CPA AUDIT REVIEW #4 Flashcards
An auditor randomly samples 50 out of 1,000 items and discovers an overstatement of $3,000. What is the projected misstatement for the entire population?
$60,000
An auditor generally extrapolates the misstatement identified for the audit sample to the total population from which the audit sample was selected. The 50 items sampled had a total overstatement of $3,000 or an average overstatement of $60 per item ($3,000 ÷ 50). Projecting to the population results in an estimated misstatement of $60,000 (1,000 × $60).
In determining the sample size for a test of controls, an auditor should consider the likely rate of deviations, the allowable risk of overreliance, and the
Tolerable population deviation rate
The initial sample size of an attribute sample is based on which (4) factors?
(1) The desired assurance (complement of the risk of overreliance) that the tolerable population deviation rate is not exceeded by the actual rate.
(2) the tolerable population deviation rate
(3) the expected population deviation rate
(4) The population size.
Subsequent events that provide evidence of conditions that arose SUBSEQUENT to the date of the financial statements
May require disclosure in notes to the financial statements.
200 Invoices were examined
7 Lacked approval
The auditor determined the achieved upper deviation limit to be 8%
What is the allowance for sampling risk?
Allowance for sampling risk = Upper deviation limit - Sample deviation rate ( 7/200 = 3.5%)
8 - 3.5%= 4.5%
Sampling Interval - 10,000
A/C Receivable recorded amount - $5.000
Audited amount -$4,000
This was the only misstatement discovered.
What is the projected misstatement?
- Calculate the tainted percentage - 5,000-4,000/5,000 = 20%
- Multiple by sampling interval - 10,000 x 20% = $2,000
The tick mark Ø most likely indicates that the amount was traced to the
Deposits in transit of the applicable bank reconciliation.
The two requirements crucial to achieving audit efficiency and effectiveness with a personal computer are selecting
The appropriate audit tasks for personal computer applications and the appropriate software to perform the selected audit tasks.
Purchase cutoff procedures should be designed to test whether all inventory
Purchased and whose title has passed before year end was recorded.
An adverse opinion most likely should be expressed when
Management uses an accounting policy not in accordance with the applicable reporting framework.
If the possible effects of a scope limitation are material and pervasive
A disclaimer of opinion is expressed.
Tracing shipping documents to sales invoices
Detects understatements in sales.
Tracing sales invoices to shipping documents
Detects overstatements in sales.
When using sampling for substantive tests of details, the auditor is required to do all but which of the following?
Compute the sample standard deviation.
When using sampling for substantive tests of details, the auditor is required to do all of the following?
- Select a representative sample.
- Project sample misstatement results to the population.
- Determine the tolerable misstatement.
Proper authorization of WRITE-OFFS of uncollectible accounts should be approved in which department?
CFO
What are the different types of special purpose frameworks?
(1) the tax basis
(2) the cash basis
(3) a regulatory basis
(4) a contractual basis
(5) a definite set of logical and reasonable criteria applied to all material items in the statements.
Management’s discussion and analysis (MD&A) must be in accordance with the rules and regulations adopted by the
SEC
Which of the following is usually a benefit of using electronic funds transfer for international cash transactions?
Reduction of the frequency of data entry errors.
MD&A most often is presented as
Further explanation of activities of management.
An auditor’s purpose in reviewing the renewal of a note payable shortly after the balance sheet date most likely is to obtain evidence concerning relevant assertions about
Classification
What determines the sample size for a test of attributes?
(1) The allowable risk of overreliance
(2) The tolerable deviation rate
(3) The expected population deviation rate
(4) The size of the population.
An audit of owner’s equity of the balance sheet includes:
1.) Determining that the declared dividend amount was closed into retained earnings.
2.) Tracing the authorization of the dividend from the directors’ minutes.
3.) Determining that dividend declarations have been in compliance with debt agreements.
In an audit of a nonissuer, an auditor should evaluate and report on a change in accounting estimate that is inseparable from a related change in principle as a change in
Principle, prospectively, and include an emphasis-of-matter paragraph.
When an auditor tests a client’s cost accounting system, the auditor’s tests are primarily designed to determine that
Costs have been properly assigned to finished goods, work-in-process, and cost of goods sold. The cost accounting system assigns costs. It does not reconcile quantities.
A primary advantage of using generalized audit software packages to audit the financial statements of a client that uses a computer system is that the auditor may
Access information stored on computer files while having a limited understanding of the client’s hardware and software features.
What are the types of computer-assisted auditing techniques?
- Parallel Simulation (an Auditor’s developed program - processes actual client data)
- Integrated Test Facility - (Dummy transactions entered into client’s program.)
- Test Data Approach (processed with the client’s computer program under Auditor’s control)
As a result of tests of controls, an auditor overrelied on controls and decreased substantive testing. This assessment occurred because the true deviation rate in the population was
More than the deviation rate in the auditor’s sample.
What causes an overreliance?
Overreliance occurs if the sample has fewer observed deviations than the true deviation rate in the population.
What are the ethical principles for an Auditor under GAS?
- Public Interest
- Integrity
- Objectivity
- Proper use of government information, resources, and positions
(5) Professional behavior
When testing the effectiveness of controls, the factor the auditor considers to determine the acceptable sample size is
The tolerable rate of deviation within the population, the expected population deviation rate, the allowable risk of overreliance and the size of a small population.
What is a factor used to determine the sample size for a test of details (not controls)?
The desired level of assurance (complement of the risk of incorrect acceptance)
What’s the difference between attribute and variable sampling?
Attribute sampling is used for test of controls and variables sampling is used for substantive tests.
The auditor is most likely to verify accrued commissions payable in conjunction with the
Sales cutoff test
A portion of a client’s inventory is in public warehouses. Evidence of the existence of this merchandise can most efficiently be acquired through which of the following methods?
Confirmation
In assessing the tolerable rate of deviations of a test of controls that was performed using statistical sampling, an auditor should consider that
Deviations from pertinent controls at a given rate ordinarily result in misstatements at a lower rate.
What is the monetary unit sampling formula?
n = RM × RF /TM – (AM × EF)
n= Sample Size
RM = Recorded or carrying amount
RF = Appropriate reliability factor (always from table 1.)
TM = Tolerable Misstatement
AM = Anticipated Misstatement
EF = Expansion Factor (from table 2)
The use of the ratio estimation sampling technique is most effective when
The calculated audit amounts are approximately proportional to the client’s carrying amounts.
Audit procedures relevant to payments of DEFINED BENEFIT PENSION amounts include
(1) Inquiries of management about pension benefit agreements.
(2) Comparison of general ledger and financial statement balances
(3) Recalculation of pension costs.
What determines the sample size under the mean-per-unit sampling method for inventory?
(1.) Both the variability in the dollar amounts of inventory items (2.) The risk of incorrect rejection (its confidence level)
(3.) Population size
(4.) An estimate of population variation (the standard deviation)
(5.) the tolerable misstatement (the desired allowance for sampling risk is a percentage thereof, and this percentage is a function of the risk of incorrect rejection and the allowable risk of incorrect acceptance).
The auditor can best verify a client’s bond sinking-fund transactions and year-end balance by
Confirmation with bond trustee
What is a record count?
Is a batch total that compares the items inputted with those processed. For. e.g. comparing inputted time cards with outputted payroll checks.
What is a hash total?
A hash total is the sum of a numeric field that has no meaning by itself. It can be used to test that authorized transactions are processed.
What is a sequence test?
This test can be used to test for missing documents.
What is a field check?
A field check tests for the correct data type in each field.
What is a reasonableness test?
A reasonableness test determines whether amount fields appear to be within an acceptable range.
What is a validity check
Validity checks are used to compare input with known information from a master file.
