2.10.19 Flashcards
An auditor has determined the recorded amount of a population of accounts receivable to be $1,638,000 and has set the level of tolerable misstatement (TM) at $46,800. No errors were expected to be found in the population. Based upon a risk of incorrect acceptance of 5% and a reliability factor (RF) of 3, what is the sample size to be used for testing?
105.
The sample size for accounts receivable testing is 105. The sampling interval is calculated as SI = TM ÷ RF [15,600 = 46,800 ÷ 3], if SI is the sampling interval. The recorded amount of the population then is divided by the sampling interval to obtain the sample size. The sample size to be tested is 105 (1,638,000 ÷ 15,600).
As a result of control testing, a CPA has decided to reduce control risk. What is the impact on substantive testing sample size if all other factors remain constant?
The sample size would be lower.
As the assessed level of control risk decreases, the auditor’s allowable risk of incorrect acceptance for the substantive tests of details increases. Thus, the required sample size decreases.
Auditors should evaluate significant accounting estimates included in the financial statements. The auditor
Should understand how management developed the estimate but may adopt a variety of approaches to evaluating its reasonableness.
In evaluating the reasonableness of an accounting estimate, the auditor should obtain an understanding of how it was developed. The auditor then may use one of several approaches, or a combination, to evaluate reasonableness. One approach is to review and test management’s process. A second approach is to develop an independent expectation to corroborate the reasonableness of management’s estimate. A third approach is to review subsequent events or transactions.
Which of the following questions is not appropriate for an internal control questionnaire concerning securities?
All are appropriate.
Is there a record of all identification numbers of securities, and are securities held in the name of the company?
Is there a periodic reconciliation of the detail of securities with the security control account?
Do the internal auditors periodically test controls over securities?
An auditor suspects that a client’s cashier is misappropriating cash receipts for personal use by lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme, the auditor most likely would compare the
Dates checks are deposited per bank statements with the dates remittance credits are recorded.
Lapping involves recording current cash payments on accounts receivable as credits to prior customers’ accounts to conceal a theft of cash. Comparing the date that a customer’s check was deposited with the date a record was made to reduce the balance determines whether the deposit was made prior to the recording date.
An auditor concluded that no excessive costs for an idle plant were charged to inventory. This conclusion most likely related to the auditor’s objective to obtain evidence about the relevant assertions regarding inventory, including presentation and disclosure and
Valuation and allocation.
Inventory should properly include the costs of direct labor, direct materials, and manufacturing overhead. Thus, to be properly measured, an appropriate amount of manufacturing overhead should be charged to inventory. Costs of an idle plant should not be included in manufacturing overhead.
In confirming with an outside agent, such as a financial institution, that the agent is holding investment securities in the client’s name, an auditor most likely gathers evidence in support of relevant financial statement assertions about existence or occurrence and
Rights and obligations.
External confirmations may be designed to test any financial statement assertion (AU-C 505). However, a given confirmation request does not test all assertions equally well. For example, if the issue is whether securities are being held in the client’s name by an outside agent, the completeness assertion with regard to the investment account is not adequately addressed by a confirmation request. Other agents may be holding securities for the client. Moreover, the agent may be holding other securities not specified in the request. Thus, the request tends to be most effective for testing the existence (whether the assets exist at a given date) assertion and the rights (whether the client has a specified ownership interest in the assets) assertion.
When auditing prepaid insurance, an auditor discovers that the original insurance policy on plant equipment is not available for inspection. The policy’s absence most likely indicates the possibility of a(n)
Lien on the plant equipment.
When liens are placed on equipment or property, the lienholder often requires that the assets be insured and that the lienholder be named as the beneficiary. Hence, the policy is likely to be held by the lienholder even though the client is required to pay the premiums.
Which of the following best describes the primary purpose of audit procedures?
To gather evidence.
According to AU-C 500, Audit Evidence, most of the auditor’s work in forming an opinion on financial statements consists of obtaining and evaluating audit evidence. Audit evidence is the information used by the auditor in drawing the conclusions on which the auditor’s opinion is based. It includes the information contained in the accounting records and sources of information other than accounting records.
In auditing accounts payable, an auditor’s procedures most likely will focus primarily on the relevant assertion about
Completeness.
The primary audit risk for accounts payable is understatement of the liability. Thus, the auditor will most likely focus on the completeness assertion.
Legal counsel’s response to an auditor’s request for information regarding litigation, claims, and assessments will ordinarily contain which of the following?
An explanation regarding limitations on the scope of the response.
AU-C 501 indicates that a statement regarding the nature and reasons for any limitation on legal counsel’s response should be requested in the letter of inquiry. The letter is sent to legal counsel requesting confirmation of the information presented.
Generalized audit software is useful for
Test of controls:
Substantive procedures:
Yes
Yes
Generalized audit software is useful for both tests of controls and substantive procedures. It can be used to perform audit tasks such as (1) sampling and selecting items; (2) testing extensions, footings, and calculations; (3) examining records; (4) summarizing and sorting data; and (5) performing analytical procedures.
The primary reason an auditor requests letters of inquiry be sent to a client’s legal counsel is to provide the auditor with
Corroboration of the information furnished by management about litigation, claims, and assessments.
A letter of inquiry to a client’s external legal counsel is the auditor’s primary means of corroborating information furnished by management about litigation, claims, and assessments. If in-house legal counsel is primarily responsible for the entity’s litigation, claims, and assessments, the auditor should send a similar letter of inquiry to in-house legal counsel. But the letter to in-house legal counsel is not a substitute for direct communication with external legal counsel.
Which of the following statements is generally correct about the sample size in statistical sampling when testing internal controls?
The population size has little or no effect on the sample size.
In an attribute sampling application, e.g., for testing internal controls, the total number of sampling units in the population should be known. However, the sample size is relatively insensitive to size changes in large populations.
If the size of the sample to be used in a particular test of attributes has not been determined by using statistical concepts, but the sample has been chosen in accordance with random selection procedures,
The auditor may or may not achieve desired precision at the desired level of confidence.
The determination of sample size for a test of attributes is a function of (1) the allowable risk of overreliance, (2) the tolerable deviation rate, (3) the expected population deviation rate, and (4) the size of the population. When the auditor does not use these criteria to determine sample size, (s)he risks not meeting the audit objectives.
