A3 - Risk Evidence And Sampling Flashcards
Primary objective of procedures performed to obtain an understanding of entity and its environment is to provide auditor
A) knowledge necessary for risk assessment and audit planning
B) audit evidence to use in assessing inherent risk
C) basis for issuing opinion on FS
D) evaluation of the consistency of application of management policy
A) knowledge necessary for risk assessment and audit planning
When government establishes a “fixed price” for a good to meet the economic objective of price stability and product affordability, what are the anticipated long term effects on consumers and producers
A) consumers to buy more and producers to make less
B) consumers to buy more and producers to make more
C) consumers to buy less and producers to make more
D) consumers to buy less and producers to make less
A) consumers to buy more and producers to make less
Leading economic indicators of business cycles are:
A) number of employees on payroll, total industrial production, and manufacturing and trade sales in constant dollars
B) ratio of manufacturing and trade inventories to sales in constant dollars, average prime rate charged by bank, and ratio of consumer investment credit outstanding
C) manufactures new orders for consumer goods in constant dollars, number of new building permits, and Change in manufacturer infilled orders for durable goods in constant dollars
D) results of decisions requiring clear knowledge of the state of the economy
C) manufactures new orders for consumer goods in constant dollars, number of new building permits, and Change in manufacturer infilled orders for durable goods in constant dollars
Which statement is correct concerning analytical procedures used in planning an audit?
A) often replace the tests of controls that are performed to assess control risk
B) usually use financial and non financial data aggregated at high level
C) usually involve the comparison of assertions developed by management to ratios calculated by an auditor
D) often used to develop an auditors preliminary judgment about materiality
B) usually use financial and non financial data aggregated at high level
Audit firm is in planning phase of new retail client audit. Which analytical procedure would most likely not be performed during planning phase of audit?
A) obtaining selected client financial ratios and comparing to industry average
B) comparing clients current year same store sales with budgeted amounts
C) reviewing financial statement and disclosures for unusual transactions or unexpected balances
D) comparing current year sales per store square foot with prior year
C) reviewing financial statement and disclosures for unusual transactions or unexpected balances
When performing analytical procedures in planning stage, auditor most likely would develop expectations by reviewing
A) unaudited information from internal quarterly reports
B) various account assertions in planning memorandum
C) comments in prior years management letter
D) control risk assessment relating to specific financial assertions
A) unaudited information from internal quarterly reports
Which represents the procedure managers use to identify whether the company has information that unauthorized individuals want, how these individuals could obtain the information, the value of the information, and probability of unauthorized access occurring?
A) disaster recovery plan
B) systems assessment
C) risk assessment
D) test of control
C) risk assessment
In understanding the entity and environment, auditor would ordinarily consider how the entity addresses each, EXCEPT:
A) changes in filing requirements for property tax assessment appeals
B) introduction of new product lines that increase product liability]
C) new regulatory requirements tha increase legal exposure
D) new accounting requirements that increase risk of improper implementation
A) changes in filing requirements for property tax assessment appeals
ANYTHING THAT WOULD AFFECT RISK ASSESSMENT
The trough of a business cycle is generally characterized by
A) shortages of essential raw materials and rising costs
B) increase purchase power and increase capital investments
C) unused productive capacity and unwillingness to risk investments
D) declining purchasing power and unused productive capacity
C) unused productive capacity and unwillingness to risk investments
TROUGH: economic low point with no positive indicators
Projections indicate that the economy is entering a slowdown. What is expected outcome?
A) inflationary pressures
B) increase demand for credit
C) wage hikes
D) drop in interest rates
D) drop in interest rates
In trying to predict how long the economy will be in current recovery phase before entering an “expansionary phase”, economists will look at indicatiors, EXCEPT
A) prices for material used in production
B) building permits for new home construction
C) data regarding new claims for unemployment
D) length of time, on average, that job seekers are unemployed
D) length of time, on average, that job seekers are unemployed
THIS IS A LAGGING INDICATOR
Which economic indicators tends to occur as a result of economic activity?
A) manufacturing and trade sales
B) building permits for residences
C) average duration of unemployment
D) average new unemployment claims
C) average duration of unemployment
Which most accurately describes the normal sequence of business cycle?
A) expansion, contraction, trough and peak
B) expansion, peak, contraction and trough
C) peak, contraction, expansion, and trough
D) trough, contraction, expansion, and peak
B) expansion, peak, contraction and trough
EPCT
Which condition is most true during a recession?
A) output (GDP) will be increasing
B) natural rate of unemployment will increase dramatically
C) potential output will exceed actual output
D) actual output will exceed potential output
C) potential output will exceed actual output
Which of the following statements is correct regarding an economy at peak of business cycle?
A) economy at the natural rate of unemployment
B) incomes will be stable
C) rate of inflation will decrease
D) economy will be in static equilibrium
A) economy at the natural rate of unemployment
Variations between business cycles most likely are attributable to which factors?
A) duration and intensity
B) comparative advantage
C) opportinity costs
D) law of diminishing returns
A) duration and intensity
To obtain an understanding of a continuing client’s business in planning an audit, an auditor most likely would
A) reevaluate the client’s control environment
B) review prior year audit documentation and the permanent file for the client
C) read specialized industry journals
D) perform test of details of transactions and balances
B) review prior year audit documentation and the permanent file for the client
Economic indicators are often used to try to predict or explain economic activity. Which of the following is NOT an example of leading economic indicator?
A) manufacturing and trade sales
B) building permits for residential properties
C) price changes of materials
D) orders for goods
A) manufacturing and trade sales
Auditor is considering internal control in an automated environment. Under these circumstances, auditor would need to focus on automated controls for all of the following reasons except
A) even manual controls may be dependent to some extent on effective functioning of automated controls
B) much of the information used in monitoring the internal control system may be provided through use of IT
C) more efficient and cost effective to focus on automated controls rather than manual controls
D) unauthorized access to data, systems, or programs create an additional control risk
C) more efficient and cost effective to focus on automated controls rather than manual controls
Which is necessary in a financial statement audit?
A) understanding of internal control relevant to each of an entity operating units
B) understanding of internal control relevant to each of an entity business functions
C) understanding of internal control relevant to an entity’s financial reporting objective
D) understanding of internal control relevant to an entity compliance objective
C) understanding of internal control relevant to an entity’s financial reporting objective
Which would be considered a detective control over standing data?
A) access and authorization control
B) reconciliation of changes to the data
C) change control
D) read only rights
B) reconciliation of changes to the data
DETECTION CONTROL IS ANYTHING THAT INVOLVES REVIEWING CHANGES
Manual controls would most likely be more unit able than automated controls for which of the following?
A) large, unusual, or non recurring transactions
B) high volume transactions that require additional calculations
C) situations with routine errors that can be predicted and corrected
D) circumstances that require a high degree of accuracy
A) large, unusual, or “non recurring” transactions
Auditor was testing whether shipments were made only to credit worthy customers. Client informed auditor that the IT system would not print bills of lading for customers that were on credit hold. Auditor would most likely perform?
A) select sample of customers, attempt to print bills of lading, and verify with IT that only a few are on credit hold
B) attempt to print a bill of lading for one customer on credit hold and verify with IT that this control cannot be overridden without approval
C) review recent shipments for a sample of customers on credit hold and verify with the accounting manager that all shipments were shipped by due. date
D) review the customer files for the names of all customers on credit hold and verify with accounting manager that no shipments were made to these customers after they were listed on credit hold
B) attempt to print a bill of lading for one customer on credit hold and verify with IT that this control cannot be overridden without approval
Which constitutes a potential risk associated with use of IT in an entity’s system of internal control?
A) reduction in ability to monitor the entity’s activities
B) facilitation of additional analysis
C) reduction in circumvention of controls
D) unauthorized changes to systems
D) unauthorized changes to systems
Primary objective of data security controls?
A) establish framework for controlling design security and use of computer programs throughout an organization
B) ensure that storage media are subject to authorization prior to access, change or destruction
C) formalize standards, rules and procedures to ensure the organizations controls are properly executed
D) to monitor the use of system software to prevent unauthorized access to system software and computer programs
B) ensure that storage media are subject to authorization prior to access, change or destruction
Which of the types of control best describe procedures to endure appropriate systems software acquisition?
A) information processing
B) physical
C) general
D) monitoring
C) general
Which situation would automated controls be suitable?
A) client operates where misstatements are difficult to define, anticipate, or predict
B) processes a large number of similar transactions that “recur” each month
C) circumstance change frequently, which requires changes to control responses
D) processes unusual transactions that “do not recur” from month to month
B) processes a large number of similar transactions that “recur” each month
Obtaining an understanding of a control involves evaluating the design and determining if it was
A) authorized
B) implemented
C) tested
D) monitored
B) implemented
Which is LEAST LIKELY to be continuous activity that an auditor would be expected to perform throughout an audit engagement?
A) understanding the entity and its environment
B) assessing the risk of material misstatement
C) considering client continuance
D) inquiring as to the design of controls
D) inquiring as to the design of controls
If budgetary reporting system provides adequate reports, but reports are not analyzed and acted upon
A) control is implemented, and is operating effectively
B) control is implemented, but is not operating effectively
C) control has not been implemented, and is not operating effectively
D) control has not been implemented, but is operating effectively
B) control is implemented, but is not operating effectively
Which is the most complete and accurate list of walkthrough procedures usually performed at an issuers integrated audit
A) inquiry, observation, analytical procedures, and testing
B) inquiry, sampling, analytical procedures, and testing of controls
C) inquiry, observation, inspection of relevant documentation, and Re performance of controls
D) inquiry, inspection of relevant documentation, sampling, and Re performance of controls
C) inquiry, observation, inspection of relevant documentation, and Re performance of controls
In obtaining an understanding of an entity’s system of internal control, an auditor is required to obtain knowledge on
Operating effectiveness of controls - YES OR NO
Design of controls - YES OR NO
NO and YES
Auditor is required to obtain knowledge on the design of controls, and whether they have been implemented. Not on the Operating effectiveness of controls
Which factors is MOST LIKELY to affect the extent of the documentation of the auditors understanding of a clients system of internal controls
A) industry and business and regulatory environments in which the client operates
B) degree to which information technology is used in the accounting function
C) relationship between management, board of directors and external stakeholders
D) degree to which auditor intends to use internal audit personnel to perform substantive tests
B) degree to which information technology is used in the accounting function
What are examples of inherent limitation of internal controls? 3 examples
Collusion, human error and management override
Which factors would MOST LIKELY be considered an inherent limitation to an entity’s internal control
A) complexity of the information processing system
B) human judgement in decision making process
C) ineffectiveness of the BOD
D) lack of management incentives to improve the control environment
B) human judgement in decision making process
Which represents an inherent limitation of controls
A) bank recs are not performed on a timely basis
B) CEO can request a check with no purchase order
C) customer credit checks are not implemented
D) shipping documents are not matched to sales invoices
B) CEO can request a check with no purchase order - EXAMPLE OF MANAGEMENT OVERRIDE
Auditor is concerned about a policy of management override.. Which example would best assess the validity of that concern?
A) matching purchase order to accounts payable
B) verifying whether approved spending limits are exceeded
C) tracing sales orders to revenue account
D) reviewing minutes of board
B) verifying whether approved spending limits are exceeded
Which factors is most relevant when an auditor considers the clients organizational structure in the context of control risk
A) management attitude toward information processing and accounting departments
B) organization recruiting and hiring practices
C) physical proximity of accounting function to upper management
D) suitability of client’s lines of reporting
D) suitability of client’s lines of reporting
Senior auditor conducted a dual purpose test on clients invoice for:
-invoice was approved
-ascertain the amount and other terms of the invoice
This is an example of:
A) substantive procedures and analytical procedures
B) substantive analytical procedures and test of controls
C) test of controls and tests of details
D) test of details and substantive procedures
C) test of controls and tests of details
Providing more supervision during an audit of a nonissuer in response to assessed risks of material misstatement at FS level is
A) substantive response
B) further audit procedures
C) test of controls
D) overall response
D) overall response
OR AN INCREASED NEED FOR PROFESSIONAL SKEPTICISM
OR ASSIGN MORE EXPERIENCED STAFF WITH SPECIALIZED SKILLS
In an environment that is highly automated, an auditor determines that it is not possible to reduce detection risk solely by substantive tests of transactions. Under these circumstances, auditor most likely would
A) perform test of controls to support lower level of assessed control risk
B) increase sample size to reduce sampling risk and detection risk
C) adjust the materiality level and consider the effect on inherent risk
D) apply analytical procedures and consider the effect on control risk
A) perform test of controls to support lower level of assessed control risk
Which statement about performing tests of controls to support a lower level of control risk is NOT TRUE?
A) observation by the auditor provides more assurance than inquiry alone
B) inquiry alone generally will support a conclusion for a lower assessed level of control risk
C) prior audits may be considered by the auditor in assessing control risk in the current audit
D) audit of financial statement is a cumulative process
B) inquiry alone generally will support a conclusion for a lower assessed level of control risk
Which documentation is NOT Required for an audit in accordance with GAAS?
A) written audit plan setting forth the procedures to accomplish objectives
B) indication that the accounting records agree/reconcile with FS
C) client engagement letter that summarizes the timing and details of the auditors fieldwork
D) basis for auditors decision not to perform test of controls concurrently with obtaining understanding of the system of internal control
D) basis for auditors decision not to perform test of controls concurrently with obtaining understanding of the system of internal control
Auditors risk assessment is based on assumption that controls are operating effectively. Which was NOT a step in making this assessment
A) evaluate the effectiveness of the controls with tests of controls
B) obtain an understanding of entity’s accounting system and control environment
C) perform test of details of transactions to detect material misstatements in FS
D) consider whether control activities can have pervasive effect on FS assertions
C) perform test of details of transactions to detect material misstatements in FS
Auditor generally tests the segregation of duties related to inventory by
A) personal inquiry and observation
B) test counts and cutoff procedures
C) analytical procedures and invoice recomputation
D) document inspection and reconciliation
A) personal inquiry and observation
In assessing control risk, auditor will select from variety of techniques, including
A) confirmation
B) verification
C) reperformance
D) analytical procedures
C) reperformance
In planning an audit, auditors knowledge about the design of relevant controls should be used to
A) identify types of potential misstatements that could occur
B) assess operational efficiency of internal control
C) determine whether controls have been circumenvented by collusion
D) document the assessed level of inherent risk
A) identify types of potential misstatements that could occur
Types of evidence would an auditor most likely examine to determine whether controls are operating as designed
A) confirmations of receivables verifying account balances
B) letters of representations corroborating inventory pricing
C) attorney responses to auditor inquiries
D) client records documenting the use of EDP programs
D) client records documenting the use of EDP programs
Client maintains large data center where access is limited to authorized employees. How may an auditor best determine effectiveness of control activity?
A) inspect policy manual
B) ask CTO about known problems
C) observe whether data center is monitored
D) obtain a list of current data center employees
C) observe whether data center is monitored
Which activities by small business clients best demonstrates management integrity in the absence of written code of conduct
A) emphasizing ethical behavior through oral communication and management example
B) develop/maintain formal description of accounting procedures
C) document internal control procedures using flowcharts
D) report to the BOD about operations and finances
A) emphasizing ethical behavior through oral communication and management example
Auditor is considering relying on effectiveness of controls that were last tested during the prior year audit. Each would likely prevent the auditor from relying on prior year’s assessment of the operating effectiveness of controls except:
A) changes that cause data to be accumulated differently
B) changes made to accounting system programs
C) changes made to clients controls environment
D) changes made to the system that enable the creation of new reports
D) changes made to the system that enable the creation of new reports
Auditor uses knowledge provided by understanding of internal control and the assessed risk of material misstatement primarily to determine nature, timing, and extent of
A) attribute test
B) compliance test
C) test of controls
D) substantive test
D) substantive test
Which would an auditor MOST Likely perform PRIOR to balance sheet date
A) review subsequent events
B) perform search for unrecorded
C) send inquiry letter to legal
D) review detail and test travel and entertainment
D) review detail and test travel and entertainment
Which of auditing procedures would assist an auditor to identify related party transactions?
A) inspect correspondence with lawyers for evidence of unreported contingent liabilities
B) vouching accounting records for recurring transactions recorded just after balance sheet date
C) reviewing confirmations of loans receivable and payable for indications of guarantees
D) performing analytical procedures for indications of possible financial difficulties
C) reviewing confirmations of loans receivable and payable for indications of guarantees
Which audit procedures would an auditor most likely perform concerning litigation, claims, and assessments
A) request client’s lawyer to evaluate whether clients pending litigation claims and assessment indicate going concern
B) examine legal documents in clients lawyers possession concerning litigation, claims and assessments to which the lawyer has devoted substantial attention
C) discuss the management the controls Adopted for evaluating and accounting for litigation claims and assessments
D) confirm directly with clients lawyer that all litigation claim and assessments have been recorded or disclosed in FS
C) discuss the management the controls Adopted for evaluating and accounting for litigation claims and assessments
Auditor concludes that there is substantial doubt about an entity’s ability to continue as going concern for a period of time and mgmt plans do not alleviate the doubt. If they disclose its financial difficulties, what is included in the auditors report?
“Reasonable period of time, not to exceed one year” YES or NO
“Going concern” YES or NO
NO and YES
Auditor will include this in a separate section of the auditors report with “Substantial doubt about entits ability to continue as Going Concern” to include “substantial doubt” and “going concern”. Time period is not mentioned
What is the auditors primary purpose in performing a retrospective review of managements significant accounting estimates reflected in prior year FS?
A) reevaluate professional judgements made by auditor
B) indicate whether bias by management existed
C) indicate whether significant deficiency existed
D) indicate whether adjustment should have been recorded
B) indicate whether bias by management existed
RETROSPECTIVE - Helps to determine management judgements, auditor to identify risk of material misstatement
Evaluating the reasonableness of an accounting estimate, an auditor would LEAST LIKELY to use:
A) review subsequent events or transactions occurring prior to audit completion
B) develop independent expectation of estimate
C) review and test the process used to develop the estimate
D) review the minutes of board of directors and shareholder meetings
D) review the minutes of board of directors and shareholder meetings
In evaluating reasonableness of an accounting estimate, an auditor most likely would concentrated on methods and significant assumptions that are
A) consistent with prior periods
B) similar to industry guidelines
C) objective and not susceptible to bias
D) deviations from historical patterns
D) deviations from historical patterns
Auditor of nonissuer is required to give special consideration to related party transactions b/c
A) usually represent significant source of revenue and expense for two related entities
B) could cause FS to fail to achieve fair presentation
C) not usually conducted in normal course of business
D) generally required to be accounted for on a basis different from basis that would be appropriate if entities were not related
B) could cause FS to fail to achieve fair presentation
Which of the following most likely would indicate the existence of related parties?
A) entering into multiple market value transactions
B) high turnover of senior management and members of BOD
C) failure to correct internal control weakness on timely basis
D) selling real estate at price significantly different from appraised value
D) selling real estate at price significantly different from appraised value
During an audit, if the terms of a related party transaction are found to be materially inconsistent with explanations provided by management
A) communicate to those charged with governance that the auditor will be unable to express an opinion on FS
B) include an emphasis of matter paragraph in auditors report describing inconsistent explanations
C) include other matter paragraph describing inconsistent explanations
D) consider the reliability of managements explanation and representation on other significant matters
D) consider the reliability of managements explanation and representation on other significant matters
Which procedure would MOST LIKELY assist auditor to identify litigation, claims and assessments?
A) inspect checks included with clients cut off statement
B) obtain letter of representation from underwriter of securities
C) apply ratio analysis on CY- liability accounts
D) read the file of correspondence from taxing authorities
D) read the file of correspondence from taxing authorities
Which procedures would an auditor MOST LIKELY perform regarding litigation?
A) confirm directly with the clerk of the court that the clients litigation is properly disclosed
B) discuss with management its policies and procedures for identifying and evaluating litigation
C) inspect legal documents in clients lawyers possession regarding pending litigation
D) confirm details of pending litigation with clients adversaries legal reps
B) discuss with management its policies and procedures for identifying and evaluating litigation
Auditor should request an audit client send a letter of inquiry to attorneys who have been consulted concerning litigation, claim or assessments. Reason why
A) opinion of specialist as to whether loss contingencies are possible, probable or remote
B) description of litigation, claims and assessment that have reasonable possibility of unfavorable outcomes
C) objective appraisal of management control adopted for identifying and evaluating legal matters
D) corroboration of the information furnished by management concerning litigation claims and assessments
D) corroboration of the information furnished by management concerning litigation claims and assessments
Which factors would cause CPA to decline to accept a new audit engagement?
A) CPA does not understand entity operations and industry
B) management acknowledges that the entity has had recurring operating losses
C) CPA is unable to review the predecessor auditors working papers
D) management is unable to permit inquiry of legal counsel
D) management is unable to permit inquiry of legal counsel
Auditor requests that the client management prepare a letter of inquiry to the clients outside legal counsel. Auditor send the letter of inquiry to attorney. B/c of inherent uncertainties regarding several lawsuits, the attorney is unable to form meaningful conclusions. What is the best course of action?
A) continue the audit but issue modified opinion on the scope limitation
B) withdraw from audit engagement
C) determine if FS disclosure is adequate and issue unmodified opinion
D) follow up with client attorney after audit date and issue disclaimer of opinion
C) determine if FS disclosure is adequate and issue unmodified opinion
While planning an audit, auditor established materiality at $40k. Auditor received an attorney’s letter indicating that it was probable that each of three lawsuits would be settled for $30k. Which action should be taken next?
A) add a separate paragraph to audit report disclosing contingencies and amounts
B) ask the client to disclose contingencies in notes to FS
C) ask client to record liability for the 3 contingencies
D) add a paragraph to auditors opinion disclosing scope limitation
C) ask client to record liability for the 3 contingencies
Which conditions most likely suggest that an auditor may have substantial doubt about an entity’s ability to continue as going concern?
A) cash flow from operations are negative
B) assets are pledged for loan collateral
C) significant related party transactions exist
D) implementation of updated manufacturing equipment is delayed
A) cash flow from operations are negative
CPA firm is completing the fieldwork for an audit and concludes that there have been several changes in Swenson during the year under audit. Which would indicate there could be substantial doubt about the clients ability to continue as going concern?
A) cash infusion by venture capital firm
B) recurring working capital shortage
C) lack of significant contracts with new customers
D) term debt refinanced with a new bank
B) recurring working capital shortage
Which conditions/events most likely would cause an auditor to have substantial doubt about an entity’s ability to continue as going concern?
A) significant related party transactions are pervasive
B) usual trade credit from suppliers is denied
C) arrearages in preferred stock dividends are paid
D) restrictions on disposal of principal assets are present
B) usual trade credit from suppliers is denied
Which circumstance would an auditor issue an unmodified opinion and have option of including emphasis of matter paragraph related to substantial doubt on continuing as a going concern?
A) going concern basis is appropriate, substantial doubt to continue REMAINS, and related disclosure is adequate
B) going concern basis is appropriate, substantial doubt to continue ALLEVIATED, and related disclosure is adequate
C) going concern basis is appropriate, substantial doubt to continue ALLEVIATED, but related disclosure are inadequate
D) going concern basis is appropriate, substantial doubt to continue REMAINS, but related disclosure are inadequate
B) going concern basis is appropriate, substantial doubt to continue ALLEVIATED, and related disclosure is adequate
Which of the situations would an auditor ordinarily choose between expressing a qualified opinion or adverse?
A) auditor did not observe entity physical inventory and is unable to become satisfied about its balance by other auditing procedures
B) conditions that cause auditor to have substantial doubt about entity’s ability to continue as going concern are inadequately disclosed
C) there was a change in accounting principles that has a material effect on comparability on the entity’s financial statement
D) auditor is unable to apply necessary procedures concerning an investors share of invested earnings recognized on equity method
B) conditions that cause auditor to have substantial doubt about entity’s ability to continue as going concern are inadequately disclosed
THIS IS A DEPARTURE FROM GAAP
In order to obtain a reasonable basis for an audit opinion regarding the fairness of the clients FS, the auditor should usually obtain and rely on evidence that is
A) cost appropriate
B) conclusive
C) assured beyond reasonable doubt
D) persuasive
D) persuasive
PERSUASIVE IS SUBJECTIVE AND IS UNIQUE TO EACH AUDIT
Which of the following factors would MOST LIKELY influence an auditors consideration of the reliability of data when performing analytical procedures
A) whether the data were developed in a computerized or manual accounting system
B) whether the data were prepared on cash basis or in conformity with GAAP
C) whether the data were developed under a system with adequate controls
D) whether the data were processed in an online system or a batch entry
C) whether the data were developed under a system with adequate controls
Which would NOT represent audit evidence obtained through the auditors direct personal knowledge?
A) sample of investment transactions is examined by the auditor to determine if transactions were recorded in proper accounts
B) auditor recomputes a sample of vendor invoices
C) accounts payable confirmations are sent out and returned to the auditor
D) auditor observes a year end inventory count by client
C) accounts payable confirmations are sent out and returned to the auditor
Auditor is in process of gathering evidence during current audit. Which would not be considered corroborating evidence?
A) confirmations
B) inquiries
C) sales invoice
D) board minutes
C) sales invoice
Which statement is generally correct about reliability of audit evidence?
A) more effective the internal structure, the more assurance it provides about the reliability of the accounting data and FS
B) reliability of audit evidence refers to the amount of corroborative evidence obtained
C) information obtained directly from independent outside sources is more persuasive than the auditors direct personal knowledge obtained through observation and inspection
D)reliability of audit evidence refers to audit evidence obtained from outside the entity
A) more effective the internal structure, the more assurance it provides about the reliability of the accounting data and FS
The reliability of evidence gathered by an auditor of a nonissuer is most influenced by
A) auditors assessment of the risk of misstatement
B) quantity of evidence obtained through the auditors procedures
C) the relevance of evidence obtained through the auditors procedures
D) the source and nature of evidence and circumstance under which it is obtained
D) the source and nature of evidence and circumstance under which it is obtained
PCAOB standards state the relevance of audit evidence depends on all but which:
A) audit procedure is designed to test an assertion
B) audit procedure is designed to test for an understatement or overstatement
C) auditors risk assessment
D) timing of audit procedure
C) auditors risk assessment
Which of following concerning audit evidence is correct?
A) audit evidence should be either reliable or relevant, but not need both
B) measure of sufficiency of audit evidence lies in auditors judgement
C) difficulty and expense of obtaining audit evidence concerning an account is always valid to omit test
D) clients accounting data can be sufficient audit evidence to support FS
B) measure of sufficiency of audit evidence lies in auditors judgement
Regarding nonissuer compliance with laws and regulations, an auditor performing an audit of the entity’s FS is responsible for
A) obtaining a general understanding of legal and regulatory framework applicable to entity and how the entity is complying with that framework
B) preventing noncompliance with existing applicable laws and regulations that determine reported amounts and disclosures in FS
C) determine whether an act performed by the entity being audited constitutes noncompliance with existing laws and regs
D) ensuring that the entity’s operations are conducted in accordance with provisions of laws and regulations relevant to the entity FS
A) obtaining a general understanding of legal and regulatory framework applicable to entity and how the entity is complying with that framework
Which information would come to an auditors attention that would raise a question about the occurrence of noncompliance with laws and regs?
A) exchange of property for similar property in nonmonetary transaction
B) discovery of unexplained payments made to government employees
C) presence of several difficult to audit transactions affecting expenses
D) failure to develop adequate procedures that detect unauthorized purchases
B) discovery of unexplained payments made to government employees
Auditors will identify predictable relationships when using analytical procedures. Relationships involving transactions from which account would yield the highest level of evidence
A) accounts receivable
B) interest expense
C) accounts payable
D) travel and entertainment expense
B) interest expense
In determining whether transactions were recorded, the direction of the audit should be from
A) general ledger
B) adjusted trial balance
C) original source documents
D) general journal entries
C) original source documents
If an auditor examines purchase orders obtained from the issuer to verify proper authorization of transactions, then the auditor is conducting
A) reperformance
B) confirmation
C) observations
D) inspection
D) inspection
In an audit defined benefit plan, which would most effectively test that benefit payments to plan participants are paid in accordance with plan documents?
A) recalculate benefits for selected participants based on plan provisions to support recorded benefits paid out
B) inquire of plan administrator about internal control procedures in place
C) send confirmations to participants to ascertain that the amount paid is the same as recorded in GL
D) testing accuracy and completeness of benefit payments made to participants, then comparing payments to GL
A) recalculate benefits for selected participants based on plan provisions to support recorded benefits paid out
As part of current audit, auditor initially determines that the Treasury Stock account had minimal activity during the year. In designing audit procedures for cleint’s Treasury Stock account
A) risk assessment procedures
B) substantive analytical procedures
C) test of details
D) other audit procedures
C) test of details
Audits of FS made in accordance with GAAS, use of analytical procedures required to some extent
SUBSTANTIVE TEST - Yes or No
IN FINAL REVIEW STATE - Yes or NO
NO and YES
Which is true about using analytical procedures as substantive test?
A) analytical procedures are required to be used as substantive test
B) analytical procedures are only required to be used a substantive test for material account balances
C) analytical procedures are not required to be used as substantive test and more likely to be used on accounts that are predicable
D0 analytical procedures are not required test and are more likely to be used when trans action are subject the management discretion
C) analytical procedures are not required to be used as substantive test and more likely to be used on accounts that are predicable
Auditor would NOT be required to use analytical procedures for which of the following purposes?
A) performing final review of overall reasonableness of account balances
B) gaining an understanding of client and their environment
C) obtaining corroborating evidence when evidence gathered by auditor is circumstantial
D) applying risk measurement procedures to alert auditor to problem areas requiring more attention
C) obtaining corroborating evidence when evidence gathered by auditor is circumstantial
In the audit of financial statements, an auditor applied analytical procedures as substantive test, but did not detect a material misstatement in an account balance. Which is most likely the reason the auditor failed to detect the misstatement
A) auditor did not document additional auditing procedures performed in response to significant unexpected differences arising from analytical procedures
B) misstatement was obscured by offsetting factors resulting from diversified nature of entity’s operations
C) expectations used by auditor were very precise and so led to a wide range of expected differences from expectations
D) auditor developed expectations at detailed line of business level rather than at broad company wide level
B) misstatement was obscured by offsetting factors resulting from diversified nature of entity’s operations
Auditor compares annual revenue and expense with similar amounts from prior year and investigates all changes exceeding 10%. This can MOST LIKELY indicate that
A) 4th QTR payroll taxes were properly accrued and recorded, but were not paid until early in subsequent year
B) unrealized gains from increases in value of AFS-debt securities were recoded in income account for trading securities
C) annual provision for credit loss expense was inadequate because of worsening economic conditions
D) notice of an increase in property tax rates were received by management, but not recorded until early subsequent year
B) unrealized gains from increases in value of AFS-debt securities were recoded in income account for trading securities
Auditor is planning to use substantive analytical procedures in current audit. Which is NOT a primary factor that affects the efficiency and effectiveness of these procedures in detecting possible misstatements by the client
A) data used to develop an expectation is available and reliable
B) there is clear understanding of relationship among data
C) more precise expectation developed will result in greater effectiveness for identifying misstatements
D) analytical procedures should be applied to assertions that potential misstatements which are apparent from detailed evidence
D) analytical procedures should be applied to assertions that potential misstatements which are apparent from detailed evidence
Analytical procedures used in overall review state of an audit generally include
A) gathering evidence concerning account balances that have not changed from prior year
B) retesting control activities that appeared to be ineffective during assessment of control risk
C) considering unusual or unexpected account balances that were not previously identified
D) performing tests of transactions to corroborate management FS assertions
C) considering unusual or unexpected account balances that were not previously identified
If objective of test of details is to detect overstatement of sales, auditor should trace transactions from
A) cash receipts journal to sales journal;
B) sales journal to cash receipts journal
C) source documents to accounting records
D) accounting records to source documents
D) accounting records to source documents
Which of these statement regarding directional testing is correct?
A) testing existence assertion, auditor will select sample of items and trace from corresponding source to corresponding accounting records
B) testing completeness assertion, auditor will select sample of items from accounting records, and vouch to corresponding source documentation
C) to ensure an expense was not understated, auditor may want to test the existence assertion
D) to ensure an asset was not overstated, auditor may want to vouch a source documentation
D) to ensure an asset was not overstated, auditor may want to vouch a source documentation
While performing tests of details on clients investment transactions, the auditor starts with source documents and then traces to clients journal entries. What kind of directional testing is this?
A) completeness
B) cutoff
C) valuation
D) existence
A) completeness
START FROM SOURCE TO CLIENTS REPORTS (JE) - COMPLETENESS
START FROM CLIENTS REPORTS (JE) TO SOURCE DOCS - EXISTENCE
Which FS assertion is violated when an expense occurring in one year is NOT recoded until following year?
A) accuracy
B) classification
C) completeness
D) occurrence
C) completeness
Which disclaimers of liability included within a response to an auditors confirmation request would allow the auditor to rely on confirmation as appropriate audit evidence for an audit of nonissuer?
A) information is obtained from electric data sources, which might not contain certain information in respondents possession
B) information in confirmation may not be relied upon by recipient
C) information is not guaranteed to be accurate or current and could be a matter of opinion
D) information is furnished as a matter of courtesy without a duty to do so and without responsibility, liability or warranty, espressos or implied
D) information is furnished as a matter of courtesy without a duty to do so and without responsibility, liability or warranty, espressos or implied
Confirmation of accounts receivable that have been categorized initially by an auditor as “exceptions” most likely could be due to
A) customers who have credit or zero balances with the client
B) responses that were axed rather than mailed to the auditor
C) accounts receivable that have been classified as uncollectible
D) payments mailed to the client that have not been recorded
D) payments mailed to the client that have not been recorded
PCAOB has established risk assessment standards for issuer audit. Which is NOT a financial statement assertion as recognized by PCAOB standards
A) occurrence
B) disclosure
C) cutoff
D) presentation
C) cutoff
Auditor wants to determine accuracy of a given account balance on clients FS. To test valuation, allocation, and accuracy assertion, auditor may perform all of the following EXCEPT
A) perform a recalculation of estimates made by the client pertaining to account balance
B) footing and cross footing account balance to supporting schedules
C) vouching a sample of transactions impacting the GL to the supporting documentation
D) reconciling the supporting schedules to the account items reported in GL
C) vouching a sample of transactions impacting the GL to the supporting documentation
DIRECTIONAL AUDIT PROCEDURES
If an auditor performs an inspection of documentation supporting a clients account balances, they would be testing any of the following FS assertions, with exception of
A) rights and obligations
B) completeness
C) valuation, allocation and accuracy
D) understandability of presentation and classification
B) completeness
Which procedures would an auditor most likely perform to test controls relating to managements assertions about the completeness of cash receipts for cash sales at retail outlet
A) observe consistency of employees use of cash registers and tapes
B) inquire about employees access to recorded but undeposited cash
C) trace deposits in cash receipts journal to cash balance in GL
D) compare cash balance in GL with bank confirmation request
A) observe consistency of employees use of cash registers and tapes
In statistical sampling methods used in substantive testing, an auditor most likely would stratify a population into meaningful groups if
A) probability proportional to size sampling is used
B) population has highly variable recorded amounts
C) the auditors estimated tolerable misstatement is extremely small
D) standard deviation of recorded amounts is relatively small
B) population has highly variable recorded amounts
In probability proportional to size sample with sampling interval of 10,000, an auditor discovered that a selected account receivable with recorded amount of 5,000 had an audited amount of 4,000. If this were the only misstatement, the projected misstatement would be
A) 1,000
B) 2,000
C) 5,000
D) 10,000
B) 2,000
Sample error calculation = recorded amount - audited amount (1,000 = 5,000 - 4,000)
Tainting factor = sample error divided by recorded amount (20% = 1,000 / 5,000)
Projected misstatement = tainting factor * sampling interval (2,000 = 20% * 10,000)’
In addition to evaluating a frequency of deviations in tests of controls, an auditor should also consider certain qualitative aspects of the deviations. The auditor most likely would give broader consideration to the implications of a deviation if it was
A) only deviation discovered in the sample
B) identical to a deviation discovered during the prior years audit
C) caused by an employee misunderstanding of instructions
D) initially concealed by forged document
D) initially concealed by forged document
Auditor finds a misstatement of $300 in selected sample that include 20% of the recorded amount of inventory. What is the projected estimate of misstatement?
A) 360
B) 540
C) 1,500
D) 1,800
C) 1,500
Projected estimate of misstatement = misstatement / % of recorded balance ( 300 / 20% = 1,500)
Use of ratio estimation sampling as compared to other sampling techniques is most effective when
A) calculated audit amounts are approximately proportional to clients book amounts
B) relatively small number of differences exist in population
C) estimating population whose records consist of quantities, but not book values
D) large overstatement differences and large understatement differences exist in population
A) calculated audit amounts are approximately proportional to clients book amounts
Definition of stratification
Grouping of transactions sharing some characteristic. Goal is to ensure selection of items for which potential misstatement may individually equal or exceed tolerable misstatement. Stratifying a sample will help unusually large transactions to be selected
Relationship between tolerable misstatement, assessed level of control risk, and the sample size amount
Sample size has an DIRECT / INVERSE RELATIONSHIP with tolerable misstatement and control risk level
Sample size has an DIRECT / INVERSE RELATIONSHIP with tolerable misstatement and control risk level
Sample size - DIRECT RELATIONSHIP with expected misstatement, standard deviation and assessed risk
Sample size - INVERSE RELATIONSHIP with tolerable misstatement and acceptable level of risk
In test of purchase orders, auditor selected a random sample of 60 items out of a population of 1,200 purchase orders. Auditor discovered 4,000 in overstatement in the sample. Company’s materiality is 65,000. Tolerable misstatement for purchases is 50,000. What should the auditor do?
A) pass on exceptions
B) propose an adjustment to purchases
C) consider expanding size of sample
D) project the detected error to entire population
D) project the detected error to entire population
Auditor randomly samples 50 out of 1000 items and discovers an overstatement of 3,000. What is the projected misstatement for entire population?
A) 150,000
B) 120,000
C) 60,000
D) 48,000
Sample size / # of items = % of population {50 / 1,000} = .05%
Projected misstatement = overstatement / percentage of population tested {3,000 / .05} = 60,000
Which statement is correct concerning probability proportional to size (PPS sampling) also known as dollar until sampling
A) sampling distribution should approximate the normal distribution
B) overstated units have lower probability of sample selection than units that are understated
C) auditor controls the risk of incorrect acceptance by specifying the risk level of sampling plan
D) sampling internal is calculated by deciding number of physical units in population by sample size
C) auditor controls the risk of incorrect acceptance by specifying the risk level of sampling plan
Which is primary objective of probability proportional to sample size
A) identify overstatement errors
B) increase proportion of small values in sample
C) identify items where controls were not properly applied
D) identify zero and negative balances
A) identify overstatement errors
If an auditor wants to run a simple linear regression analysis to determine if utility expenses correspond with daily temperatures, which technique will aid in presenting and reviewing this analytic?
A) pie chart
B) bar chart
C) scatter plot
D) line chart
C) scatter plot
GRAPHICALLY SHOW RELATIONSHIP AMONG VARIABLES, ALLOW FOR REGRESSION LINES
Pie charts demonstrate
Proportional information
Bar charts demonstrate
Comparative information
Line charts demonstrate
Trend information
Audit data analytics provide many benefits during the course of an audit. Which is NOT a benefit of applying audit data analytics
A) enhanced fraud protection
B) simplifying creation and documentation of workpapers
C) expanded Audit coverage through testing of full populations
D) insights gains from evaluating metadata and relationships among internal and external data
B) simplifying creation and documentation of workpapers
Auditor wants to evaluate year end allowance for credit losses. Auditor obtains a listing of all customers with open balances as of the end of the fiscal period. Frank decides to age the data to evaluate the reasonableness of the allowance for credit loss balance. What type of data analytic is Frank executing?
A) descriptive analytic
B) diagnostic analytic
C) predictive analytic
D) prescriptive analytic
A) descriptive analytic
Diagnostic - explain why something happened
Predictive - provide expected or predicted outcomes based on historical data (estimate)
Prescriptive - prescribe or recommend actions to be taken
Which is NOT a reason an auditor may apply audit data analytics (ADA) when concluding an audit?
A) auditor will have deeper knowledge of the entity being audited and may reperform tests done in risk assessment process
B) gain comfort that no material misstatement went unidentified during the audit
C) to update existing analytics with numbers that were revised during the audit
D) verify the assertions of accuracy and occurrence for all material transactions
D) verify the assertions of accuracy and occurrence for all material transactions
Which term describes the unique attribute that identifies a specific record in a table - database?
A) foreign key
B) primary key
C) secondary key
D) schema
B) primary key
Which term describes a column (column group) found in relational database table that links data between two tables?
A) foreign key
B) primary key
C) secondary key
D) schema
A) foreign key
Also RAW DATA TRANSFORMATION
Which term describes a Non-identifying column (column set) used to find a row in a table?
A) foreign key
B) primary key
C) secondary key
D) schema
C) secondary key
Which term describes the organization of data that represents the construction of the database management system (DBMS)?
A) foreign key
B) primary key
C) secondary key
D) schema
D) schema
What’s the best way to evaluate the reliability of data obtained for payroll function that is outsourced through Pay Services?
A) perform validation of sourced data through review of batch totals
B) confirmations
C) perform summary statistics on data and review outcomes
D) request SOC 1 report for Pay Services
D) request SOC 1 report for Pay Services
Which error would most likely be detected by analyzing financial totals?
A) transposition error on employees paycheck
B) missing digit in invoice number in batch of daily sales
C) purchase order mistakenly entered into two different batches
D) malfeasance resulting from clerk pocketing a customers payment
A) transposition error on employees paycheck
Which is the best form of backup to run an analytic on fixed assets?
A) data obtained through verbal interviews
B) spreadsheet obtained through query of fixed assets database
C) digital copies of invoices for all major fixed asset purchases during the year
D) spreadsheet provided by fixed assets manager detailing all changes to fixed assets accounts during the year
B) spreadsheet obtained through query of fixed assets database
Which is accurate as it pertains to visualizations to present audit data analytics?
A) visualizations should be used sparingly b/c they do not provide audit evidence
B) type of visualization utilized will not change how results are interpreted
C) when utilizing a graph, scaling is an appropriate consideration to avoid misinterpretation of differences
D) visualization are utilized for communicating findings and are not part of the analysis
C) when utilizing a graph, scaling is an appropriate consideration to avoid misinterpretation of differences
