2.21.19 Flashcards
Which of the following combinations results in a decrease in sample size in an attribute sample?
Allowable risk of overreliance:
Tolerable rate:
Expected population deviation rate:
Increase
Increase
Increase
To determine the sample size for a test of controls, the auditor considers (1) the tolerable rate of deviations from the control being tested, (2) the expected actual rate of deviations, and (3) the allowable risk of overreliance. An increase in the allowable risk of overreliance, an increase in the tolerable rate, and a decrease in the expected rate each has the effect of reducing the required sample size.
In determining the sample size for a test of controls, an auditor should consider the likely rate of deviations, the allowable risk of overreliance, and the
Tolerable population deviation rate.
A test of controls is an application of attribute sampling. The initial size for an attribute sample is based on (1) the desired assurance (complement of the risk of overreliance) that the tolerable population deviation rate is not exceeded by the actual rate, (2) the tolerable population deviation rate, (3) the expected population deviation rate, and (4) the population size. However, a change in the size of the population has a very small effect on the required sample size when the population is large. Consequently, population size is often not considered unless it is small.
Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities?
Vouch a sample of cash disbursements recorded just after year end to receiving reports and vendor invoices.
The greatest risk in the audit of payables is that unrecorded liabilities exist. Omission of an entry to record a payable is a fraud or error that is more difficult to detect than an inaccurate or false entry. The search for unrecorded payables should include (1) examining cash disbursements made after the balance sheet date and comparing them with the accounts payable trial balance, (2) sending confirmations to vendors with small and zero balances, and (3) reconciling payable balances with vendors’ documentation.
Which of the following actions should an accountant take when engaged to compile a company’s financial statements in accordance with Statements on Standards for Accounting and Review Services (SSARSs)?
Perform the engagement even though independence is compromised.
An accountant may perform and report on a compilation without being independent if the lack of independence is disclosed in the report.
As a result of analytical procedures, the independent auditor determines that the gross profit percentage has declined from 30% in the preceding year to 20% in the current year. The auditor should
Consider the possibility of a misstatement in the financial statements.
The auditor should consider the possibility of a misstatement when (s)he has identified unexpected differences between recorded amounts and expectations. The auditor’s judgments about materiality and the desired level of assurance determine the significance of the difference. Because a change of 10% is likely to be significant, the auditor should reconsider the expectations used and make inquiries of management. If the difference still cannot be explained, additional procedures should be performed.
Which of the following is correct regarding a compilation of financial statements engagement in accordance with Statements on Standards for Accounting and Review Services?
The accountant is not required to make inquiries or perform procedures to corroborate the information provided by the client.
The accountant should read the financial statements after obtaining an understanding of the reporting framework and the entity’s significant accounting policies. The accountant then should consider whether the financial statements appear to be appropriate in form and free from obvious material misstatements. However, the accountant is not required to make inquires or perform other procedures to verify, corroborate, or review information supplied by the entity.
Which of the following is a substantive procedure that an auditor most likely would perform to verify the existence and valuation assertions about recorded accounts payable?
Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports.
Vouching a sample of recorded accounts payable to purchase orders and receiving reports provides evidence that the obligations exist at a given date. The purchase orders evidence the initiation of the transactions, and the receiving reports indicate that goods were received and that liabilities were thereby incurred. Thus, these documents provide evidence that amounts are owed to others, that the transactions occurred, and that the liabilities have been included at appropriate amounts.
Each of the following statements is correct regarding the likely sources of potential misstatements in an integrated audit except
An evaluation of the entity’s information technology risk and controls should be performed separately from the top-down approach.
The auditor begins an integrated audit at the statement level by understanding overall risks to internal control over financial reporting. (S)he then focuses on entity-level controls and works down to significant classes of transactions, account balances, disclosures, and their relevant assertions. The following are examples of entity-level controls: (1) the control environment, (2) controls over management override, (3) monitoring of the results of operations, (4) controls over the period-end financial reporting process, (5) monitoring of other controls, and (6) the risk assessment process.
A change in accounting principle made by a nonissuer has no material effect on the financial statements in the current year but is expected to have a material effect in later years. Accordingly, the change should be
Disclosed in the notes to the financial statements of the current year.
The accounting change has no material effect on the financial statements in the current year but is expected to have a material effect in later years. The applicable financial reporting framework may require that the change be disclosed in the notes to the financial statements. But the independent auditor need not recognize the change in the current period’s report.
If requested to perform a compilation engagement for a nonissuer in which an accountant has an immaterial direct financial interest, the accountant is
Not independent and, therefore, may issue a compilation report, but may not issue a review report.
If a member of the AICPA has an immaterial direct financial interest in the client, (s)he is not independent. When the accountant issues a report on a compilation for an entity from which (s)he is not independent, the accountant’s report should be modified. The accountant should indicate his or her lack of independence in a final paragraph of the report and is permitted but not required to disclose the reasons (AR-C 80). An accountant must not perform a review if his or her independence is impaired for any reason (AR-C 90).
A CPA should not normally refer to which one of the following subjects in a comfort letter?
Management’s determination of operating segments.
AU-C 920 lists the permissible content of a comfort letter. In addition to the other answer choices, the letter may address (1) the form of audit statements and schedules in the registration statement, (2) other items in the filing (e.g., pro forma information, MD&A, and capsule information), and (3) the provision of negative assurance. However, management’s determination of operating segments is a matter addressed in an audit, an engagement with a broader scope than that for the issuance of a comfort letter.
A purchasing agent searches the inventory master file for what information relevant to a purchase?
The approved vendor and the economic order quantity.
The inventory master file includes the approved vendor, economic order quantity, costs, and any other relevant terms.
In a comfort letter, the auditor should most likely avoid using which of the following terms to describe the work performed?
Make a general review.
The auditor performs a reasonable investigation to provide negative assurance in a comfort letter. Terms of uncertain meaning, such as “general review,” “limited review,” “check,” or “test,” should not be used in describing the work unless the procedures to be performed are described in the comfort letter (AU-C 920).
When an audit is made in accordance with auditing standards, the auditor should always
Obtain certain management representation letters.
Written representations are written statements by management provided to confirm certain matters or to support other audit evidence. They do not include financial statements, the assertions in them, or supporting books and records (AU-C 580).
An accountant is required to comply with the provisions of Statements on Standards for Accounting and Review Services (SSARSs) when
Compiling financial statements generated through the use of computer software:
Reproducing client-prepared financial statements, without modification, for the client:
Yes
No
A compilation is a service that assists management to present financial information in the form of financial statements without undertaking to provide any assurance. When the accountant is engaged to compile the statements, they should be accompanied by a written report. Thus, producing financial statements generated through the use of computer software is a compilation. Reproducing client-prepared financial statements, without modification, for the client is not.
