Reporting 2 Flashcards
Which of the following statements is correct concerning probability-proportional-to-size (PPS) sampling, also known as dollar-unit sampling?
The auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan.
Which of the following statements extracted from a client’s lawyer’s letter concerning litigation, claims, and assessments most likely would cause the auditor to request clarification?
“We believe that the action can be settled for less than the damages claimed.
An auditor most likely would limit substantive audit tests of sales transactions when control risk is assessed as low for the existence assertion concerning sales transactions, and the auditor has already gathered evidence supporting:
cash receipts and accounts receivable.
In establishing the existence and ownership of long-term investments in the form of publicly traded stock, an auditor most likely would inspect the securities or:
confirm the number of shares owned that are held by an independent custodian
Which of the following would be a consideration in planning a sample for a test of subsequent cash receipts?
Preliminary judgments about materiality levels
Davis, CPA, believes there is substantial doubt about the ability of Hill Co. to continue as a going concern for a reasonable period of time. In evaluating Hill’s plans for dealing with the adverse effects of future conditions and events, Davis most likely would consider, as a mitigating factor, Hill’s plans to:
negotiate reductions in required dividends being paid on preferred stock.
Regardless of the assessed risk of material misstatement, an auditor would perform
substantive tests to restrict detection risk for significant transaction classes
Which of the following is not generally considered necessary if an auditor applies principal substantive tests to details of balance sheet accounts at an interim date?
Assessing control risk below the maximum is required in order to have a reasonable basis for extending audit conclusions from an interim date to the balance sheet date.
An important element in the effective application of analytical procedures is the development by the auditor of relevant expectations regarding the client’s financial statements. As expectations on the part of the auditor become more precise:
the range of expected differences become narrower, and, accordingly, the likelihood increases that significant differences from the expectations are due to misstatements.
An auditor is required to confirm accounts receivable if the accounts receivable balances are:
material to the financial statements.
An auditor is determining the sample size for an inventory observation using mean-per-unit estimation, which is a variables sampling plan. To calculate the required sample size, the auditor usually determines:
both the variability in the dollar amounts of inventory items and the risk of incorrect acceptance.
Which of the following statements is correct concerning statistical sampling in tests of controls?
Deviations from specific internal control procedures at a given rate ordinarily result in misstatements at a lower rate.
To what degree, if at all, is a significant deficiency related to a material weakness?
It is less severe than a material weakness.
To satisfy the valuation assertion when auditing an investment accounted for by the equity method, an auditor most likely would
examine the audited financial statements of the investee company.
The client asked the auditor to audit financial statements covering the current year. The auditor did not observe at the prior year’s physical inventory. Which of the following actions would the auditor most likely take?
Audit the prior-year inventory using alternative substantive procedures
