AICPA Blueprint #3 Flashcards
In a test of purchase orders, the auditor selected a random sample of 60 items out of a population of 1,200 purchase orders. The auditor discovered $4,000 in overstatements in the sample. The company’s materiality threshold is $65,000. The tolerable misstatement for purchases is $50,000. Which option best describes what the auditor should do next?
A
Pass on the exceptions.
B
Propose an adjustment to purchases.
C
Consider expanding the size of the sample.
D
Project the detected error to the entire population.
The correct answer is (D).
After identification of misstatements in the sample, the next step is to project the detected error to the entire population. The 60 samples in a test of purchase orders for 1,200 samples resulted in an overstatement of $4,000. In this case, the calculations would be as follows: Expected misstatements in the population:
(Misstatements in the population x Total number of items in the population) / Sample size. = ($4,000 x 1,200) / 60 = $80,000.
(A) is incorrect because the auditor should not pass on the exceptions in the misstatements. These misstatements are relevant and could be material.
(B) is incorrect because the auditor may eventually propose an adjustment to management. However, this is not the next step in the process.
(C) is incorrect because the auditor considers expanding the sample size based on factors other than the actual misstatement in the sample. At this point, the misstatement has been discovered, and the best course of action is to project the detected error to the entire population, not just a larger sample size.
The audit working paper that reflects the major components of an amount reported in the financial statements is the
A
Inter-bank transfer schedule
B
Carry forward schedule
C
Supporting schedule
D
Lead schedule
Work papers for each asset, liability, and equity account begin with a lead schedule summarizing the account’s balance per the general ledger, and then showing adjusting and reclassification entries, and the final balance per audit. The lead schedule also includes the auditor’s conclusion about whether the account is stated fairly.
An auditor discovered that a client’s accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that
A
Obsolete inventory has not yet been reduced to fair market value.
B
There was an improper cutoff of sales at the end of the year.
C
An unusually large receivable was written off near the end of the year.
D
The aging of accounts receivable was improperly performed in both years.
Accounts Receivable Turnover = Net Credit Sales / Average Net Accounts Receivable.
Accounts Receivable Turnover would be lower than prior year, if both net credit sales and average net receivables are overstated by the same amount. Then the turnover would be lower than expected when compared to the prior year. (Ratio Greater than 1 would always decrease if the numerator and denominator are both increased by the same amount).
So, if the client did not properly cutoff sales at the end of the year and included next year sales in the current year as well then Accounts Receivable as well as Sales would be overstated resulting in a decrease in Accounts Receivable Turnover.
Answers A. and D. would not affect A/R turnover. Accounts Receivable Turnover would increase if a large receivable were written off near the end of the year.
“There are no violations or possible violations of laws or regulations whose effects should be considered for disclosure in the financial statements or as a basis for recording a loss contingency.” The foregoing passage most likely is from a (an)
A
Client engagement letter
B
Report on compliance with laws and regulations
C
Representation letter
D
Attestation report on an entity’s internal control
The representation letter should address that there are no violations or possible violations of laws or regulations whose effects should be considered for disclosure in the financial statements or as a basis for recording a loss contingency.
The use of the ratio estimation sampling technique is most effective when
A
The calculated audit amounts are approximately proportional to the client’s book amounts.
B
A relatively small number of differences exist in the population.
C
Estimating populations whose records consist of quantities, but not book values.
D
Large overstatement differences and large understatement differences exist in the population.
The use of the ratio estimation sampling technique is most effective when the calculated audit amounts are approximately proportional to the client’s book amounts. The auditor uses sample results to estimate the ratio of audited value to book value, which is then applied to the population to estimate the actual value. Ratio estimation should be used when each population item has a book value, an audited value may be ascertained for each sample item, and differences occur frequently. Large overstatement or understatement differences would reduce the effectiveness of this technique.
Which of the following circumstances does not describe when a change in accounting principle is a change from one generally accepted accounting principle to another generally accepted accounting principle?
A
There are two or more generally accepted accounting principles that apply.
B
The accounting principle formerly used is no longer generally accepted.
C
There is a change in accounting estimate.
D
There is a change in the method of applying an accounting principle.
A change in accounting estimate is not a change in accounting principle. Editor Note: However, the auditor should evaluate and report on a change in accounting estimate effected by a change in accounting principle like other changes in accounting principle. (A change in accounting estimate effected by a change in accounting principle is a change in accounting estimate that is inseparable from the effect of a related change in accounting principle.) This guidance is the same for issuers (PCAOB audit standards) and nonissuers (GAAS).
