not a management assertion? a. Completeness. b. Existence. c. Rights and obligations. d. Valuation. e. Placement. Placement. Which management assertion is usually most relevant for liability accounts? a. Completeness. b. Existence. c. Rights and obligations. d. Presentation and disclosure. e. None of the above address whether the components of the financial statements are properly classified, described, and disclosed. Rights and obligations. Audit procedures fall into three categories. Which of the following is not a category of audit procedures? a. Risk assessment procedures. b. Tests of risks. c. Tests of controls. d. Substantive procedures. e. All of the above are categories of audit procedures. Tests of risks. Which of the following is a true statement regarding audit evidence and audit procedures? a. The auditor has a responsibility to design and perform audit procedures to obtain sufficient appropriate audit evidence. b. Inquiry is a type of audit procedure that typically does not require the auditor to perform additional procedures. c. Substantive procedures are performed to test the operating effectiveness of a client's internal control. d. Risk assessment procedures alone provide sufficient appropriate audit evidence on which to base an audit opinion. The auditor has a responsibility to design and perform audit procedures to obtain sufficient appropriate audit evidence. Which of the following information should be included in audit documentation? a. Procedures performed. b. Audit evidence examined. c. Conclusions reached with respect to relevant financial statement assertions. d. All of the above should be included. All of the above should be included. Which of the following statements is false regarding audit documentation? a. An audit program is an example of audit documentation. b. The only purpose of audit documentation is to provide evidence that the audit was planned and performed in accordance with auditing standards. c. Audit documentation helps facilitate internal and external inspections of completed audits. d. Audit documentation is required on all audit engagements. The only purpose of audit documentation is to provide evidence that the audit was planned and performed in accordance with auditing standards. Which of the following factors would an auditor typically not consider when making a client acceptance decision? a. Any potential independence-impairing relationships. b. Any internal control deficiencies. c. Management's commitment to GAAP. d. Management integrity. e. An auditor would consider all of the above factors. An auditor would consider all of the above factors. Which of the following statements regarding client acceptance/continuance decisions is false? a. An audit firm's client portfolio is impacted by both audit firm decisions and client decisions. b. It would not be appropriate for audit firms to perform background checks on management of a potential client. c. Auditors are not required to perform audits for any organization that asks for an audit. d. Auditors should assess the background and experience of accounting personnel of a potential client. It would not be appropriate for audit firms to perform background checks on management of a potential client. Which of the following statements is true regarding the design of controls related to credit limits? a. The effectiveness of the control design is contingent on the credit manager's process for establishing and reviewing credit limits. b. Because the process of establishing credit limits is fairly time consuming, the control should be designed so that the marketing manager has the ability to approve sales on an ad hoc basis while waiting for the credit approval. c. The control should be designed so that the sales manager has final approval regarding credit limits. d. All are true statements regarding the design of controls related to credit limits. The effectiveness of the control design is contingent on the credit manager's process for establishing and reviewing credit limits. The baseline for quality financial reporting is that the organization will have controls over which of the following? a. Significant, unusual transactions, particularly those that result in late or unusual journal entries. b. Top-side journal entries. c. Related-party transactions. d. Significant management estimates. e. All of the above. All of the above. What actions should auditors take if they identify control deficiencies at their client? a. Assess the severity of those deficiencies. b. Determine whether and how the preliminary control risk assessment should be modified. c. Provide documentation about the effect of the control risk assessment on modifications to substantive procedures. d. Actions (a), (b), and (c) are all appropriate. e. Only (a) and (c) are appropriate. Actions (a), (b), and (c) are all appropriate. In testing controls over adjusting journal entries, which of the following would the auditor likely review? a. Supporting documentation for the entry. b. Evidence proving that the entry is material. c. Evidence that the debits and credits are to appropriate accounts. d. All of the above. e. Only two of the above (a-c) are appropriate. Only two of the above (a-c) are appropriate. In performing substantive procedures, which of the following statements provides appropriate guidance to the auditor? a. The auditor can perform both substantive analytical procedures and substantive tests of details. b. The auditor should perform substantive procedures for all assertions of all financial statement accounts. c. The auditor should perform more (or more rigorous) substantive procedures when control risk is low than when control risk is high. d. All of the above statements provide appropriate guidance. e. Only two of the above statements (a-c) provide appropriate guidance. Only two of the above statements (a-c) provide appropriate guidance. In which of the following scenarios is the auditor most likely to obtain more (or more rigorous) substantive evidence? a. When subjectivity related to the assertion is low. b. When controls are determined to be operating effectively. c. When the account is immaterial. d. When the design of controls is determined to be ineffective. When the design of controls is determined to be ineffective. Which of the following procedures is least likely to be performed during Phase V of the audit opinion formulation process? a. Assessment of misstatements detected during the performance of substantive procedures and tests of controls. b. Performance of preliminary analytical review procedures. c. Performance of an engagement quality review. d. Determination of the appropriate audit opinion(s) to issue. Performance of preliminary analytical review procedures. Which of the following statements is true regarding the auditor's report on a public company's internal control over financial reporting? a. The audit report will indicate whether it was the company or the auditor that initially identified the indicated material weakness. b. The auditor must explicitly reference the criteria for evaluating internal control using, for example, the COSO framework. c. The audit is performed in conjunction with the auditing standards promulgated by the AICPA's ASB. d. The auditor must report on whether management used the appropriate tools in its assessment of internal control over financial reporting. The audit is performed in conjunction with the auditing standards promulgated by the AICPA's ASB. [Show Less]
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Audit 7 - Chapter 15 & 17, questions and answers with rated solution, latest updated
A sample in which the characteristics of the sample are the same as those of the population is a(n) A) variables sample. B) representative sample. C) at... [Show More] tributes sample. D) random sample. B ) When the auditor decides to select less than 100 percent of the population for testing, the auditor is said to use A) audit sampling. B) representative sampling. C) poor judgment. D) estimation sampling. A To determine if a sample is truly representative of the population, an auditor would be required to A) conduct multiple samples of the same population. B) never use sampling because of the expense involved. C) audit the entire population. D) use systematic sample selection. C One of the causes of nonsampling risk is A) choosing the wrong sample size. B) ineffective audit procedures. C) inadequate sample size. D) exceptions being found in the sample B Which one of the choices below is most correct regarding a cause of sampling risk? A) ineffective use of audit procedures B) testing less than the entire population C) use of extensive tests of controls D) use of random sampling B An auditor can increase the likelihood that a sample is representative by using care in A) Designing the sampling process Designing the sample selection Yes Yes B) Designing the sampling process Designing the sample selection No No C) Designing the sampling process Designing the sample selection Yes No D) Designing the sampling process Designing the sample selection No Yes A Which of the following is the risk that audit tests will not uncover existing exceptions in a sample? A) sampling risk B) nonsampling risk C) audit risk D) detection risk B Which of the following is the risk that an auditor will reach an incorrect conclusion because a sample is not representative of the population? A) sampling risk B) nonsampling risk C) audit risk D) detection risk A Sampling risk may be controlled by A) Adjusting the sample size Using an appropriate method of selecting sample items Yes Yes B) Adjusting the sample size Using an appropriate method of selecting sample items No No C) Adjusting the sample size Using an appropriate method of selecting sample items Yes No D) Adjusting the sample size Using an appropriate method of selecting sample items No Yes A Which of the following statements is most correct? A) A sample of all items of a population will eliminate sampling risk, but increase nonsampling risk. B) The use of an appropriate sample selection technique ensures a representative sample. C) The auditor's failure to recognize an exception is a significant cause of sampling risk. D) The use of inappropriate audit procedures is a significant cause of nonsampling risk. D One of the causes of nonsampling risk is A) choosing the wrong sample size. B) effective audit procedures. C) inadequate sample size. D) failure to recognize exceptions D ) Sampling risk results from the auditor's failure to recognize exceptions in transaction data. F If an auditor does a test in the wrong direction, sampling risk will increase. F If a particular internal control is not followed by the client exactly 6% of the time, and the auditor's tests of that control find three control violations in a sample of 50, the sample is considered to be representative. T In practice, auditors do not know whether a sample is representative, even after all testing is complete T One way to control sampling risk is to increase sample size. T A sample of all items in a population will have a zero sampling risk. T It is virtually impossible to reduce sampling risk to zero. T A representative sample means the sampled items are similar to the items not sampled. T Assume a client's internal controls require each sales invoice to be supporting by a shipping document prepared by an outside company, but the clerk preparing sales invoices fails to follow this procedure exactly 3 percent of the time. If the auditor selects a sample of 100 sales invoices and finds two or four sales invoices are missing a shipping document, the sample is nonrepresentative of the population. F It is never possible to know whether a sample is truly representative of a population F Auditors can increase the likelihood of a sample being representative by using professional care in the design of the sampling process, in the selection of the sample, and in the evaluation of the sample results. T ) Assume the auditor decides a control is not effective if there is a population exception rate of 3%. Assume the auditor accepts this control as effective based on test of control with a sample of 100 items that had 2 exceptions. If the population actually has a 6% exception rate, the auditor correctly accepted the population because the sample was representative of the population F A sample of all the items in a population still has sampling risk for the auditor F Using an appropriate sample selection method does not increase the likelihood of representativeness of the sample. F Assume an important control is shipping documents being attached to invoices. An effective audit procedure for detecting exceptions to this control would be to examine a sample of shipping documents and determining whether each is attached to a duplicate sales invoice. T There are three phases in both statistical and nonstatistical sampling. The first phase is to A) generate random numbers for the sample. B) evaluate the results. C) plan the sample. D) select the sample. C Which of the following statements is most correct concerning the quantification of sampling risk? A) Sampling risk cannot be quantified. B) Sampling risk can be quantified only when nonprobabilistic selection techniques are used to select the sample. C) Sampling risk can be quantified only when probabilistic selection techniques are used to select the sample. D) None of the above is correct. C Which of the following statements is most correct with respect to the evaluation of nonprobabilistic sample results? A) It is acceptable to make nonprobabilistic evaluations only when probabilistic sample selection is used. B) It is acceptable to make nonprobabilistic evaluations only if the auditor cannot quantify sampling risk. C) It is never acceptable to evaluate a nonprobabilistic sample using statistical methods. D) All of the above are correct C Which of the following is not a phase in the planning of both statistical and nonstatistical sampling? A) Plan the sample. B) Determine the probability that fraud has occurred. C) Select the sample and perform the tests. D) Evaluate the results. B Which of the following statements is not correct regarding probabilistic and nonprobabilistic sample selection? A) In probabilistic selection, every population item has a known chance of being selected. B) It is acceptable to evaluate a nonprobabilistic sample using statistical methods. C) Probabilistic selection is required for all statistical sampling methods. D) Both probabilistic and nonprobabilistic methods are acceptable and commonly used. B Which of the following is a correct statement regarding probabilistic versus nonprobabilistic sample selection? A) Auditors may make nonstatistical evaluations when using probabilistic sample selection. B) The AICPA recommends probabilistic sample selection. C) Nonstatistical sampling can't provide results that are as effective as a statistical sample. D) There is only one type of nonprobabilistic sample selection method. A ) An advantage of using statistical sampling techniques is that such techniques A) quantify sampling risk. B) eliminate the need for judgmental decisions. C) define the values of precision and reliability required to provide audit satisfaction. D) have been established in the courts to be superior to judgmental sampling. A Auditors who prefer statistical to nonstatistical sampling believe that the principal advantage of statistical sampling flows from its ability to A) quantify sampling risk. B) promote a more legally defensible procedural approach. C) define the precision required to provide audit satisfaction. D) establish conclusive audit evidence with decreased audit effort A Which of the following is an accurate statement regarding sampling? A) A 95 percent confidence level provides a 5 percent sampling risk. B) The auditor can perform the audit tests only after the sample items are selected. C) The purpose of planning the sample is to make sure that the audit tests are performed in a manner that provides the desired sampling risk and minimizes the likelihood of nonsampling errors. D) All of the above are accurate statements D It is equally acceptable under professional auditing standards for auditors to use either statistical or nonstatistical sampling methods T When using nonstatistical sampling, the sample must be a probabilistic one F Statistical sampling differs from nonstatistical sampling in that, by applying mathematical rules, the auditor can measure sampling risk in planning the sample; however, mathematical rules cannot then be applied in evaluating the sample results. F A 95 percent confidence level in statistical sampling means there is more than a 5 percent sampling risk which the auditor needs to address in the sampling design. F A sample in which every possible combination of items in the population has an equal chance of constituting the sample is a A) random sample. B) statistical sample. C) judgment sample. D) representative sample. A The process which requires the calculation of an interval and then selects the items based on the size of the interval is A) statistical sampling. B) random sample selection. C) systematic sample selection. D) computerized sample selection. C In systematic sample selection, the population size is divided by the number of sample items desired in order to determine the A) sampling interval. B) tolerable exception rate. C) computed upper exceptions rate. D) mean. A appropriately used when selecting a random sample? A) Auditor's judgmental selection of items Use of random number generators Generalized audit software Yes No Yes B) Auditor's judgmental selection of items Use of random number generators Generalized audit software No Yes Yes C) Auditor's judgmental selection of items Use of random number generators Generalized audit software Yes No No D) Auditor's judgmental selection of items Use of random number generators Generalized audit software No Yes No B Simple random sampling A) is used when there is a need to emphasize one or more types of population items. B) requires both input and output parameters to be set when using a random number generator. C) is generally used with replacement sampling. D) is a probabilistic sampling method. D When a population is divided into subpopulations, usually by dollar size, and larger samples are taken from the subpopulation with the larger sizes, ________ is being used. A) sampling with probability proportional to size B) stratified sampling C) block sampling D) haphazard sampling B The advantage of systematic sample selection is that A) it is easy to use. B) there is limited possibility of it being biased. C) it is unnecessary to determine if the population is arranged randomly. D) it automatically selects items material to the financial statements A In performing a review of a client's cash disbursements, an auditor uses systematic sample selection with a random start. The primary disadvantage of this technique is population items A) may occur twice in the sample. B) must be reordered in a systematic pattern before the sample can be drawn. C) may occur in a systematic pattern, thus negating the randomness of the sample. D) must be replaced in the population after sampling to permit valid statistical inference. C Which of the following is a correct statement regarding block sampling? A) It is acceptable to use block sampling only if a reasonable number of blocks are used. B) Block sampling uses sampling with replacement. C) Block sampling is a probabilistic sampling method. D) There is considerable cost and time involved when block sampling is used. A The most serious shortcoming of the haphazard sample selection method is A) it is not subject to statistical sampling methods. B) it is time consuming to use. C) it is costly to use. D) it is difficult to remain completely unbiased in the selection. D Which of the following statements regarding block sampling is least likely to be true? A) Block sampling is the selection of several items in sequence. B) It is acceptable to use block sampling for tests of transactions only if a reasonable number of blocks is used. C) Only one block should be selected to increase the probability of a representative sample. D) Once the first item in the block is selected, the remainder of the block is chosen automatically. C When the auditor goes through a population and selects items using nonprobabilistic selection methods, without regard to their size, source, or other distinguishing characteristics, it is called A) block sample selection. B) haphazard selection. C) systematic sample selection. D) statistical selection. B When auditors wish to evaluate a sample statistically, an acceptable selection method is A) systematic sample selection. B) judgmental selection. C) haphazard selection. D) block sample selection A Which is not a method used by auditors to generate random numbers? A) electronic spreadsheets B) systematic sample generators C) random number generators D) generalized audit software B When selecting a sample, random numbers may be obtained either with replacement or without replacement. Although both selection methods are theoretically sound, auditors rarely use replacement sampling. T Although systematic sample selection is easy to use, its primary disadvantage is that it is not a probabilistic sampling method. F Nonprobabilistic sampling methods are not based on mathematical probabilities, and therefore the representativeness of the sample may be difficult to determine T The use of haphazard sample selection is encouraged under professional auditing standards. F Directed sample selection, block sample selection, and haphazard sample selection are three types of probabilistic sample selection methods. F When generating random numbers, the random numbers must be obtained with replacement F Sound statistical theory consistently supports random number sampling with or without replacement T Haphazard and block sampling are often used in situations where the nature of the data makes the data more difficult to use a probabilistic sampling method. T Auditors prefer to use probabilistic sample selection methods for nonstatistical sample applications involving tests of controls and substantive tests of transactions to improve the likelihood of selecting a representative sample. T Which of the following occurrences would be least likely to warrant further audit attention for the auditor? A) deviations from client's established control procedures B) deviations from client's budgeted values C) monetary misstatements in populations of transaction data D) monetary misstatements in populations of account balance details B Which of the following statements is correct when dealing with sampling for exception rates? A) The term exception refers to both deviations from the client's control procedures and amounts that are not monetarily correct. B) When used with sampling, the term deviation is synonymous with the term exception. C) The actual population exception rate is the same as the sample exception rate. D) In using audit sampling for exception rates, the auditor is most concerned with the confidence interval A In using audit sampling for exception rates A) the auditor wants to know the most the exception rate is likely to be. B) sampling error is the likelihood that the auditor will miss a monetary misstatement. C) the upper limit of the interval estimate is known as the sampling risk. D) the computed upper exception rate (CUER) cannot be considered in the context of specific audit objectives. A Which of the following is most correct when using audit sampling for exception rates? A) The auditor is concerned with the lowest rate. B) The auditor is concerned with the highest rate. C) The auditor is concerned with the average on previous audits. D) The auditor is not concerned with the exception rate for audits of nonpublic companies. B The upper limit of the probable population exception rate is the A) upper exception rate. B) estimated population exception rate. C) computed upper exception rate. D) tolerable exception rate C You are determining the significance of the following: you set a 5% risk of assessing control risk too low and your computation of the upper deviation risk is 7%. What could you conclude? A) There is a 95% chance the deviation rate in the population is less than 5%. B) There is a 5% chance the deviation rate in the population is less than 7%. C) There is a 95% chance the deviation rate in the population exceeds 95%. D) There is a 5% chance the deviation rate in the population exceeds 7%. D If the auditor concludes that the computer upper exception rate (CUER) is 5% at an 8% sampling risk, this means that the exception rate in the population is no greater than 5% with an 8% risk of the exception rate exceeding 5%. T The upper limit of the interval estimate is also known as the confidence interval. F Deviation refers to a departure from prescribed controls or amounts that are not monetarily correct. F Deviation rate and tolerable deviation are used instead of exception rate when referring to tests of controls. T The auditor focuses on the lower limit of the interval estimate, which is called the estimated computed lower exception rate (CLER) in tests of controls and substantive tests of transactions. F An auditor might conclude that the computed upper exception rate (CUER) for missing shipping documents is 4 percent at a 5 percent sampling risk, meaning the auditor concludes that the exception rate in the population is no greater than 5 percent with a 4 percent risk of the exception rate exceeding 5 percent. F The risk which the auditor is willing to take in accepting a control as being effective when the true population exception rate is greater than a tolerable rate is the A) finite correction factor. B) tolerable exception rate. C) acceptable risk of overreliance. D) estimated population exception rate. C The exception rate the auditor will permit in the population and still be willing to conclude that the control is operating effectively is the A) tolerable exception rate. B) estimated population exception rate. C) acceptable risk of overreliance. D) sample exception rate. A If the auditor decides to assess control risk at the moderate level in a private company audit, when in previous years the auditor set control risk at the maximum level, then tests of controls for the current year would be A) increased in number. B) reduced in number. C) not performed. D) unchanged from prior planned settings. A When the computed upper exception rate (CUER) is greater than the tolerable exception rate (TER), it is necessary for the auditor to take specific action. Which of the following courses of action would be most difficult to justify? A) Reduce the tolerable exception rate so as to accept the sample results. B) Expand the sample size and perform more tests. C) Revise the assessed control risk upward. D) Write a letter to management which outlines the control deficiencies. A Which of the following would have the least impact in determining sample size? A) acceptable risk of overreliance B) risk of assessing control risk too low C) tolerable exception rate D) population size D Which of the following represents the best description of the tolerable exception rate? A) the highest exception rate the auditor will permit in the control being tested and still conclude it is operating effectively B) the highest exception rate the auditor expects to find in the population C) the number of exceptions found in the sample divided by the sample size D) the highest estimated exception rate in a population at a given estimated population exception rate. A When analyzing exceptions, the auditor should keep in mind that A) all exceptions must be reported to management. B) they should determine the breakdown in the internal controls that allowed the exceptions to occur. C) the nature of an exception and its causes have no effect on the qualitative evaluation of the system. D) exceptions do not need to be analyzed if it is too costly. B The exception rate that the auditor will permit in the population and still be willing to use the preliminary control risk assessment is called the A) acceptable exception rate. B) estimated population exception rate. C) sample exception rate. D) tolerable exception rate. D Auditors often use the ________ to determine the estimated population exception rate. A) current year's audit results B) tolerable exception rate C) preceding year's audit results D) estimated computed by management C Place the following steps in their proper order: 1. Analyze exceptions. 2. Select the sample. 3. Define attributes and exception conditions. 4. State the objectives of the audit test. 5. Specify the tolerable exception rate. A) 1, 3, 2, 4, 5 B) 4, 3, 1, 2, 5 C) 4, 3, 5, 2, 1 D) 1, 2, 3, 4, 5 C If an auditor judgmentally selects a sample of one hundred items from a population and finds two exceptions, the auditor A) can conclude that the sample exception rate is 2%. B) can conclude that the population exception rate is 2%. C) can calculate the highest exception rate expected in the population. D) cannot make any conclusions about either the sample or the population. A When planning the audit sample, A) one objective of the tests of controls is to test the effectiveness of the controls. B) audit sampling applies to analytical procedures. C) audit sampling generally applies to automated controls. D) the auditor must generalize from the sample to the population. A Which of the following is the exception rate that the auditor expects to find before testing? A) sample exception rate B) estimated population exception rate C) computed exception rate D) tolerable exception rate B Which of the following is not a term related to evaluating results in audit sampling until after a sample is tested and evaluated? A) sample exception rate B) estimated population exception rate C) computed upper exception rate D) exception B The relationship of tolerable exception rate (TER) to sample size is A) direct (larger TER = larger sample). B) inverse (larger TER = smaller sample). C) variable (sometimes larger, sometimes smaller). D) not determinable. B Which of the following must be set prior to testing a sample? A) sample exception rate B) achieved upper precision limit C) computed exception rate D) tolerable exception rate D The acceptable risk of overreliance A) is the risk that the auditor will erroneously conclude that the controls are less effective than they actually are. B) is less of a concern to the auditors than the risk of underreliance. C) represents the auditor's measure of sampling risk. D) is determined by a statistical formula, and not by professional judgment. C 18) The sample exception rate equals A) the number of exceptions in the population divided by the sample size. B) the number of items in the population multiplied by the number of exceptions in the sample. C) the number of exceptions in the sample divided by the sample size. D) the number of exceptions in the population divided by the population size. C When defining the population, A) it may be necessary to define separate populations for different audit procedures. B) the auditor may generalize only about the population that has been sampled. C) auditors can define the population to include any items they want. D) all of the above D One way to evaluate sampling risk when nonstatistical sampling is used is to A) subtract the sample exception rate from the tolerable exception rate. B) add the sample exception rate and the tolerable exception rate. C) subtract the sample exception rate from the acceptable risk of overreliance. D) add the sample exception rate and the acceptable risk of overreliance. A A danger in setting the acceptable risk of overreliance too low is A) The risk that the auditor is willing to take of accepting a control as ineffective when it is effective The risk that the auditor is willing to take of accepting a control as effective when it is ineffective Yes Yes B) The risk that the auditor is willing to take of accepting a control as ineffective when it is effective The risk that the auditor is willing to take of accepting a control as effective when it is ineffective No No C) The risk that the auditor is willing to take of accepting a control as ineffective when it is effective The risk that the auditor is willing to take of accepting a control as effective when it is ineffective Yes No D) The risk that the auditor is willing to take of accepting a control as ineffective when it is effective The risk that the auditor is willing to take of accepting a control as effective when it is ineffective No Yes D When using statistical sampling, the auditor would most likely require a smaller sample if the A) population increases. B) desired reliability decreases. C) desired precision interval narrows. D) expected exception rate increases. B Whenever auditors use sampling, they risk making incorrect conclusions about the population. The risk that the auditor concludes that controls are more effective than they actually are is known as the A) risk of overreliance. B) risk of underreliance. C) risk that the sample is not representative of the population. D) risk that the sample conclusions cannot be useful because of nonprobability sampling. A When choosing the appropriate acceptable risk of overreliance, the auditor needs to A) rely on his/her professional judgment. B) err on the side of conservatism. C) consult the professional standards. D) follow SEC guidelines. A When planning the audit sample, the ________ is (are) those items about which the auditor wishes to generalize. A) attributes B) sampling unit C) population D) sample C If the result obtained from a particular sample for control and substantive tests of transactions is critical to the formation of an audit opinion, which of the following is the most important to the auditor in concluding of the appropriateness and sufficiency of evidence gathered? A) acceptable risk of overreliance B) estimated population exception rate C) tolerable exception rate D) size of the population A ) There is a(n) ________ relationship between acceptable risk of overreliance and planned sample size. A) direct B) inverse C) proportional D) exponential B Which of the following results in a larger sample size? A) Decrease the estimated population exception rate and decrease the tolerable exception rate. B) Increase the estimated population exception rate and decrease the tolerable exception rate. C) Decrease the estimated population exception rate and increase the tolerable exception rate. D) Increase the estimated population exception rate and increase the tolerable exception rate. B When determining tolerable exception rate (TER), A) the auditor considers the degree of reliance to be placed on the control and the significance of the control to the audit. B) if only one internal control is used to support a low control risk assessment for an objective, TER will be higher for the attribute than if multiple controls are used to support a low control risk assessment for the same objective. C) control deviations increase both the risk of material misstatements in the accounting record, and will always result in misstatements. D) a smaller sample size is needed for a low TER than for a high TER. A The acceptable risk of overreliance A) is normally assessed at a high level when auditing an accelerated filer public company. B) and the extent of tests of controls depend on assessed control risk for accelerated filer public companies. C) and the control risk will be assessed as low for audits where there is extensive reliance on internal controls. D) does not impact the effectiveness of the audit. C The auditor must use the same TER and ARO levels for all attributes of an audit test. F The tolerable exception rate is the rate that the auditor will permit in the population and still be willing to conclude a control is effective. T The only way to know with certainty whether a sample is representative is to subsequently audit the entire population. T Acceptable risk of overreliance is the risk that the auditor is willing to take in accepting a control as effective when the true population exception rate is greater than the estimated population exception rate. F Acceptable risk of overreliance is normally lower for a public company audit than a private company audit. T When the estimated population exception rate exceeds the sample exception rate, the auditor can conclude that the sample results do not support the preliminary assessed control risk. F When the sample exception rate is greater than the tolerable exception rate in attributes sampling, one possible appropriate course of action is to increase sample size. T Tolerable exception rate (TER) is inversely related to sample size. T When the sample exception rate (SER) exceeds the tolerable exception rate (TER), the auditor should decide whether to increase sample size or to revise assessed control risk on the basis of cost versus benefit. F In nonstatistical sampling, the calculated sampling error is the difference between the tolerable exception rate and the sample exception rate. T The sampling unit is the physical unit that corresponds to the random numbers the auditor generates. T The sum of the tolerable exception rate and the estimated population exception rate is the precision of the initial sample estimate. F Audit sampling can be applied for reviewing sales transactions for large and/or unusual amounts, and also for observing whether the duties and responsibilities of the receivables clerk are separate from the handling of cash (a test of control). F Audit sampling can be applied to manual controls when application of the control produces documentary evidence of performance. T When audit evidence is in electronic format, the auditor can use data analytics to test the entire population, rather than testing a sample of the population. T The auditor uses professional judgment in establishing the tolerable exception rate for an attribute being tested in a population. T As the auditor performs statistical procedures and finds material weaknesses in internal controls, it is important to communicate in writing to those at the audit client charged with governance. T The auditor finds material weaknesses in internal controls before year end. In these situations, the auditor must issue an adverse opinion in the audit report on internal controls, even if the auditor is able to test management's corrected controls before year-end. F Rodgers CPA believes that the rate of client billing errors is 4% and has established a tolerable deviation rate of 6%. In auditing client invoices, Rodgers should use A) stratified sampling. B) classical sampling. C) proportional sampling. D) attributes sampling. D [Show Less]
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