AUD - all subjects Deck 2

Question 1

When should an auditor refer to the work of a specialist?

Answer 1

The auditor may refer to an auditor’s external specialist only if the opinion is modified.
A modified opinion is a qualified opinion, adverse opinion, or a disclaimer of opinion. The reference is made because it is relevant to understanding the modification.

Question 2

What are the 5 sources of information used to develop analytical procedures?

Answer 2

1) Financial info from comparable prior periods (ex. trend of sales)
2) Anticipated results (ex. budgeted results)
3) Relationships among elements of
financial info (ex. Relationships of sales and A/R)
4) Comparable info from client’s industry (Industry inventory turnover)
5) Relationships between financial and relevant nonfinancial info (Labor costs and hours worked)

Question 3

In order to determine whether a company’s internal control operates effectively to minimize errors of failure to post invoices to the customers’ accounts ledger, the auditor should select a sample of transactions from the population represented by the

Answer 3

Sales invoice file.
The auditor should trace sales according to the sales invoices to the accounts receivable subsidiary ledger. Sales invoices in the sales invoice file without corresponding entries in the subsidiary ledger represent transactions not posted.

Question 4

A control most likely would help ensure that all credit sales transactions of an entity are recorded?

Answer 4

The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.

Question 5

What population should an auditor test for failure to invoice a shipment?

Answer 5

Bill of Lading file.
The auditor should match bill of lading file copies relating to customer shipments to sales invoices (or possibly to the accounts receivable subsidiary ledger) to determine whether shipments were not billed.

Question 6

How does an auditor test for completeness of the revenue cycle?

Answer 6

The auditor checkso that an invoice is prepared for each shipping document.

Tests of completeness determine whether all assets, liabilities, and equity interests are recorded properly. They emphasize the events rather than the existence of the documents. When a shipping document does not have a matching invoice, the relevant revenue is not recorded. The invoice is used to prepare the necessary journal entries.

Question 7

What does the completeness assertion state?

Answer 7

That all transactions and accounts that should be presented are included (key words “prenumbered and accounted for”)

Question 8

Which department is responsible for approving vendor’s invoice for payment?

Answer 8

The A/P unit housed in the accounting department (Not the CFO)

Question 9

Who should sign checks for disbursement and cancel supporting documents (documentation typically includes a voucher, PO, receiving report and vendor invoice)?

Answer 9

The CFO

Question 10

What is the purpose behind canceling vouchers, and supporting documents upon payment?

Answer 10

It prevents payment of a duplicate voucher.

Question 11

Prior to beginning field work, if the auditor does not have possess expertise in the industry, what is required of the auditor?

Answer 11

The auditor performs risk assessment procedures (makes inquires of mgmt and other within entity, analytical procedures and observation and inspection)

Question 12

What is the role of the cash disbursement bookkeeper?

Answer 12

The cash disbursement bookkeeper has an asset custody function. She signs checks prepared by the A/P function after inspecting supporting docs; she then cancels those docs and mails out the checks.

Question 13

What are some examples of tests of controls?

Answer 13

Inspection, observation, risk assessment, inquiry, spot checks (transactions approvals), CAT (computer assisted techniques), reperformance

Question 14

What are some examples of substantive procedures?

Answer 14

Tests of details of transaction classes, account balances, and disclosures are substantive procedures.
Ex. Sharing account balances and transactions, testing transaction classes, making account records, examining account materials, inquiring about certain transactions.

Question 15

Why does the auditor use substantive analytical procedures in an audit?

Answer 15

Substantive procedures in auditing are processes or methods that auditors use in order to find or prevent miscalculations in financial records.
Substantive procedures often provide a record of some financial activity that alerts professionals that the activity is happening and documents it for further review.

Question 16

Why does the auditor use tests of controls in an audit?

Answer 16

Auditors use tests of controls to assess the effectiveness of an organization’s internal controls.
The aim of tests of control in auditing is to determine whether these internal controls are sufficient to detect or prevent risks of material misstatements.

Question 17

When is an auditor’s independence not impaired in a business relationship?

Answer 17

When the auditor’s role is advisory in the business relationship.

Question 18

Regarding purchasing a client’s stock, when is auditor independence impaired?

Answer 18

Independence is impaired if, during the period of the professional engagement, a covered member had or was committed to acquire any direct or material indirect financial interest in the client (even when auditor places it in a trust for his dependent minor).

Question 19

What is the relationship between detection risk and RMM?

Answer 19

For a given audit risk, the acceptable detection risk (the auditor’s risk) is inversely related to the assessed RMMs (the entity’s risks) at the assertion level. Detection risk is the risk that audit procedures will not detect a material misstatement.

Question 20

What is parrallel simulation in audit?

Answer 20

Parallel simulation is a test of the controls in a client’s application program. An auditor-developed program, not the client’s program, is used to process actual client data and compare the outputs and exceptions report with those of the client’s application program.

Question 21

What is a negative confirmation in audit?

Answer 21

A negative confirmation requests a response if the debtor disagrees with the stated account balance.

Question 22

What is a blank confirmation in audit?

Answer 22

Blank confirmation requests are used to reduce the risk that recipients will respond without verifying the information. They omit the amount or other information to be confirmed and ask the confirming parties to fill in the information.

Question 23

What is a positive confirmation in audit?

Answer 23

A positive confirmation request asks for a reply in all cases. It may ask the confirming parties to state whether they agree with the information given or to provide information.

Question 24

What are the two assertions that the confirmation of A/R provides evidence for are?

Answer 24

Rights and obligations, and existence.

Question 25

What is the MUS simplified sample size formula?

Answer 25

N = (BV x CF)/TM
Where:
N is sample size
BV is the recorded amount of the account
CF is the appropriate confidence factor
TM is the tolerable misstatement

Question 26

What is the auditor’s failure to recognize a misstatement or an amount or a deviation from a prescribed control called?

Answer 26

Nonsampling risk

Question 27

What is sampling risk?

Answer 27

Sampling risk is the risk that the auditor’s conclusion based on a sample may differ from the conclusion when the same procedure is applied to the entire population.

Question 28

What are the factors necessary to determine sample size in an attribute sampling plan for a large population?

Answer 28

1) The tolerable deviation rate
2) The acceptable risk of overreliance
3) The expected deviation rate

Question 29

What does performing a review entail?

Answer 29

A review primarily involves performing analytical and inquiry procedures.

Question 30

What is audit risk?

Answer 30

The risk of the auditor expressing an inappropriate opinion when the statements are materially misstated.