AUD Becker Personalized Practice Test A3 Flashcards
Brian is currently auditing the fixed-asset process at a large manufacturing firm. He wants to run a simple diagnostic analytic on changes in the different asset types that make up the fixed-assets account. He wants to obtain reliable date to ensure that the analytic can be utilized as audit evidence. Which of the following types of date obtained by Brian would be considered the most reliable?
- Date obtained through verbal interviews with the fixed-assets manager?
- A spreadsheet obtained by Brian through a query of the fixed-assets database.
- Digital copies of the invoices for all major fixed assets purchases during the year provided by the fixed-assets manager.
- A spreadsheet provided by the fixed-assets manager detailing all changes to the fixed-assets accounts during the year, including dates and values.
Choice “2” is correct. Data obtained by the auditor directly is considered more reliable than data provided by the client.
Choice “1” is incorrect. Data obtained from oral inquiries are not as reliable as documented evidence.
Choice “3” is incorrect. Reproduced documents do not provide as reliable evidence as original copies.
Choice “4” is incorrect. Data provided by the client would be considered less reliable than data sourced by the auditor.
While performing a test of details during an audit, an auditor determined that the sample results supported the conclusion that the recorded account balance was materially misstated. It was, in fact, not materially misstated. This situation illustrates the risk of:
- Assessing control risk too low.
- Assessing control risk too high.
- Incorrect rejection.
- Incorrect acceptance.
Choice “3” is correct. Erroneously concluding that an account balance is materially misstated is an example of incorrect rejection.
Choice “1” is incorrect. The assessment of control risk relates to tests of controls, not to tests of details (substantive testing).
Choice “2” is incorrect. The assessment of control risk relates to tests of controls, not to tests of details (substantive testing).
Choice “4” is incorrect. If the auditor had concluded that the account was fairly presented when, in fact, it was not, it would be an example of incorrect acceptance.
Which of the following procedures most likely could assist an auditor in identifying related party transactions?
- Performing tests of controls concerning the segregation of duties.
- Evaluating the reasonableness of management’s accounting estimates.
- Reviewing confirmations of compensating balance arrangements.
- Scanning the accounting records for recurring transactions.
Choice “3” is correct. Compensating balance arrangements may be maintained by or for related parties.
Choice “1” is incorrect. Performing tests of controls concerning the segregation of duties relates to the allocation of responsibilities among company employees; related party transactions typically relate to transactions with affiliates, owners, or management.
Choice “2” is incorrect. Evaluating the reasonableness of management’s accounting estimates would not provide any evidence of transactions with affiliates, owners, or management.
Choice “4” is incorrect. Related party transactions are more likely to be nonrecurring than recurring.
Which of the following best explains why an analytical procedure might be used as a substantive test?
- To assist in planning the nature, timing, and extent of the auditing procedures to be performed.
- To achieve audit objectives in the most effective and efficient manner possible.
- To assess the conclusions reached by staff auditors.
- To determine the adequacy of evidence gathered in response to unusual or unexpected balances.
Choice “2” is correct. For some assertions, analytical procedures are more effective and efficient at providing an appropriate level of assurance than are tests of details.
Choice “1” is incorrect. The objective of analytical procedures used in the planning stage of the audit is to assist in planning the nature, timing, and extent of auditing procedures to be performed.
Choices “3” and “4” are incorrect. The purpose of applying analytical procedures in the overall review stage of the audit is to assist the auditor in assessing the conclusions reached and the overall financial statement presentation. The overall review would also generally include consideration of the adequacy of evidence gathered in response to unusual or unexpected balances.
TBS-002168
Pop-up 1:]
[Furthermore, we will determine whether significant declines in sales indicate potential issues with inventory valuation (as a result of obsolescence) or the completeness of warranty provisions (if the declines are due to quality issues).]
Significant declines in the volume of copiers sold may indicate that the copiers may be overvalued due to obsolescence. If the declines in sales are due to quality issues, then this may indicate potential issues with the completeness of warranty provisions.
[Pop-up 2:]
[As expected, revenue for the first three quarters of the current year is less than the previous year’s due to the labor strike.]
The revenue chart by quarter shows that there was a significant decline in sales for the first three quarters of Year 4. Based on the e-mail from the controller, it appears that the decline is due to the labor strike.
[Pop-up 3:]
[As a result, we did not modify the current risk of material misstatement related to occurrence, completeness, and accuracy of revenue.]
The auditor performed the ADA to determine whether it would uncover any additional information that may indicate there was a need for change in the assessment and planned response related to the occurrence, completeness, and accuracy of revenue. Based on management’s inquiry (via e-mail) and the results of other risk assessment procedures, the results of the ADA confirmed the auditor’s expectation that sales would decrease in Q1–Q3 as a result of the labor strike. The ADA did not uncover any other trends related to revenue that the auditor did not already anticipate. As a result, the auditor does not need to modify the current risk of material misstatement related to occurrence, completeness, and accuracy of revenue.
[Pop-up 4:]
[We increased the assessed risk related to the valuation of inventory due to the significant declines in Copier 100A and 300A in Year 4.]
The ADA identified significant changes in sales mix that were not identified in other risk assessment procedures. The significant declines in Copier 100A and 300A may indicate potential issues with the valuation of inventory. As a result, the auditor increased the risk of material misstatement related to the valuation of inventory. The auditor plans to respond to this increase risk by increasing sample size.
(Note that there is no inventory of Copier 200B as of November Year 3.)
[Pop-up 5:]
[In addition, based on the reason for the declines in sales, we decided there was no need to modify the risk of material misstatement related to the completeness of warranty provisions.]
The decline in the revenue appears to be a result of the labor strike. The decline in the sales mix of some of the copiers appears to be due to the release of the new copier. There is no indication that the decline in revenue or sales mix is a result of a decline in the quality of the products. As a result, there is no need to modify the risk of material misstatement related to warranty expense.
How would increases in tolerable misstatement and assessed level of control risk affect the sample size in a substantive test of details?
I. Increase in tolerable misstatement.
II. Increase in assessed level of control risk.
1. Increase sample size: Decrease sample size
2. Increase sample size: Increase sample size
3. Decrease sample size: Increase sample size
4. Decrease sample size: Decrease sample size:
Choice “3” is correct. An increase in tolerable misstatement results in a smaller sample size. An increase in the assessed level of control risk leads to an increase in sample size.
Choices “2”, “1”, and “4” are incorrect, per the above explanation.
In which of the following circumstances is substantive testing of accounts receivable before the balance sheet date most appropriate?
- Internal controls during the remaining period are effective.
- The client has a new sales incentive program in place.
- There is a high turnover of senior management.
- It is a first engagement of a new client.
Choice “1” is correct. The higher the auditor’s risk assessment, the closer to period end substantive procedures should be performed. Conversely, effective controls reduce control risk and reduce the risk of material misstatement, allowing more interim testing to occur.
Choice “2” is incorrect. A new sales incentive program results in an increase in the risk of material misstatement, making it less likely that interim testing will be performed.
Choice “3” is incorrect. High turnover of senior management results in an increase in the risk of material misstatement, making it less likely that interim testing will be performed.
Choice “4” is incorrect. In the first engagement of a new client, the auditor will have less knowledge of the client and therefore would be less inclined to utilize interim testing, which increases audit risk.
Which of the following parties should an auditor notify first when discovering an immaterial fraud is committed by an accounting clerk?
- An appropriate level of management
- The audit committee
- The client’s legal counsel
- The client’s internal auditor.
Choice “1” is correct. Generally, any indication of fraud (even immaterial fraud) should be discussed with an appropriate level of management at least one level above those involved.
Choice “2” is incorrect. An auditor will generally notify the audit committee when the fraud causes a material misstatement of the financial statements or if the fraud involved senior management.
Choice “3” is incorrect. An auditor may notify the client’s legal counsel of the immaterial fraud, but the auditor would most likely discuss the immaterial fraud first with an appropriate level of management at least one level above the accounting clerk.
Choice “4” is incorrect. An auditor may notify the client’s internal auditor of the immaterial fraud, but the auditor would most likely discuss the immaterial fraud first with an appropriate level of management at least one level above the accounting clerk.
Which of the following statements concerning audit evidence is correct?
- Reliable evidence supporting management’s assertions should be conclusive rather than merely persuasive.
- An effective internal control structure contributes little to the reliability of the evidence created within the entity.
- The cost of obtaining evidence is not an important consideration to an auditor in deciding what evidence should be obtained.
- A client’s accounting data cannot be considered sufficient audit evidence to support the financial statements.
Choice “4” is correct. Audit evidence consists of the underlying accounting data and all corroborating information available to the auditor. A client’s accounting data by itself is not considered sufficient audit evidence to support the financial statements.
Choice “1” is incorrect. Reliable evidence supporting management’s assertions only needs to be corroborative or persuasive, not conclusive.
Choice “2” is incorrect. An effective internal control structure contributes greatly to the reliability of the evidence created within the entity.
Choice “3” is incorrect. The cost of obtaining evidence is an important consideration to an auditor in selecting appropriate audit procedures. The cost of a procedure may be a valid reason for omitting that procedure, as long as an appropriate alternative procedure is available.
After obtaining an understanding of internal control and performing risk assessment procedures, an auditor decided not to perform tests of controls. The auditor most likely concluded that the:
- Assessed level of inherent risk exceeded the assessed level of control risk.
- Additional evidence to support a reduction in control risk was not cost-beneficial to obtain.
- Internal control was properly designed and justifiably may be relied on.
- Evidence obtainable through tests of controls would not support an increased level of control risk.
Choice “2” is correct. When an auditor decides not to perform tests of controls, the auditor most likely concluded that the additional evidence to support a reduction in control risk was not cost-beneficial to obtain. In other words, the additional costs that would be incurred to support a lower assessed level of control risk would not be offset by the anticipated cost savings resulting from a lower level of substantive tests.
Choice “1” is incorrect. The assessed level of inherent risk (which is the susceptibility of an assertion to a material misstatement based upon the nature of the account balance or transaction class) exists independently from and bears no direct relationship to control risk.
Choice “3” is incorrect. Even if internal control is properly designed, it cannot justifiably be relied upon unless tests of controls are performed.
Choice “4” is incorrect. When performing additional tests of controls, an auditor is attempting to support a lower level of control risk, not higher.
