NEW AUD 1 Flashcards
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.
A relatively small number of differences exist in the population.
Estimating populations whose records consist of quantities, but not book values.
Large overstatement differences and large understatement differences exist in the population.
The calculated audit amounts are approximately proportional to the client’s book amounts.
Ratio estimation is most efficient when the differences are proportional to book values. If the calculated audit amounts are approximately proportional to the book amounts, a correlation exists between book values and the individual differences, and ratio estimation will be effective.
Which of the following most likely would be an advantage in using classical variables sampling rather than probability‐proportional‐to‐size (PPS) sampling?
An estimate of the standard deviation of the population’s recorded amounts is not required.
The auditor rarely needs the assistance of a computer program to design an efficient sample.
Inclusion of zero and negative balances generally does not require special design considerations.
Any amount that is individually significant is automatically identified and selected.
Inclusion of zero and negative balances generally does not require special design considerations.
Because PPS sampling utilizes dollar units for sampling, the inclusion of zero and negative balances requires special design considerations. This would be an advantage for classical variables sampling, rather than PPS sampling.
Which of the following statements is correct concerning probability‐proportional‐to‐size (PPS) sampling, also known as dollar unit sampling?
The sampling distribution should approximate the normal distribution.
Overstated units have a lower probability of sample selection than units that are understated.
The auditor controls the risk of incorrect acceptance by specifying this risk level for the sampling plan.
The sampling interval is calculated by dividing the number of physical units in the population by the sample size.
The auditor controls the risk of incorrect acceptance by specifying this risk level for the sampling plan.
PPS sampling enables the auditor to directly control for the risk of incorrect acceptance by requiring the auditor to specify the desired level of that risk.
In a PPS sampling application, the sampling interval was $6,000. The auditor discovered that a selected account receivable having a recorded amount of $5,000 had an audit amount of $1,000. What was the projected error associated with this sample?
$ 4,000
$ 1,200
$ 4,800
$ 3,200
$ 4,800
When the recorded balance of the account involved is less than the sampling interval, the auditor must determine the “tainting” percentage and apply that percentage to the sampling interval. In this case the tainting percentage = [($5,000 − $1,000)/$5,000] = 80%. Accordingly, the projected misstatement is $6,000 × 80% = $4,800.
An auditor who uses statistical sampling for attributes in testing internal controls should reduce the planned reliance on a prescribed control when the
Sample rate of deviation plus the allowance for sampling risk equals the tolerable rate.
Sample rate of deviation is less than the expected rate of deviation used in planning the sample.
Tolerable rate less the allowance for sampling risk exceeds the sample rate of deviation.
Sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate.
Sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate.
Planned reliance on a prescribed control should be reduced when the sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate. The auditor’s best guess of the population error rate is the sample error rate. Thus, the auditor uses the sample error rate plus an additional amount to take sampling risk into consideration as the adjusted estimate of the population error rate.
Which of the following statements is correct regarding characteristics required of an engagement quality reviewer under PCAOB auditing standards?
Only a partner of the registered public accounting firm conducting the audit can serve as an engagement quality reviewer.
An individual outside of the registered public accounting firm becomes an “associated person” of the registered public accounting firm when receiving compensation from the firm for performing the engagement quality review.
There is no requirement that the engagement quality reviewer must be independent from the client involved, since the engagement quality reviewer cannot make engagement team decisions or otherwise assume any responsibilities of the engagement team.
The engagement quality reviewer is required to be a partner in a public accounting firm, regardless of whether the reviewer is from within the firm or outside the firm responsible for the audit engagement subject to the engagement quality review.
An individual outside of the registered public accounting firm becomes an “associated person” of the registered public accounting firm when receiving compensation from the firm for performing the engagement quality review.
AS #7 requires the engagement quality reviewer to be a partner (or have an equivalent position) only if the engagement quality reviewer is from the within the registered public accounting firm. If the engagement quality reviewer is from outside the registered public accounting firm, there is no such requirement.
Which of the following are essential elements of the audit trail in an electronic data interchange (EDI) system?
Network and sender/recipient acknowledgments.
Message directories and header segments.
Contingency and disaster recovery plans.
Trading partner security and mailbox codes.
Network and sender/recipient acknowledgments.
Network and sender/recipient acknowledgments document the trail of accounting data (and transactions) through the system. In doing so, they serve as essential elements of the audit trail in an EDI system.
Which of the following computer‐assisted auditing techniques processes client input data on a controlled program under the auditor’s control to test controls in the computer system?
Test data.
Review of program logic.
Integrated test facility.
Parallel simulation.
Parallel simulation.
Parallel simulation is a computer‐assisted auditing technique in which an auditor‐written or auditor‐controlled program is used to process client data. The results are then compared to those obtained using the client’s program and differences are investigated. This technique enables the auditor to test controls in and processing performed by a client program.
Which of the following is usually a benefit of using electronic funds transfer for international cash transactions?
Improvement of the audit trail for cash receipts and disbursements.
Creation of self‐monitoring access controls.
Reduction of the frequency of data entry errors.
Off‐site storage of source documents for cash transactions.
Reduction of the frequency of data entry errors.
Using electronic funds transfer for international cash transactions reduces the manual handling and data entry related to such transfers. As a result, the frequency of data entry errors is reduced. As a general rule, whenever the data must be “touched” by human hands, the opportunity for error is introduced. The less the data are touched, the fewer the opportunities for error.
Which of the following strategies would a CPA most likely consider in auditing an entity that processes most of its financial data only in electronic form, such as a paperless system?
Continuous monitoring and analysis of transaction processing with an embedded audit module.
Increased reliance on internal control activities that emphasize the segregation of duties.
Verification of encrypted digital certificates used to monitor the authorization of transactions.
Extensive testing of firewall boundaries that restrict the recording of outside network traffic.
Continuous monitoring and analysis of transaction processing with an embedded audit module.
An audit of an entity with primarily electronic data systems would be more likely to include continuous monitoring and analysis via an embedded audit module because, in such environments, transactions or accounting records may be available on a temporary basis and in machine‐readable form only.
As a result, testing would need to be performed continuously, rather than at a single time. An embedded audit module is a computer program inserted by the auditor into the client’s application system. The audit module selects transactions, e.g., large or unusual transactions, for further review and testing by the auditor.
Which of the following computer‐assisted auditing techniques allows fictitious and real transactions to be processed together without client operating personnel being aware of the testing process?
Integrated test facility.
Input controls matrix.
Parallel simulation.
Data entry monitor.
Integrated test facility.
Fictitious and real transactions are processed together without the knowledge of operating personnel in an integrated test facility.
A numeric value that is computed to provide assurance that the original value has not been altered in data processing or transmission.
Application control procedures
Hash total
Check digit
Integrated test facility
Test data
Embedded audit modules
Local area network
Electronic data interchange
WebTrust
Worm
- A check digit is a digit that enables verification of other digits in the item. It is calculated based on the other digits and is used to detect errors. For example, a student identification number could consist of 7 digits with the 7th digit computed based on the first 6 digits. If the number is input incorrectly or inappropriately changed during processing, the check digit won’t compute properly and the number will be rejected as invalid.
Auditing by manually testing the input and output of a computer system.
A. Auditing "around" the computer B. I/O audit approach C. Integrated test facility D. Parallel simulation E. Processing output control F. Test data G. Write extract routine
A. Auditing “around” the computer
(A) Auditing “around” the computer involves examining inputs into and outputs from the computer while ignoring processing, as contrasted to auditing “through” the computer which in some manner directly utilizes the computer’s processing ability.
In testing long‐term investments, an auditor ordinarily would use analytical procedures to ascertain the reasonableness of the
Completeness of recorded investment income.
Classification between current and noncurrent portfolios.
Valuation of marketable equity securities.
Existence of unrealized gains or losses in the portfolio.
Completeness of recorded investment income.
Analytical procedures could be used to ascertain the reasonableness of the completeness of recorded investment income. The auditor uses analytical procedures to develop an expectation of investment income. This figure is then compared to recorded investment income and significant differences are investigated further.
In a probability‐proportional‐to‐size sample with a sampling interval of $5,000, an auditor discovered that a selected account receivable with a recorded amount of $10,000 had an audit amount of $8,000.
If this were the only error discovered by the auditor, the projected error of this sample would be
$1,000.
$2,000.
$4,000.
$5,000.
2,000
In a probability‐proportional‐to‐size application, the projected error of the sample is the amount of the difference between the book value and the audit value when the amount of the account examined is greater than the sampling interval.
As the selected account receivable was $10,000 and the sampling interval was $5,000, the projected error was $2,000 (the actual difference between the recorded amount and the audit value).
