Quiz 8-11

Question 1

Which of the following statements is a valid criticism of the use of nonstatistical sampling​ methods?

A.
Nonstatistical sampling does not differ substantially from statistical sampling methods.
B.
Many audit​ tests, such as footing of​ journals, must be performed outside a statistical sampling context.
C.
The cost of performing random selection or testing often exceeds the benefits.
D.
It can be difficult to remain unbiased in the selection of items.

Answer 1

D

Question 2

A sample in which the characteristics of the sample are the same as those of the population is​ a(n)

A.
representative sample.
B.
attribute sample.
C.
variables sample.
D.
random sample.

Answer 2

A

Question 3

Assume that the​ client’s internal controls require a clerk to attach a shipping document to every duplicate sales invoice but this procedure is not followed exactly 3 percent of the time. If the auditor selects a sample of 200 duplicate sales​ invoices, which of the following sample results is most representative of the​ population?

A.
five shipping document are missing
B.
six shipping documents are missing
C.
three shipping documents are missing
D.
there were no shipping documents missing

Answer 3

B

Question 4

One of the ways to eliminate nonsampling risk is through

A.
the use of attribute sampling rather than variables sampling.
B.
controls that ensure the sample drawn is random and representative.
C.
proper supervision and instruction of the​ client’s employees.
D.
proper supervision and instruction of the audit team.

Answer 4

D

Question 5

An underlying feature of the random-based selection of items is that each

A.
stratum of the population is given equal representation in the sample.
B.
each item must be systematically selected using replacement.
C.
each item in the population must be randomly ordered.
D.
each item in the population should have an equal opportunity to be selected.

Answer 5

D

Question 6

Helen found that the expense reports were not properly approved while the senior accounts payable clerk was on vacation in July. Helen decided to perform a test of control on the authorization of expense reports for all the months except for​ July, which she will test substantively. Helen is allowed to do this because

A.
compensating controls exist in the payroll reconciliation process.
B.
the authorizations for the month of July are not representative of the population as a whole.
C.
the authorized expense reports for July are not material.
D.
it would not be cost beneficial to test the entire population substantively.

Answer 6

B

Question 7

A statistical method used to estimate the proportion of items in a population containing a characteristic of interest is

A.
estimation sampling.
B.
attribute sampling.
C.
population-proportional-to-size sampling.
D.
variables sampling.

Answer 7

B

Question 8

The auditing standards indicate that
A.
it is preferable to use nonstatistical sampling instead of statistical sampling.
B.
it is equally acceptable to use either statistical or nonstatistical sampling.
C.
nonstatistical sampling should only be used if statistical sampling is too costly to use.
D.
it is preferable to use statistical sampling instead of nonstatistical sampling.

Answer 8

B

Question 9

In performing a review of his​ client’s cash​ disbursements, a public accountant uses systematic sampling with a random start. The primary disadvantage of systematic sampling is that population items
A.
must be replaced in the population after sampling to permit valid statistical inference.
B.
may occur twice in the sample.
C.
may occur in a systematic​ pattern, thus negating the randomness of the sample.
D.
must be reordered in a systematic pattern before the sample can be drawn.

Answer 9

C

Question 10

The most common method used for performing statistical tests of controls is
A.
variables sampling.
B.
judgment sampling.
C.
attribute sampling.
D.
random selection of samples.

Answer 10

C

Question 11

One of the ways to reduce sampling risk is to
A.
use an appropriate method of selecting sample items from the population.
B.
carefully design the audit procedures to be used.
C.
provide proper supervision and instruction of the audit team.
D.
use variables sampling rather than attribute sampling.

Answer 11

C

Question 12

Nonsampling errors occur when audit tests do not uncover existing exceptions in the
A.
planning stage.
B.
sample.
C.
population.
D.
financial statements.

Answer 12

B

Question 13

Auditors consider statistical sampling to be characterized by
A.
representative sample selection and statistical calculation of the results.
B.
representative sample selection and nonmathematical consideration of the results.
C.
carefully biased sample selection and nonmathematical consideration of the results.
D.
carefully biased sample selection and statistical calculation of the results.

Answer 13

A

Question 14

The auditor is going to select a sample that is a statistical probabilistic method of sample evaluation that results in an estimate of the proportion of items in a population containing a characteristic or attribute of interest. The auditor is using what type of​ sampling?
A.
variable estimation sampling
B.
monetary unit sampling
C.
attribute sampling
D.
discovery sampling

Answer 14

C

Question 15

When statistical sampling is​ used, the sample selected must be a probabilistic one. In​ addition, the auditor should
A.
use the haphazard selection method to make sure that the sample is properly selected.
B.
request the client to review the sample and approve all items that are selected.
C.
use appropriate statistical evaluation methods of nonsampling risk computations.
D.
use appropriate statistical evaluation methods of sampling risk computations.

Answer 15

D

Question 16

8 - Which one of the following is an example of a specific​ authorization?

A.
The highest credit limit allowed for accounts receivable customers is​ $100 000.
B.
Each sales transaction that exceeds the credit limit of a customer must be approved by the controller.
C.
The computer systems automatically reorder inventory when quantities fall below the economic order quantity.
D.
Grocery sales clerks may approve returns of goods less than ten dollars in value.

Answer 16

B

Question 17

8 - Management assesses risks as a part of designing and operating internal controls to minimize fraud and errors. Auditors assess risks to

A.
decide the evidence needed in the audit.
B.
make sure that the company will continue to operate over the next year.
C.
enable them to assess the completeness of internal controls.
D.
fully implement the audit risk model.

Answer 17

A

Question 18

Which is one aspect of​ management’s assessment of internal control over financial​ reporting?
A.
Evaluate the design of the payroll system.
B.
Have the external auditors document the internal control over financial reporting.
C.
Have the external auditors test the effectiveness the internal control over financial reporting.
D.
Evaluate the design of internal control over financial reporting.

Answer 18

D

Question 19

The essence of an effectively controlled organization lies in the
A.
attitude of its management.
B.
effectiveness of its auditor.
C.
attitude of its employees.
D.
effectiveness of its internal auditor.

Answer 19

A

Question 20

Management safeguards assets by
A.
controlling access and by comparing physical items to records.
B.
requiring the external auditors to do surprise audits.
C.
having management sign a management representation letter.
D.
having the internal auditors conduct periodic counts of physical assets.

Answer 20

A

Question 21

As a first time auditor of a small​ company, what will be your strategy to obtain an understanding of internal controls of the​ company?
A.
conduct the procedure of understanding internal controls in the current year
B.
rely on the verbal assurance from management that internal control exists
C.
as the company is​ small, defer the procedure to understand internal controls until next year
D.
get the company employees to test the internal controls for you

Answer 21

A

Question 22

To help with corporate governance and a positive​ “tone at the​ top,” the board of directors and its​ committees, such as the audit​ committee, should
A.
rubber-stamp the financial statements once per year.
B.
consist of all members of executive management.
C.
take an active role in overseeing the company.
D.
follow the policies and procedures approved by management.

Answer 22

C

Question 23

Why is it important to separate systems development​ (or acquisition) and program maintenance activities from​ accounting?
A.
Custody of media is important to help ensure ongoing operations.
B.
This allows accounting to reconcile transaction totals to transaction details.
C.
Lack of separation could result in unauthorized changes to programs and systems.
D.
Accounting personnel have the expertise to evaluate program changes that have been implemented.

Answer 23

C

Question 24

FiddleWare Limited uses a purchased software package to handle the processing of its transactions. An important control that management should implement with respect to information systems is the
A.
use of a formal systems development methodology.
B.
tracking of routine program maintenance changes.
C.
evaluation of potential new systems against organizational objectives.
D.
use of appropriate checkpoints and milestones during development.

Answer 24

C

Question 25

A major control available in a small​ company, which might not be feasible in a large​ company, is
A.
use of sequentially numbered documents.
B.
fewer transactions to process.
C.
the owner-​manager's personal interest in and close relationship with personnel.
D.
a wider segregation of duties.

Answer 25

C

Question 26

Public key encryption uses
A.
two keys.
B.
three keys.
C.
one key.
D.
four keys.

Answer 26

A

Question 27

Carrie is the manager of the Bay Street Pharmacy. Carrie is considering implementing a security tag system to reduce the losses related to stolen goods at their store. The system Carrie is looking at currently costs​ $60 000 and is expected to be effective for 5 years. In order to justify the implementation of the security tag​ system, average theft per year should be at least
A.
​$1000.
B.
​$12 000.
C.
​$60 000.
D.
Theft should be prevented at all costs.

Answer 27

B

Question 28

Effective internal control in a small company that has an insufficient number of employees to permit proper division of responsibilities can best be enhanced by
A.
delegation of​ full, clear-cut responsibility to each employee for the functions assigned to each.
B.
engaging a public accountant to perform monthly ​”write-up” work.
C.
direct participation by the owner of the business in the record-keeping activities of the business.
D.
employment of temporary personnel to aid in the segregation of duties.

Answer 28

C

Question 29

An essential characteristic of the persons performing internal check procedures is
A.
an analytical and inquisitive mind.
B.
independence from the original data preparer.
C.
a thorough knowledge of accounting.
D.
competence in data entry skills.

Answer 29

B

Question 30

A system of internal control consists of policies and procedures designed to provide management with
A.
assurance that fraud will be prevented.
B.
assurance that the​ firm’s resources will be used in the optimal way.
C.
reasonable assurance that the company achieves its objectives.
D.
reasonable assurance that fraud will be detected.

Answer 30

C

Question 31

To comply with auditing​ standards, the auditor need not be concerned with all areas of internal control that apply to management. The​ auditor’s primary concerns are with the​ system’s ability to
A.
promote efficiency and encourage adherence to policy.
B.
prevent and detect financial statement fraud and error.
C.
provide reliable data and safeguard assets.
D.
maintain reliable control systems pertaining to financial transactions.

Answer 31

D

Question 32

The Sarbanes Oxley Act has had consequences for many areas of corporate​ activities, including the following impact on the work of the​ auditor:
A.
The auditor is now required to report all fraudulent activities​ he/she uncovers directly to the Securities and Exchange Commission.
B.
The auditor is specifically required to assess and report on the effectiveness of internal control over financial reporting.
.C.
The auditor must monitor how well management is carrying out its financial reporting responsibilities.
D.
The auditor must prepare a report verifying the information in the financial statements.

Answer 32

B

Question 33

For large​ companies, what is essential for effective monitoring of internal​ controls?
A.
competent external auditors
B.
competent accounting department
C.
competent fraud department
D.
competent internal audit department

Answer 33

D

Question 34

It is important for the public accountant to consider the competence of the audit​ clients’ employees because their competence bears directly and importantly upon the
A.
timing of the tests to be performed.
B.
achievement of the objectives through effective internal controls.
C.
​cost/benefit relationship of internal controls.
D.
comparison of recorded accountability with assets.

Answer 34

B

Question 35

Which of the following best describes the inherent limitations that should be recognized by an auditor when considering the potential effectiveness of an accounting​ system?
A.
The benefits expected to be derived from an effective accounting system usually do not exceed the costs of such control.
B.
Procedures whose effectiveness depends on segregation of duties can be circumvented by collusion.
C.
The competence and integrity of client personnel provides an environment conducive to accounting control and provides assurance that effective control will be achieved.
D.
Procedures designed to assure the execution and recording of transactions in accordance with proper authorizations are effective against irregularities perpetrated by management.

Answer 35

B