Ninja AUD Flashcards
Which of the following tests of details most likely would help an auditor determine whether accounts payable have been misstated?
A
Examining reported purchase returns that appear too low
B
Examining vendor statements for amounts not reported as purchases
C
Searching for customer-returned goods that were not reported as returns
D
Reviewing bank transfers recorded as cash received from customers
Examining vendor statements for amounts not reported as purchases is the test of details that would most likely help an auditor determine whether accounts payable have been misstated. The vendor statements are directly related to amounts that should be recorded as accounts payable. Cash received from customers and customer-returned goods are related to sales and accounts receivable, not accounts payable. The examination of reported purchase returns would not reveal evidence of unrecorded purchase returns.
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 audited amount of $6,000. If this were the only misstatement discovered by the auditor, the projected misstatement of this sample would be:
A
$1,000
B
$3,000
C
$4,000
D
$5,000
The interval is $5,000. The observed error is $10,000 – $6,000 = $4,000. Tainting is not required in this instance since the book value of the account is $10,000 and that’s above the interval. So in this case the projected misstatement is equal to the observed error of $4,000.
The demand curve for a product reflects which of the following?
A
The impact of prices on the amount of product offered
B
The willingness of producers to offer a product at alternative prices
C
The impact that price has on the amount of a product purchased
D
The impact that price has on the purchase amount of two related products
The demand curve for a product reflects the impact that changes in price have on the demand for a product (the amount of product that consumers are willing to purchase).
The likelihood of assessing control risk too high is the risk that the sample selected to test controls
A
Does not support the auditor’s planned assessed level of control risk when the true operating effectiveness of the internal control justifies such an assessment
B
Contains misstatements that could be material to the financial statements when aggregated with misstatements in other account balances or transactions classes
C
Contains proportionately fewer monetary errors or deviations from prescribed internal control structure policies or procedures than exist in the balance or class as a whole
D
Does not support the tolerable error for some or all of management’s assertions
The risk of assessing control risk too high is the risk that the assessed level of control risk based on the sample is greater than the true operating effectiveness of the control structure policy or procedure. Answer (B) is incorrect because fewer errors or deviations would be discovered; therefore, the auditor would not identify those misstatements. Answer (C) is incorrect because the true operating effectiveness of internal control would not support such an assessment; the auditor would find fewer errors or deviations. Answer (D) is incorrect because the sample would support the tolerable error for misstatements because the sample would reveal fewer errors or deviations than exist in the balance or class of transactions.
When performing a substantive test of a random sample of cash disbursements, an auditor is supplied with a photocopy of vendor invoices supporting the disbursements for one particular vendor rather than the original invoices. The auditor is told that the vendor’s original invoices have been misplaced. What should the auditor do in response to this situation?
A
Increase randomly the number of items in the substantive test to increase the reliance that may be placed on the overall test
B
Reevaluate the risk of fraud, and design alternate tests for the related transactions
C
Increase testing by agreeing more of the payments to this particular vendor to the photocopies of its invoices
D
Count the missing original documents as misstatements, and project the total amount of the error based on the size of the population and the dollar amount of the errors
When an auditor is supplied with copies of vendor invoices instead of originals and told the originals have been misplaced, the auditor should reevaluate the risk of fraud and design alternate tests for the related transactions. Audit procedures that are appropriate to the particular audit objective should be applied to each sample item. If considering those unexamined items [the originals] to be misstated would lead to a conclusion that the balance or class contains material misstatement, the auditor should consider alternative audit procedures that would provide sufficient appropriate audit evidence to form a conclusion. The auditor should also consider whether the reasons for the lack of availability of the items have implications in relation to assessing risks of material misstatement due to fraud, the assessed level of control risk that the auditor expects to be supported, or the degree of reliance on management representations.
Which of the following input controls is a numeric value computed to provide assurance that the original value has not been altered in construction or transmission?
A
Hash total
B
Parity check
C
Encryption
D
Check digit
A check digit is a digit that is appended to a piece of numeric data following a pre-specified routine. A hash total is a numeric total with meaning only as a control. A parity check is an extra bit attached to the end of a string of bits to detect errors resulting from electronic interference when transmitting the string. Encryption is the conversion of a message into a coded message.
Which of the following procedures would an auditor most likely perform during the overall review stage of an audit of an entity’s financial statements?
A
Obtain assurance from the entity’s attorney that all material litigation has been disclosed in the financial statements
B
Verify the clerical accuracy of the entity’s proof of cash and its bank cutoff statement
C
Determine whether controls for the safeguarding of assets are effective
D
Consider whether the results of audit procedures affect the assessment of the risk of material misstatement due to fraud
Considering whether audit results affect the assessment of fraud risk is an overall review stage procedure.
Auditors obtain assurance from the entity’s attorney, verify clerical accuracy, and test the operating effectiveness of controls during the evidence gathering stage of the audit.
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.
For financial statement audits performed in accordance with generally accepted government auditing standards, auditors should report which of the following?
A
All violations of private grant agreements, regardless of materiality
B
Suspected illegal acts
C
Significant deficiencies in internal control
D
Significant changes in the entity’s internal control policies
The correct answer is (C).
As per generally accepted government auditing standards, report on ICFR is always required. An auditor should report any significant deficiencies or materials weaknesses in Internal Control identified by the auditor.
An IT input control is designed to ensure that
A
Only authorized personnel have access to the computer area.
B
Machine processing is accurate.
C
Data received for processing are properly authorized and converted to machine readable form.
D
Electronic data processing has been performed as intended for the particular application.
Input controls are designed to provide reasonable assurance that data received by IT have been properly authorized, converted into machine readable form and identified as well as that data has not been lost, added, duplicated, or otherwise improperly changed.
Answer (A) describes an access control.
Answer (B) describes an output control.
Answer (D) describes a processing control.
According to US GAAS, all of the following statements about other auditing publications are true, except
A
The auditor is not expected to be aware of the full body of other auditing publications.
B
In determining whether another auditing publication is appropriate to the circumstances of the audit, the auditor should first consider the degree to which the issuer or author is recognized as an authority on auditing matters.
C
In applying the auditing guidance, the auditor should, exercising professional judgment, assess its relevance and appropriateness to the circumstances of the audit.
D
Other auditing publications have no authoritative status.
Answer B. does not describe what is considered first when determining if a publication is appropriate. If the publication is relevant, the auditor may presume that it is appropriate if another auditing publication is published by the AICPA and has been reviewed by the AICPA Audit and Attest Standards staff. The criteria in answer B. for determining whether a publication is appropriate is only applicable when a publication has not been reviewed by the AICPA. Only in this case would the auditor consider the degree to which a publication is recognized as being helpful in understanding and applying US GAAS and the degree to which the issuer or author is recognized as an authority on auditing matters. All of the other answer alternatives are true statements.
Editor Note: Other auditing publications are defined as publications other than interpretive publications. Examples include AICPA auditing publications not defined as interpretive publications; auditing articles in professional journals; textbooks; continuing professional education programs; and other instructional materials.
Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?
A
Confirming a sample of material accounts receivable established after year-end
B
Comparing the financial statements being reported on with those of the prior period
C
Investigating personnel changes in the accounting department occurring after year-end
D
Inquiring as to whether any unusual adjustments were made after year-end
One of the auditor’s procedures to determine the occurrence of subsequent events that may require adjustment or disclosure is asking management if any unusual adjustments were made after year-end. For example, as an auditor you can inquire about whether the books were closed on time, and if they weren’t was it because of a ton of last minute entries that weren’t made, or adjustments to intercompany balances that may have an effect on a subsidiary’s ability to meet certain ratios for loan covenants? Confirming a sample of accounts receivable established after year-end is usually done to determine if proper cutoff was made. Comparison between the current and the prior year financial statements is unlikely to uncover evidence about the occurrence of subsequent events — rather a comparison of the current statements to the latest interim statements and an analysis of those interim statements should be done. Investigating personnel changes in the accounting department occurring after year-end would be more likely when possible misconduct, rather than a subsequent event, is being considered.
When should the auditor make the written communication of significant deficiencies and material weaknesses to management and those charged with governance?
A
No later than 60 days following the audit report release date
B
No later than 30 days following the audit report release date
C
No later than 60 days following the audit report date
D
No later than 30 days following the audit report date
According to AU-C Section 265 (Communicating Internal Control Related Matters Identified in an Audit), an auditor is required to communicate significant deficiencies and material weaknesses in internal control to management and those charged with governance. The communication should be made in writing and can be made during the audit or after the audit is completed.
However, the written communication must be delivered no later than 60 days following the audit report release date. The audit report release date refers to the date the auditor grants the client permission to use the auditor’s report.
Editor’s note: Although the auditor is required to make both these written communications no later than 60 days following the report release date, the written communication is best made by the report release date because it will enable those charged with governance to discharge their oversight responsibilities.
For public companies, the written communication of significant deficiencies and material weaknesses should be made prior to the issuance of the audit report on the financial statements.
Which of the following is least likely to be a continuous activity that an auditor would be expected to perform throughout an audit engagement?
A
Understanding the entity and its environment.
B
Assessing risk of material misstatement.
C
Considering client continuance.
D
Inquiring as to the design of controls.
The activity least likely to be continuous throughout the audit engagement is considering client continuance. Considering client continuance typically occurs at the beginning of the engagement to determine if the auditor should continue with the client relationship. Once this decision is made, it is not usually revisited continuously throughout the audit.
Understanding the entity and its environment is a continuous activity as auditors must maintain a thorough understanding of the entity to identify risks and plan the audit effectively.
Assessing the risk of material misstatement is also a continuous process as new information and circumstances can change the auditor’s assessment of risks throughout the engagement.
Inquiring as to the design of controls is another ongoing activity as auditors continually evaluate the effectiveness of controls in response to the identified risks.
If, as a result of identified fraud or suspected fraud, the auditor encounters circumstances that bring into question the auditor’s ability to continue performing the audit, the auditor should consider whether it is appropriate to withdraw from the engagement, when withdrawal is possible under applicable law or regulation. If the auditor withdraws, the auditor should
A
Issue an audit report with an adverse opinion
B
Issue an audit report with a disclaimer of opinion
C
Determine whether a professional or legal requirement exists to report to those who engaged the auditor the auditor’s withdrawal from the engagement and the reasons for the withdrawal
D
Only discuss with those charged with governance the auditor’s withdrawal from the engagement and the reasons for the withdrawal
If the auditor withdraws, the auditor should determine whether a professional or legal requirement exists to report to the person or persons who engaged the auditor or, in some cases, to regulatory authorities, the auditor’s withdrawal from the engagement and the reasons for the withdrawal.
Regarding incorrect answers A. and B., if the auditor withdraws from the engagement, the auditor would not issue an audit report.
Regarding incorrect answer D., if the auditor withdraws, the auditor should discuss with the appropriate level of management and those charged with governance (not just those charged with governance) the auditor’s withdrawal from the engagement and the reasons for the withdrawal. (This corrected version of answer D. and the correct answer C. explanation are the only required actions when the auditor withdraws under the question’s circumstances.)
Prior to commencing the compilation of financial statements of a non-issuer, an accountant is required to
A
Verify that the financial information supplied by the entity agrees with the books of original entry.
B
Perform preliminary analytical procedures to identify accounts that may represent specific risks relevant to the engagement.
C
Make inquiries of management concerning the entity’s procedures used in adjusting and closing the books of account.
D
Obtain an understanding of any specialized financial reporting frameworks and practices used in the entity’s industry.
The correct answer is (D)
Specific requirements for compilation engagements:
Engagement letter required and must be signed by the accountant and management (or TCWG).
Obtain an understanding of the financial reporting framework and the significant accounting policies intended to be used in the preparation of the financial statements.
Read financial statements in light of the accountant’s understanding of the applicable financial reporting framework and significant accounting policies adopted by the management and consider whether the financial statements appear to be appropriate in form and free from obvious material misstatements.
In a compilation engagement an accountant is not required to:
Perform preliminary analytical procedures to identify accounts that may represent specific risks relevant to the engagement or Make inquiries of management concerning the entity’s procedures used in adjusting and closing the books of account as these are done in Audit and Review engagements.
Verify that the financial information supplied by the entity agrees with the books of original entry need not be done prior to commencing of the engagement.
Buff Co. is considering replacing an old machine with a new machine. Which of the following items is economically relevant to Buff’s decision? (Ignore income tax considerations.)
Carrying amount
of old machine Disposal value
of new machine
A Yes No
B No Yes
C No No
D Yes Yes
The carrying amount of the old machine is irrelevant because it is a past (historical) cost. The disposal value of the new machine is relevant because it is an expected future cash inflow that differs between alternatives.
In auditing accounts payable, an auditor’s procedures most likely would focus primarily on management’s assertion of
A
Existence
B
Classification and understandability
C
Completeness
D
Valuation and allocation
Completeness deals with whether all transactions, assets, liabilities, and equity interests that should have been recorded have been recorded. Completeness also pertains to whether all disclosures that should have been included in the financial statements have been included. Because liabilities have the inherent risk of being understated, substantive tests and tests of controls are directed towards determining that all liabilities of the company as of the balance sheet date are properly included.
In which of the following circumstances may an auditor include an other-matter paragraph in an audit report of a nonissuer?
A
A material weakness in internal control exists.
B
The entity engaged in significant transactions with a related party during the year under audit and subsequent to year end.
C
The audited financial statements include a material misstatement.
D
The auditor has been engaged to report on an entity’s financial statements prepared under U.S. GAAP and under IFRS.
An other-matter paragraph is included in the auditor’s report to draw attention to matters that are relevant to users’ understanding of the audit, the auditor’s responsibilities, or the auditor’s report. When the auditor has been engaged to report on an entity’s financial statements prepared under different frameworks, such as U.S. GAAP and IFRS, it is appropriate to include an other-matter paragraph to explain this situation and how it affects the audit and the auditor’s report.
Using statistical sampling to assist in verifying the year-end accounts payable balance, an auditor has accumulated the following data:
Number of accounts Book balance Balance determined by the author
Population 4,000 $ 5,000,000 ?
Sample 200 $125,000 $150,000
Using the MPU technique, the auditor’s estimate of year-end accounts payable balance would be
A $5,500,000
B $6,000,000
C $4,500,000
D $3,000,000
Take the total balance determined by the auditor $150,000 and divide by the number of accounts in the sample 200 to get the Mean Per Unit of the sample $750. Multiply the Mean Per Unit of the sample $750 by the total population 4,000 to get the estimate of year-end accounts payable $3,000,000.
An auditor examining inventory most likely would use variables sampling rather than attributes sampling to
A
Identify whether inventory items are properly priced
B
Estimate whether the dollar amount of inventory is reasonable
C
Discover whether misstatements exist in inventory records
D
Determine whether discounts for inventory are properly recorded
You answered: A. The correct answer is: B
Generally, variables sampling involves the determining of proper dollar value of the sampled items and makes inferences about the fairness of the amounts reported in the financial statements. Variables sampling typically involves deciding whether the dollar value of an account is reasonable. Generally, attributes sampling involves the determination of the rate of occurrence of some characteristic in a population. Proper prices, the number of misstatements, or proper recording are attributes. The other answer choices seem to test whether an outcome of a section of inventory is correct or not.
Which of the following conditions is necessary for an auditor to accept an engagement to examine the design and operating effectiveness of a nonissuer’s internal control over financial reporting that is integrated with an audit of financial statements?
A
The auditor anticipates relying on the entity’s internal control in a financial statement audit.
B
Management provides its assertion about the effectiveness of internal control in a report that accompanies the auditor’s report.
C
The auditor is a continuing auditor who previously has audited the entity’s financial statements.
D
Management agrees not to present the auditor’s report in a general-use document to stockholders.
You answered: A. The correct answer is: B
An auditor may perform an examination of internal control only if (1) management provides its assertion about the effectiveness of the entity’s internal control in a report that accompanies the auditor’s report; (2) management accepts responsibility for the effectiveness of the entity’s internal control; (3) management evaluates the effectiveness of the entity’s internal control using suitable and available criteria; and (4) management supports its assertion about the effectiveness of the entity’s internal control with sufficient appropriate evidence. The other alternatives are not required conditions for acceptance of the engagement.
Which of the following is a control procedure that most likely could help prevent employee payroll fraud?
A
The personnel department promptly sends employee termination notices to the payroll supervisor.
B
Employees who distribute payroll checks forward unclaimed payroll checks to the absent employees’ supervisors.
C
Salary rates resulting from new hires are approved by the payroll supervisor.
D
Total hours used for determination of gross pay are calculated by the payroll supervisor.
You answered: B. The correct answer is: A
By promptly notifying the payroll supervisor of employee terminations, the personnel department would avoid a terminated employee from continuing to be paid. Unclaimed payroll checks should be forwarded to the Treasurer’s office. Salary rates should be controlled in the personnel office. Total hours should be determined and approved prior to getting to the payroll department.
