As compared to a nonstatistical sampling plan, a statistical sampling plan

makes greater use of mathematical methods in determining an appropriate sample size.

eliminates the need to apply professional judgment in determining sample size.

provides a more representative sample from the population.

emphasizes qualitative evaluation of results as opposed to quantitative evaluations.

Which of the following is true?

Since the tolerable deviation rate less the allowance for sampling risk is less than the sample deviation rate, the auditor may not rely on the control.

Since the tolerable deviation rate exceeds the sample deviation rate, the auditor may rely on the control.

Since the tolerable deviation plus the allowance for sampling risk exceeds the sample deviation rate, the auditor may not rely on the control.

Since the sample deviation rate exceeds the tolerable deviation rate less the allowance for sampling risk, the auditor may rely on the control.

In assessing sampling risk, the risk of incorrect rejection and the risk of assessing control risk too high relate to the

selection of the items in the sample.

As a result of analytical procedures, the auditor determines that the gross profit percentage has declined from 30 percent in the preceding year to 20 percent in the current year. The auditor should

consider the possibility of a misstatement in the financial statements.

express a qualified opinion due to inability of the client company to continue as a going concern.

evaluate management’s performance in causing this decline.

After a CPA has determined that accounts receivable have increased as a result of slow collections in a “tight money” environment, the CPA will be likely to

expand tests of collectibility.

review the going concern ramifications.

review the credit and collection policy.

increase the balance in the allowance for bad debt account.

The return of a positive confirmation of accounts receivable without an exception attests to the

accuracy of the receivable balance.

Collectability of the receivable balance.

accuracy of the allowance for uncollectible accounts.

accruacy of the aging of accounts receivable.

Which of the following procedures will an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests?

Inspect the shipping records documenting the merchandise sold to the debtors.

Review the cash receipts journal for the month prior to year end.

Intensify the study of internal control concerning the revenue cycle.

Increase the assessed level of detection risk for the existence assertion.

The negative form of accounts receivable confirmation request is useful except when

individual account balances are relatively large.

internal control surrounding accounts receivable is considered to be effective.

a large number of small balances is involved.

the auditor has reason to believe the persons receiving the requests are likely to give them consideration.

Which of the following will likely provide the most assurance concerning the accuracy balance-related objective for accounts receivable?

Vouch amounts in the subsidiary ledger to details on shipping documents.

Compare receivable turnover ratios with industry statistics for reasonableness.

Inquire about receivables pledged under loan agreements.

Assess the allowance for uncollectible accounts for reasonableness.

Which of the following audit procedures will best uncover an understatement of sales and accounts receivable?

Test a sample of sales transactions, selecting the sample from prenumbered shipping documents.

Test a sample of sales transactions, selecting the sample from sales invoices recorded in the sales journal.

Review the aged accounts receivable trial balance.

The confirmation of customers’ accounts receivable rarely provides reliable evidence about the completeness assertion because

customers may not be inclined to report understatement errors in their accounts.

recipients usually respond only if they disagree with the information on the request.

many customers merely sign and return the confirmation without verifying details.

there is likely to be reliable third-party evidence available.

The auditor sends out positive accounts receivable confirmations for a client. Assuming a second confirmation is sent out to a major customer who still fails to respond, which action should the auditor take?

Send out a third confirmation request and, if no response, perform alternative procedures.

Consider the nonresponse as a minor audit finding and use responding confirmations as a basis for test results.

Issue a qualified opinion due to the lack of sufficient audit evidence.

Provide the client a copy of the accounts receivable confirmation and request that they obtain the information from the customer.

An auditor who is auditing accounts receivable would least likely perform which of the following tests?

Select cash disbursements made shortly after year end and examine the supporting documentation such as receiving reports and vendor invoices.

Confirm a sample of accounts receivables with the customers that owe the balances.

Vouch cash receipts to the accounts receivables transactions.

Obtain an aged trial balance of accounts receivable and trace the total to the general ledger control account.

A CPA obtains a January 10 cutoff bank statement for a client directly from the bank. Very few of the outstanding checks listed on the client’s December 31 bank reconciliation cleared during the cutoff period. A probable cause for this is that the client

transmitted the checks to payees after year end.

has overstated its year-end bank balance.

In establishing the existence and ownership of an investment held by a corporation in the form of publicly traded stock, an auditor should inspect the securities or

confirm the number of shares owned that are held by an independent custodian.

obtain written representations from management confirming that the securities are properly classified as trading securities.

inspect the audited financial statements of the investee company.

determine that the investment is carried at the lower of cost or market.

The auditor should ordinarily send confirmation requests to all banks with which the client has conducted any business during the year, regardless of the year-end balance because

the confirmation form also seeks information about indebtedness to the bank.

this procedure will detect kiting activities that would otherwise not be detected.

the sending of confirmation requests to all such banks is required by auditing standards.

this procedure relieves the auditor of any responsibility with respect to nondetection of forged checks.

Which of the following controls would most likely detect a kiting scheme?

Preparing a bank transfer schedule

Preparing a bank reconciliation

Using a lockbox system for customer receipts

Comparing the details of deposit tickets and recorded remittance advices

All of the following are effective ways to prevent and/or detect lapping, except for

preparing a bank transfer schedule.

comparing the dollar amounts and dates on the bank deposit slips with customer remittance credits entered into the accounts receivable ledger.

requiring that customers send their payments directly to a lockbox.

independently comparing the recorded cash receipts with funds actually deposited in the bank.

Which of the following discovered by the auditor would be a weakness in the client’s internal control over its investments?

Investments not held by an independent third-party custodian are kept in the Treasurer’s office.

The internal auditor performs a periodic count of the actual securities and reconciles the securities counted to the investment subsidiary ledger.

A designated accounting individual that has no custody or authorization responsibilities maintains the detailed records of the investment subsidiary ledger.

The client’s board of directors authorizes all purchases and sales of investment securities.

When a contingency is resolved subsequent to the issuance of audited financial statements, which correctly contained disclosure of the contingency in the footnotes based on information available at the date of issuance, the auditor should

take no action regarding the event.

inform the appropriate authorities that the report cannot be relied on.

insist that the client issue revised financial statements.

inform the audit committee that the report cannot be relied on.

Which of the following would be least likely to be included in a standard inquiry to the client’s attorney?

A request for the attorney to opine on the correct accounting treatment associated with an outstanding claim or pending lawsuit outcome

A list provided by the client of pending litigation or asserted or unasserted claims with which the attorney has had some involvement

A request that the attorney provide information about the status of pending litigation

A request for the attorney to identify any pending litigation or threatened legal action not identified on a list provided by the client

An example of an event occurring in the period between the end of the year being audited and the date of the auditor’s report that normally will not require disclosure in the financial statements or auditor’s report is

decreased sales volume resulting from a general business recession.

serious damage to the company’s plant from a widespread flood.

issuance of a widely advertised capital stock issue with restrictive covenants.

settlement of a large liability for considerably less than the amount recorded.

Which of the following is not a required item to be communicated by the auditor to the audit committee or others charged with governance?

Recommendations for improving the client’s business

Information about the auditor’s responsibility in an audit of financial statements

Information about the overall scope and timing of the audit

Significant findings arising from the audit

Written management representations obtained by the auditor in connection with a financial statement audit should include a

statement of management’s belief that the effects of uncorrected misstatements are not material.

summary of all corrected misstatements.

statement of management’s belief that any uncorrected misstatements are in fact not misstatements.

summary of all uncorrected misstatements.

contains recommendations from the auditor designed to help the client improve the efficiency and effectiveness of its business.

is the auditor's response on significant deficiencies and material weaknesses in internal control.

Is mandatory in all audits and must be dated the same date as the audit report.

contains management's representation to the auditor documenting statements made by management to the auditor during the audit about matters affecting the financial statements.

The Form 10-K filed by management of a public company includes a section on management’s discussion and analysis (MD&A) in addition to the annual financial statements. Which of the following best describes the auditor’s responsibility for the MD&A information?

The auditor must read the MD&A information to determine whether there is any material inconsistency with the audited financial statements.

The auditor must perform sufficient appropriate audit procedures to opine on the MD&A information.

The auditor has no responsibilities related to the MD&A disclosures.

The auditor must provide a disclaimer of opinion related to the MD&A information.

Management of Thurman Corporation included additional supplementary information in documents that include the audited financial statements for the year ended December 31, 2023. Management has asked its audit firm, Wally, CPAs, whether they can report on the supplementary information. Which of the following conditions would preclude Wally, CPAs, from conducting this engagement?

The supplementary information covers the period January 1, 2023, through February 15, 2024.

The supplementary information is derived from the accounting records used to generate the basic financial statements.

Wally’s opinion on the basic financial statements was unmodified.

When evaluating supplementary information, Wally plans to use the same materiality threshold as that used in the audit of the basic financial statements.

Investments and property schedules are presented for purposes of additional analysis in a document outside the basic financial statements. The schedules are not required supplementary information. When the auditor is engaged to report on whether the supplementary information is fairly stated in relation to the audited financial statements as a whole, the measurement of materiality is the

same as that used in forming an opinion on the basic financial statements as a whole.

greater of the individual schedule of investments or schedule of property by itself.

lesser of the individual schedule of investments or schedule of property by itself.

combined total of both the individual schedules of investments and property as a whole.

A client acquired 25% of its outstanding capital stock after year end but prior to the date of the auditor’s report. The auditor should:

advise management to disclose the acquisition in the notes to the financial statements.

disclose the acquisition in the opinion paragraph of the auditor’s report.

advise management to adjust the balance sheet to reflect the acquisition.

issue pro forma financial statements giving effect to the acquisition as if it had occurred at year end.

Which of the following statements is correct about an auditor’s required communication with those charged with governance?

The auditor is required to inform those charged with governance about significant misstatements discovered by the auditor and subsequently corrected by management.

Any matters communicated with those charged with governance are also required to be communicated to the entity’s management.

Disagreements with management about the application of accounting principles must be communicated in writing to those charged with governance.

The auditor should not communicate frequently recurring misstatements unless they are material.

In addition to making management inquiries, an auditor should perform the following procedures to identify client contingencies with the exception of:

reviewing derivative transactions reflected on the quarter-end balance sheet.

obtaining a client representation letter.

reviewing the status of long-term leases.

discussing sales contracts with the sales manager.

Which of the following is an advantage of a computer-based system for transaction processing over a manual system? A computer-based system

will be more efficient in generating financial statements.

eliminates the need to reconcile control accounts and subsidiary ledgers.

does not require as stringent a set of internal controls.

will produce a more accurate set of financial statements.

Which one of the following is NOT a condition that must be met for an application to be classified as Audit Sampling?

Using the results to forecast future financial outcomes

Projecting the results of the sample to the population being examined

Comparing the projected results to some existing criterion

Examining less than 100% of the items composing the population

Which action regarding fraud is an activity related to performance of risk assessment procedures?

Discussions among the engagement team members regarding the risks of material misstatement due to fraud.

Document the results of procedures used to address the risk of fraud.

Consider the characteristics of journal entries, particularly those made near year end.

Consider whether estimates prepared and recorded by management could indicate a bias in reporting.

Which of the following circumstances is most likely to cause an auditor to increase the assessment of the risk of material misstatement of the financial statements due to fraud?

Unusual discrepancies exist between the entity’s records and confirmation replies.

Property and equipment are usually sold at a loss before being fully depreciated.

Monthly bank reconciliations usually include several in-transit items.

Clerical errors are listed on a computer-generated exception report.

Which of the following statements reflects an auditor’s responsibility for detecting fraud?

An auditor should design the audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements.

An auditor is responsible for detecting employee errors and simple fraud, but not for discovering fraudulent acts involving employee collusion or management override.

An auditor should plan the audit to detect fraud caused by departures from GAAP.

An auditor is not responsible for detecting fraud unless the application of auditing standards would result in such detection.

If an independent audit leading to an opinion on financial statements causes the auditor to believe that a material misstatement due to fraud exists, the auditor should first

make the investigation necessary to determine whether fraud has actually occurred.

request that management investigate to determine whether fraud has actually occurred.

consider the implications for other aspects of the audit and discuss the matter with the appropriate levels of management.

consider whether fraud was the result of a failure by employees to comply with existing controls.

Which of the following is least likely to suggest to an auditor that the client’s management may have overridden internal control?

Differences are always disclosed on a computer exception report.

There are numerous delays in preparing timely internal financial reports.

Management does not correct internal control weaknesses that it knows about.

There have been two new controllers this year.

Which of the following internal controls will best detect the theft of valuable items from an inventory that consists of hundreds of different items selling for $1 to $10 and a few items selling for hundreds of dollars?

Maintain a perpetual inventory of only the more valuable items, with frequent periodic verification of the validity of the perpetual inventory records.

Have an independent auditing firm examine and report on management’s assertion about the design and operating effectiveness of the control activities relevant to inventory.

Have separate warehouse space for the more valuable items, with sequentially numbered tags.

Require an authorized officer’s signature on all requisitions for the more valuable items.

Cash receipts from sales on account have been misappropriated. Which of the following acts will conceal this embezzlement and be least likely to be detected by the auditor?

Overstating the accounts receivable control account

Overstating the accounts receivable subsidiary records

Understating the cash receipts journal

An auditor discovers that a client’s accounts receivable turnover is substantially lower for the current year than for the prior year. This trend may indicate that

fictitious credit sales have been recorded during the year.

the client recently tightened its credit-granting policies.

employees have stolen inventory just before year end.

an employee has been lapping receivables in both years.

Exam 2 Practice

Authored by Erin Goodson

Professional Development

University

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77 questions

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MULTIPLE CHOICE QUESTION

30 sec • 1 pt

If all other factors specified in a sampling plan remain constant, changing the ARO from 5 percent to 10 percent will cause the required sample size to

increase.

remain the same.

decrease.

become indeterminate.

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

Of the four factors that determine the initial sample size in attributes sampling (population size, tolerable exception rate, acceptable risk of overreliance, and expected population exception rate), which factor has the least effect on sample size?

Population size

Expected population exception rate

Tolerable exception rate

Acceptable risk of overreliance

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

What is an auditor’s evaluation of a statistical sample for attributes when a test of 50 documents results in two exceptions if the tolerable exception rate is 7 percent, the expected population exception rate is 5 percent, and the allowance for sampling risk is 2 percent?

Modify the assessed level of control risk because the tolerable exception rate plus the allowance for sampling risk exceeds the population exception rate.

Accept the sample results as support for the assessed level of control risk because the sample exception rate plus the allowance for sampling risk is less than the tolerable exception rate.

Accept the sample results as support for the assessed level of control risk because the tolerable exception rate minus the allowance for sampling risk equals the expected population exception rate.

Modify the assessed level of control risk because the sample exception rate plus the allowance for sampling risk exceeds the tolerable exception rate.

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

An auditor most likely would give additional consideration to the implications of a deviation if it was

the only deviation discovered in the sample.

identical to a deviation discovered during the prior year’s audit.

caused by an employee’s misunderstanding of instructions.

initially concealed by a forged document.

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor

minimize the failure to detect errors and fraud.

eliminate the risk of nonsampling errors.

design more effective audit procedures.

measure the sufficiency of the audit evidence by quantifying sampling risk.

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

Which of the following best illustrates the concept of sampling risk?

The documents related to the chosen sample may not be available to the auditor for inspection.

An auditor may fail to recognize errors in the documents from the sample.

A randomly chosen sample may not be representative of the population as a whole for the characteristic of interest.

An auditor may select audit procedures that are not appropriate to achieve the specific objective.

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

For which of the following tests would an auditor most likely use attributes sampling?

Selecting accounts receivable for confirmation of account balances.

Inspecting employee time records for proper approval by supervisors.

Making an independent estimate of the amount of a LIFO inventory.

Examining invoices in support of the valuation of fixed asset additions.

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