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

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

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.

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.

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.

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.

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

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? Options: 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.

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

The negative form of accounts receivable confirmation request is useful except when individual account balances are relatively large.

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? Options: 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.

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

Which audit procedure will best uncover an understatement of sales and accounts receivable? Options: 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.

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

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.

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.

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

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

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.

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.

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.

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

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; requiring that customers send their payments directly to a lockbox; independently comparing the recorded cash receipts with funds actually deposited in the bank.

preparing a bank transfer schedule.

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.

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

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, what should the auditor do?

take no action regarding the event.

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

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.

decreased sales volume resulting from a general business recession.

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

Recommendations for improving the client’s business

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.

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

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? Options: 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.

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

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.

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.

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.

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

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.

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

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.

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

Using the results to forecast future financial outcomes

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

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

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? Options: 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.

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

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.

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:

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

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.

Differences are always disclosed on a computer exception report.

Which internal control will best detect the theft of valuable items from an inventory consisting of hundreds of different items selling for $1 to $10 and a few items selling for hundreds of dollars? Options: 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.

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

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.

Exam 2 Practice

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Professional Development

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University

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Practice Problem

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Hard

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FLASHCARD QUESTION

Front

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

Back

decrease.

FLASHCARD QUESTION

Front

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?

Back

Population size

FLASHCARD QUESTION

Front

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?

Back

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.

FLASHCARD QUESTION

Front

An auditor most likely would give additional consideration to the implications of a deviation if it was initially concealed by a forged document.

Back

initially concealed by a forged document.

FLASHCARD QUESTION

Front

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

Back

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

FLASHCARD QUESTION

Front

Which of the following best illustrates the concept of sampling risk? Options: 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.

Back

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

FLASHCARD QUESTION

Front

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.

Back

Inspecting employee time records for proper approval by supervisors.

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