3. Performing Further Procedures and Obtaining Evidence

Question 1

Which of the following audit techniques ordinarily would provide an auditor with the least assurance about the operating effectiveness of an internal control activity?

Answer 1

Preparation of system flowcharts
System flowcharts may document the auditor’s understanding of internal control, but flowchart preparation provides little assurance about the documented activity’s operating effectiveness.

Question 2

Given random selection, the same sample size, and the same precision requirement for the testing of two unequal populations, the risk of assessing control risk too low on the smaller population is

Answer 2

Lower than assessing control risk too low for the larger population.
All things being equal, a sample taken from a smaller population will be more representative of the population than a sample of the same size taken from a larger population.

Question 3

Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities?

Answer 3

Vouch a sample of cash disbursements recorded just after year-end to receiving reports and vendor invoices

Question 4

In auditing a client’s retained earnings account, an auditor should determine whether there are any restrictions on retained earnings that result from loans, agreements, or state law. This procedure is designed to corroborate management’s financial statement assertion of

Answer 4

Completeness of disclosures
Restrictions on retained earnings should be disclosed in the financial statements
Rights and obligations pertain to assets and liabilities, not retained earnings.

Question 5

Key Co. plans to present comparative financial statements for the years ended December 31, year 7, and year 8, respectively. Smith, CPA, audited Key’s financial statements for both years and plans to report on the comparative financial statements on May 1, year 9. Key’s current management team was not present until January 1, year 8. What period of time should be covered by Key’s representation letter?

Answer 5

January 1, year 7,through May 1,year 9

The representations should be made as of the date of the auditor’s report

Question 6

When an auditor of a nonissuer becomes aware that one or more auditing procedures that the auditor considered necessary in the circumstances existing at the time of the audit were omitted from the audit of the financial statements,

Answer 6

The US GAAS guidance relevant to this matter relates to the period subsequent to the AUDIT REPORT RELEASE DATE date regarding when the auditor became aware of the omission.

Question 7

Which of the following auditing procedures most likely would provide assurance about a manufacturing entity’s inventory valuation?

Answer 7

Testing the entity’s computation of standard overhead rates

Question 8

In general, cutoff tests are used to detect

Answer 8

unrecorded transactions at the end of the period.

Question 9

An auditor usually tests the reasonableness of dividend income from investments in publicly-held companies by computing the amounts that should have been received by referring to

Answer 9

Dividend record books produced by investment advisory services

Question 10

Which of the following nonfinancial information would an auditor most likely consider in performing analytical procedures during the planning phase of an audit?

Answer 10

Square footage of selling space. plausible relationship with retail revenues and expenses to industry and prior year

Question 11

Which of the following factors should an auditor consider most important upon subsequent discovery of facts that existed at the date of the audit report and would have affected the report?

Answer 11

The client’s willingness to issue revised financial statements or other disclosures to persons known to be relying on the financial statements

Question 12

Which of the following statements extracted from a client’s lawyer’s letter concerning litigation, claims, and assessments most likely would cause the auditor to request clarification?

• “We believe that the possible liability to the company is nominal in amount.”
• “We believe that the action can be settled for less than the damages claimed.”
• “We believe that the plaintiff’s case against the company is without merit.”
• “We believe that the company will be able to defend this action successfully.”

Answer 12

a) liability is nominal so won’t have material affects on FS
b) correct, likelihood of unfavorable outcome but need more info for disclosure/accrual
c) without merit, remote chance to have a loss
d) successful case, remote chance to have loss

Question 13

Which of the following strategies most likely could improve the response rate of the confirmations of accounts receivable?

Answer 13

Include a list of items or invoices that constitute the customers’ account balances

Question 14

In auditing accounts receivable, the negative form of confirmation request most likely would be used when

Answer 14

The combined assessed level of inherent risk and control risk relative to accounts receivable is low.

Negative confirmations are used when the auditor can tolerate a high level of detection risk

Question 15

While performing audit data analytics in substantive analytical procedures, data obtained from the entity is arranged for analytics tools in which step?

Answer 15

Access and prepare the data

Question 16

In performing a count of negotiable securities, an auditor records the details of the count on a security count worksheet. What other information is usually included on this worksheet?

Answer 16

An acknowledgment by a client representative that the securities were returned intact

Question 17

An independent auditor asked a client’s internal auditor to assist in preparing a standard financial institution confirmation request for a payroll account that had been closed during the year under audit. After the internal auditor prepared the form, the controller signed it and mailed it to the bank. What was the major flaw in this procedure?

Answer 17

The form was mailed by the controller.

Question 18

The primary reason for a letter of audit inquiry to the client’s attorneys is to

Answer 18

is to corroborate management’s information concerning litigation, claims, and assessments.

Question 19

Once the auditor determines that a deficiency, or a combination of deficiencies, in internal control is not a material weakness, the auditor should consider whether

Answer 19

Prudent officials, having knowledge of the same facts and circumstances, would likely reach the same conclusion

Question 20

A client is a defendant in a patent infringement lawsuit against a major competitor. Which of the following items would least likely be included in the attorney’s response to the auditor’s letter of inquiry?

Answer 20

An evaluation of the ability of the client to continue as a going concern if the verdict is unfavorable and maximum damages are awarded

Question 21

Under which of the following circumstances should an auditor consider confirming the terms of a large complex sale?

Answer 21

When the combined assessed level of inherent and control risk over the sale is high

Question 22

A deficiency in internal control

Answer 22

Exists when a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis

Question 23

In evaluating the reasonableness of an entity’s accounting estimates, an auditor most likely concentrates on key factors and assumptions that are

Answer 23

Deviations from historical patterns

Question 24

n 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 management’s financial statement assertions of existence and

Answer 24

Rights and obligations

Question 25

An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the audit assertion that all

Answer 25

Expenditures for property and equipment have not been charged to expense

Question 26

Cooper, CPA, performs a test to determine whether all merchandise for which the client was billed was received. The population for this test consists of all

Answer 26

Vendors’ invoices

Question 27

Analytical procedures performed in the FINAL review stage of an audit generally would include

Answer 27

Considering the adequacy of the evidence gathered in response to unexpected balances identified in planning

Question 28

In which of the following circumstances would the use of the NEGATIVE form of accounts receivable confirmation most likely be justified?

Answer 28

A SMALL number of accounts may be in dispute and the accounts receivable balance arises from sales to MANY customers with SMALL balances.

Question 29

critical accounting estimate is an accounting estimate where

Answer 29

(1) the nature of the estimate is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and (2) the impact of the estimate on financial condition or operating performance is material.

Question 30

An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal and the cash disbursements journal. The purpose of this substantive audit procedure most likely was to

Answer 30

Determine that purchases were properly recorded.

To verify that cash disbursements were for goods actually received would require vouching from the cash disbursements journal to the receiving reports. To test whether payments were for goods actually ordered would require vouching from the cash disbursements journal to the purchase orders.