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WorksheetsExam 2 Practice
Total questions: 77
Worksheet time: 39mins
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.
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
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.
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.
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.
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.
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.
As compared to a nonstatistical sampling plan, a statistical sampling plan
eliminates the need to apply professional judgment in determining sample size.
provides a more representative sample from the population.
makes greater use of mathematical methods in determining an appropriate sample size.
emphasizes qualitative evaluation of results as opposed to quantitative evaluations.
Which of the following is true?
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.
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.
In assessing sampling risk, the risk of incorrect rejection and the risk of assessing control risk too high relate to the
efficiency of the audit.
effectiveness of the audit.
selection of the items in the sample.
audit quality controls.
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
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.
require footnote disclosure.
consider the possibility of a misstatement in the financial statements.
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
Collectability of the receivable balance.
accuracy of the allowance for uncollectible accounts.
accruacy of the aging of accounts receivable.
accuracy of the receivable balance.
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?
Review the cash receipts journal for the month prior to year end.
Intensify the study of internal control concerning the revenue cycle.
Inspect the shipping records documenting the merchandise sold to the debtors.
Increase the assessed level of detection risk for the existence assertion.
The negative form of accounts receivable confirmation request is useful except when
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.
individual account balances are relatively large.
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?
Confirm accounts receivable.
Test a sample of sales transactions, selecting the sample from sales invoices recorded in the sales journal.
Test a sample of sales transactions, selecting the sample from prenumbered shipping documents.
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?
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.
Send out a third confirmation request and, if no response, perform alternative procedures.
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
is engaged in lapping.
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
obtain written representations from management confirming that the securities are properly classified as trading securities.
inspect the audited financial statements of the investee company.
confirm the number of shares owned that are held by an independent custodian.
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
this procedure will detect kiting activities that would otherwise not be detected.
the confirmation form also seeks information about indebtedness to the bank.
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 reconciliation
Using a lockbox system for customer receipts
Comparing the details of deposit tickets and recorded remittance advices
Preparing a bank transfer schedule
All of the following are effective ways to prevent and/or detect lapping, except for
comparing the dollar amounts and dates on the bank deposit slips with customer remittance credits entered into the accounts receivable ledger.
preparing a bank transfer schedule.
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?
The internal auditor performs a periodic count of the actual securities and reconciles the securities counted to the investment subsidiary ledger.
Investments not held by an independent third-party custodian are kept in the Treasurer’s office.
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
inform the appropriate authorities that the report cannot be relied on.
take no action regarding the event.
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 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
A request for the attorney to opine on the correct accounting treatment associated with an outstanding claim or pending lawsuit outcome
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?
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
Recommendations for improving the client’s business
Written management representations obtained by the auditor in connection with a financial statement audit should include a
summary of all corrected misstatements.
statement of management’s belief that any uncorrected misstatements are in fact not misstatements.
statement of management’s belief that the effects of uncorrected misstatements are not material.
summary of all uncorrected misstatements.
A management letter
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.
contains recommendations from the auditor designed to help the client improve the efficiency and effectiveness of its business.
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 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 read the MD&A information to determine whether there is any material inconsistency with the audited financial statements.
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 is derived from the accounting records used to generate the basic financial statements.
The supplementary information covers the period January 1, 2023, through February 15, 2024.
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
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.
same as that used in forming an opinion on the basic financial statements as a whole.
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:
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.
advise management to disclose the acquisition in the notes to the financial statements.
Which of the following statements is correct about an auditor’s required communication with those charged with governance?
Any matters communicated with those charged with governance are also required to be communicated to the entity’s management.
The auditor is required to inform those charged with governance about significant misstatements discovered by the auditor and subsequently corrected by 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:
obtaining a client representation letter.
reviewing derivative transactions reflected on the quarter-end balance sheet.
reviewing the status of long-term leases.
discussing sales contracts with the sales manager.
Which of the following would not be considered an inherent limitation of the potential effectiveness of an entity’s internal control structure?
Collusion among employees
Mistakes in judgment
Management override
Incompatible duties
Actions, policies, and procedures that reflect the overall attitude of management, directors, and owners of the entity about internal control relate to which of the following internal control components?
Monitoring
Risk assessment
Control environment
Information and communication
Vendor account reconciliations are performed by three clerks in the accounts payable department on Friday of each week. The accounts payable supervisor reviews the completed reconciliations the following Monday to ensure they have been completed. The work performed by the supervisor is an example of which COSO component?
Control environment
Risk assessment
Monitoring
Information and communication
Which of the following is an advantage of a computer-based system for transaction processing over a manual system? A computer-based system
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.
will be more efficient in generating 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?
Document the results of procedures used to address the risk of fraud.
Discussions among the engagement team members regarding the risks of material misstatement due to 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?
Property and equipment are usually sold at a loss before being fully depreciated.
Unusual discrepancies exist between the entity’s records and confirmation replies.
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 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.
An auditor should design the audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements.
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
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.
make the investigation necessary to determine whether fraud has actually occurred.
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?
There are numerous delays in preparing timely internal financial reports.
Management does not correct internal control weaknesses that it knows about.
Differences are always disclosed on a computer exception report.
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?
Understating the sales journal
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
the client recently tightened its credit-granting policies.
employees have stolen inventory just before year end.
fictitious credit sales have been recorded during the year.
an employee has been lapping receivables in both years.
Which of the following circumstances would most likely cause an auditor to suspect that there are material misstatements in an entity’s financial statements?
The entity’s management strictly enforces its integrity and ethical values.
Monthly bank reconciliations ordinarily include several outstanding checks.
Management outsources the internal audit function to another CPA firm.
The auditor identifies an inappropriate valuation method that is widely applied by the entity.
Which of the following is an advantage of a computer-based system for transaction processing over a manual system? A computer-based system
does not require as stringent a set of internal controls.
will produce a more accurate set of financial statements.
eliminates the need to reconcile control accounts and subsidiary ledgers.
will be more efficient in generating financial statements.
Which of the following is generally not considered a category of IT general controls?
Controls that determine whether a vendor number matches the preapproved vendors in the vendor database
Controls that restrict systemwide access to programs and data
Controls that oversee the acquisition of application software
Controls that oversee the day-to-day operation of IT applications
Which of the following is an example of an application control?
The client uses access security software to limit access to each of the accounting applications.
Employees are assigned a user ID and password that must be changed every quarter.
The sales system automatically computes the total sale amount and posts the total to the sales journal file.
Systems programmers are restricted from doing applications programming functions.
Which of the following correctly describes an internal control component?
Control activities set the tone of the organization.
Information and communication systems have to do with management’s analysis of risk.
Risk assessment relates to assessing the quality of the internal control structure over time.
Monitoring relates to ongoing assessment by management to determine whether controls are operating as intended.
An internal control deficiency may be defined as a condition in which material misstatements would ordinarily not be timely detected by
auditors in assisting control risk.
the controller reconciling the general ledger.
employees in normal course of assigned functions.
the chief financial officer reviewing interim financial statements.
Which of the following is an example of an operation deficiency in internal control?
The company does not have a code of conduct for employees to consider.
The cashier has online ability to post write-offs to accounts receivable accounts.
Clerks who conduct monthly reconciliation of intercompany accounts do not understand the nature of misstatements that could occur in those accounts.
Management does not have a process to identify and assess risks on a recurring basis.
A material weakness in internal control represents a control deficiency that
more than remotely adversely affects a company’s ability to initiate, authorize, record, process, or report external financial statements reliably.
results in a reasonable possibility that internal control will not prevent or detect material financial statement misstatements.
exists because a necessary control is missing or not properly designed.
reduces the efficiency and effectiveness of the entity’s operations.
On the basis of audit evidence gathered and evaluated, an auditor decides to increase assessed control risk from that originally planned. To achieve an audit risk level (AcAR) that is substantially the same as the planned audit risk level (AAR), the auditor will
increase inherent risk.
increase materiality levels.
decrease substantive testing.
decrease planned detection risk.
An auditor uses assessed control risk to
evaluate the effectiveness of the entity’s internal controls.
identify transactions and account balances where inherent risk is at the maximum.
indicate whether materiality thresholds for planning and evaluation purposes are sufficiently high.
determine the acceptable level of detection risk for financial statement assertions.
The ultimate purpose of assessing control risk is to contribute to the auditor’s evaluation of the
factors that raise doubts about the auditability of the financial statements.
operating effectiveness of internal control policies and procedures.
risk that material misstatements exist in the financial statements.
possibility that the nature and extent of substantive tests may be reduced.
Before processing, the system validates the sequence of items to identify any breaks in sequence of input documents. This automated control is primarily designed to ensure the
accuracy of input.
authorization of data entry.
completeness of input.
restriction of duplicate entries.
An auditor’s decision either to apply analytical procedures as substantive tests or to perform substantive tests of transactions and account balances usually is determined by the
availability of data aggregated at a high level.
timing of tests performed after the balance sheet date.
auditor’s familiarity with industry trends.
relative effectiveness and efficiency of the tests.
The auditor faces a risk that the audit will not detect material misstatements that occur in the accounting process. To minimize this risk, the auditor relies primarily on
internal control.
tests of controls.
substantive tests.
statistical analysis.
A conceptually logical approach to the auditor’s evaluation of internal control consists of the following four steps:
I Determining the internal controls that should prevent or detect and correct errors and fraud.
II Identifying control deficiencies to determine their effect on the nature, timing, or extent of auditing procedures to be applied and suggestions to be made to the client.
III Determining whether the necessary internal control procedures are prescribed and are being followed satisfactorily.
IV Considering the types of errors and fraud that can occur.
What should be the order in which these four steps are performed?
I, II, III, and IV
I, III, IV, and II
III, IV, I, and II
IV, I, III, and II
To support the auditor’s initial assessment of control risk below maximum, the auditor performs procedures to determine that internal controls are operating effectively. Which of the following audit procedures is the auditor performing?
Tests of controls
Substantive tests of transactions
Tests of details of balances
Tests of trends and ratios
The primary objective of performing tests of controls is to obtain
sufficient appropriate audit evidence to afford a reasonable basis for the auditor’s opinion, without the need for additional evidence.
a reasonable degree of assurance that the client’s internal controls are operating effectively on a consistent basis throughout the year.
assurances that informative disclosures in the financial statements are reasonably adequate.
knowledge and understanding of the client’s prescribed procedures and methods.
Tests of controls are most likely to be omitted when
an account balance reflects many transactions.
control risk is assessed at less than the maximum.
the understanding of internal control indicates that evaluating the effectiveness of control policies and procedures is likely to be inefficient.
the auditor wishes to increase the acceptable level of detection risk.
Which of the following controls would be most effective in detecting a failure to record cash received from customers paying on their accounts?
A person in accounting reconciles the bank deposit to the cash receipts journal.
Transactions recorded in the cash receipts journal are posted on a real-time basis to the accounts receivable database file.
Monthly statements are sent to customers and any discrepancies are resolved by someone independent of cash handling and accounting.
Deposits of cash received are made daily.
The accounting system will not post a sales transaction to the sales journal without a valid bill of lading number. This control is most relevant to which transaction-related Objective for sales?
Accuracy
Occurrence
Completeness
Posting and summarization
The accounting system automatically obtains the unit price based on scans of bar codes for merchandise sold. This control is most relevant to which transaction-related Objective for sales?
Posting and Summarization
Occurrence
Completeness
Accuracy
A sales invoice for $5,200 was computed correctly but, by mistake, was entered as $2,500 to the sales journal and posted to the accounts receivable database. The customer remitted only $2,500, the amount on their monthly statement.
Prelistings and predetermined totals are used to control postings.
The customers’ monthly statements are verified and sent by a responsible person other than the bookkeeper who prepared them.
Unauthorized remittance deductions made by customers or other matters in dispute are investigated promptly by a person independent of the accounts receivable function.
Sales invoice numbers, prices, discounts, extensions, and footings are independently checked.
Shipments occurring in December 2023 did not get recorded until the first few days of January 2024.
The system automatically assigns bill of lading numbers and ensures no duplicates are issued.
As goods leave the shipping dock, the system generates a bill of lading and associated sales invoice, which is automatically recorded in the sales journal.
The accounting system requires entry of a valid bill of lading number provided by the shipping department before a sales transaction is accepted for entry.
The system prevents the creation of a bill of lading without a customer order dated prior to the shipping date.
To determine whether internal control relative to the revenue cycle of a wholesaling entity is operating effectively in minimizing the failure to prepare sales invoices, an auditor would most likely select a sample of transactions from the population represented by the
sales order file.
customer order file.
shipping document file.
sales invoice file.
An auditor is performing substantive tests of transactions for sales. One step is to trace a sample of debit entries from the accounts receivable database back to the supporting duplicate sales invoices. What will the auditor intend to establish by this step?
Sales invoices represent existing sales.
All sales have been recorded.
All sales invoices have been correctly posted to customer accounts.
Debit entries in the accounts receivable database are correctly supported by sales invoices.
An auditor wishes to test the completeness assertion for sales. Which of the following audit tests would most likely accomplish this objective?
Select a sample of shipments occurring during the year and trace each one to inclusion in the sales journal.
Compare accounts receivable turnover (net credit sales/average gross receivables) in the current year to that achieved in the prior year.
Use common size analysis to compare recorded sales to sales recorded by other companies in the same industry.
Select large individual sales recorded during the year and review supporting documentation.
