Certified Public Accountant CPA Questions + Answers Part 41
Posted: Tue Feb 22, 2022 6:46 pm
QUESTION 223
This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.
Was the difference of opinion on the accrued pension liabilities that existed between the engagement personnel and the actuarial specialist resolved in accordance with firm policy and appropriately documented?
A. Practitioner'sreportonmanagement'sassertionaboutanentity'scompliancewithspecifiedrequirements.
B. Auditor'scommunicationsonsignificantdeficienciesininternalcontrol.
C. Auditinquirylettertolegalcounsel.
D. Lawyer's response to audit inquiry letter.
E. Communicationfromthosechargedwithgovernancetotheauditor.
F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).
G. Report on the application of accounting principles.
H. Auditor's engagement letter.
I. Letter for underwriters.
J. Accounts receivable confirmation request.
K. Requestforbankcutoffstatement.
L. Explanatory paragraph of an auditor's report on financial statements.
M. Partner's engagement review notes.
N. Management representation letter.
O. Successor auditor's communication with predecessor auditor.
P. Predecessorauditor'scommunicationwithsuccessorauditor.
Correct Answer: M
Section: Auditing and Attestation (II) (Volume E)
Explanation Explanation/Reference:
Explanation:
Choice "M" is correct. The engagement partner has ultimate responsibility for the performance of the audit and the preparation of the report. He or she would therefore want to ensure that any differences of opinion between engagement personnel and a specialist were resolved in accordance with firm policy and were appropriately documented.
QUESTION 224
This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.
Our audit is designed to provide reasonable assurance of detecting misstatements that, in our judgment, could have a material effect on the financial statements taken as a whole. Consequently, our audit will not necessarily detect all misstatements that exist due to error, fraudulent financial reporting, or misappropriation of assets.
A. Practitioner'sreportonmanagement'sassertionaboutanentity'scompliancewithspecifiedrequirements.
B. Auditor'scommunicationsonsignificantdeficienciesininternalcontrol.
C. Auditinquirylettertolegalcounsel.
D. Lawyer's response to audit inquiry letter.
E. Communicationfromthosechargedwithgovernancetotheauditor.
F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).
G. Report on the application of accounting principles.
H. Auditor's engagement letter.
I. Letter for underwriters.
J. Accounts receivable confirmation request.
K. Requestforbankcutoffstatement.
L. Explanatory paragraph of an auditor's report on financial statements.
M. Partner's engagement review notes.
N. Management representation letter.
O. Successor auditor's communication with predecessor auditor.
P. Predecessorauditor'scommunicationwithsuccessorauditor.
Correct Answer: H
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "H" is correct. An understanding with the client should be established, and this understanding should be documented through an engagement letter. The understanding, and the letter, should include the auditor's responsibilities, including the fact that an audit is designed to provide only reasonable assurance of detecting material misstatements, and therefore may not necessarily detect all misstatements that exist.
QUESTION 225
This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.
There have been no communications from regulatory agencies concerning noncompliance with or deficiencies in financial reporting practices.
A. Practitioner'sreportonmanagement'sassertionaboutanentity'scompliancewithspecifiedrequirements.
B. Auditor'scommunicationsonsignificantdeficienciesininternalcontrol.
C. Auditinquirylettertolegalcounsel.
D. Lawyer's response to audit inquiry letter.
E. Communicationfromthosechargedwithgovernancetotheauditor.
F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).
G. Report on the application of accounting principles.
H. Auditor's engagement letter.
I. Letter for underwriters.
J. Accounts receivable confirmation request.
K. Requestforbankcutoffstatement.
L. Explanatory paragraph of an auditor's report on financial statements.
M. Partner's engagement review notes.
N. Management representation letter.
O. Successor auditor's communication with predecessor auditor.
P. Predecessorauditor'scommunicationwithsuccessorauditor.
Correct Answer: N
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "N" is correct. Management's statement that there have been no communications from regulatory agencies concerning noncompliance with or deficiencies
in financial reporting practices provides information regarding the completeness of information, and would be included in the management representation letter.
QUESTION 226
This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.
Nothing came to our attention that caused us to believe that at October 31, 20XX, there was any change in the capital stock, increase in long-term debt, or decrease in consolidated net current assets or stockholders' equity as compared with the amounts shown in the September 30, 20XX unaudited condensed consolidated balance sheet.
A. Practitioner'sreportonmanagement'sassertionaboutanentity'scompliancewithspecifiedrequirements.
B. Auditor'scommunicationsonsignificantdeficienciesininternalcontrol.
C. Auditinquirylettertolegalcounsel.
D. Lawyer's response to audit inquiry letter.
E. Communicationfromthosechargedwithgovernancetotheauditor.
F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).
G. Report on the application of accounting principles.
H. Auditor's engagement letter.
I. Letter for underwriters.
J. Accounts receivable confirmation request.
K. Requestforbankcutoffstatement.
L. Explanatory paragraph of an auditor's report on financial statements.
M. Partner's engagement review notes.
N. Management representation letter.
O. Successor auditor's communication with predecessor auditor.
P. Predecessorauditor'scommunicationwithsuccessorauditor.
Correct Answer: I
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "I" is correct. In a comfort letter, negative assurance is provided with respect to changes in selected financial statement items during a period subsequent to the date and period of the latest financial statements included in the registration statement.
QUESTION 227
This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.
It is our opinion that the possible liability to the company in this proceeding is nominal in amount.
A. Practitioner'sreportonmanagement'sassertionaboutanentity'scompliancewithspecifiedrequirements.
B. Auditor'scommunicationsonsignificantdeficienciesininternalcontrol.
C. Auditinquirylettertolegalcounsel.
D. Lawyer's response to audit inquiry letter.
E. Communicationfromthosechargedwithgovernancetotheauditor.
F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).
G. Report on the application of accounting principles.
H. Auditor's engagement letter.
I. Letter for underwriters.
J. Accounts receivable confirmation request.
K. Requestforbankcutoffstatement.
L. Explanatory paragraph of an auditor's report on financial statements.
M. Partner's engagement review notes.
N. Management representation letter.
O. Successor auditor's communication with predecessor auditor.
P. Predecessorauditor'scommunicationwithsuccessorauditor.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "D" is correct. In response to an audit inquiry letter, a lawyer would provide corroboration regarding the likelihood of an unfavorable outcome to pending litigation and an estimate of any potential loss.
QUESTION 228
This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.
As discussed in Note 4 to the financial statements, the company experienced a net loss for the year ended July 31, 20XX, and is currently in default under substantially all of its debt agreements. In addition, on September 25, 20XX, the company filed a prenegotiated voluntary petition for relief under Chapter 11 of the
U.S. Bankruptcy Code. These matters raise substantial doubt about the company's ability to continue as a going concern.
A. Practitioner'sreportonmanagement'sassertionaboutanentity'scompliancewithspecifiedrequirements.
B. Auditor'scommunicationsonsignificantdeficienciesininternalcontrol.
C. Auditinquirylettertolegalcounsel.
D. Lawyer's response to audit inquiry letter.
E. Communicationfromthosechargedwithgovernancetotheauditor.
F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).
G. Report on the application of accounting principles.
H. Auditor's engagement letter.
I. Letter for underwriters.
J. Accounts receivable confirmation request.
K. Requestforbankcutoffstatement.
L. Explanatory paragraph of an auditor's report on financial statements.
M. Partner's engagement review notes.
N. Management representation letter.
O. Successor auditor's communication with predecessor auditor.
P. Predecessorauditor'scommunicationwithsuccessorauditor.
Correct Answer: L
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "L" is correct. When there is substantial doubt about an entity's ability to continue as a going concern, the auditor would state his or her concerns in an explanatory paragraph of the auditor's report.
QUESTION 229
This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.
During the year under audit, we were advised that management consulted with Better & Best, CPAs. The purpose of this consultation was to obtain another CPA firm's opinion concerning the company's recognition of certain revenue that we believe should be deferred to future periods. Better & Best's opinion was consistent with our opinion, so management did not recognize the revenue in the current year.
A. Practitioner'sreportonmanagement'sassertionaboutanentity'scompliancewithspecifiedrequirements.
B. Auditor'scommunicationsonsignificantdeficienciesininternalcontrol.
C. Auditinquirylettertolegalcounsel.
D. Lawyer's response to audit inquiry letter.
E. Communicationfromthosechargedwithgovernancetotheauditor.
F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).
G. Report on the application of accounting principles.
H. Auditor's engagement letter.
I. Letter for underwriters.
J. Accounts receivable confirmation request.
K. Requestforbankcutoffstatement.
L. Explanatory paragraph of an auditor's report on financial statements.
M. Partner's engagement review notes.
N. Management representation letter.
O. Successor auditor's communication with predecessor auditor.
P. Predecessorauditor'scommunicationwithsuccessorauditor.
Correct Answer: F
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "F" is correct. Unless all of those charged with governance are also involved with managing the entity, the auditor should discuss with those charged with governance significant accounting or auditing matters that were the subject of outside consultation.
QUESTION 230
This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.
The company believes that all material expenditures that have been deferred to future periods will be recoverable.
A. Practitioner'sreportonmanagement'sassertionaboutanentity'scompliancewithspecifiedrequirements.
B. Auditor'scommunicationsonsignificantdeficienciesininternalcontrol.
C. Auditinquirylettertolegalcounsel.
D. Lawyer's response to audit inquiry letter.
E. Communicationfromthosechargedwithgovernancetotheauditor.
F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).
G. Report on the application of accounting principles.
H. Auditor's engagement letter.
I. Letter for underwriters.
J. Accounts receivable confirmation request.
K. Requestforbankcutoffstatement.
L. Explanatory paragraph of an auditor's report on financial statements.
M. Partner's engagement review notes.
N. Management representation letter.
O. Successor auditor's communication with predecessor auditor.
P. Predecessorauditor'scommunicationwithsuccessorauditor.
Correct Answer: N
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "N" is correct. Management's discussion of its belief that all material expenditures that have been deferred to future periods will be recoverable provides information regarding recognition, measurement, and disclosure, and would be included in the management representation letter.
QUESTION 231
This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.
Our use of professional judgment and the assessment of audit risk and materiality for the purpose of our audit mean that matters may have existed that would have been assessed differently by you. We make no representation as to the sufficiency or appropriateness of the information in our audit documentation for your purposes.
A. Practitioner'sreportonmanagement'sassertionaboutanentity'scompliancewithspecifiedrequirements.
B. Auditor'scommunicationsonsignificantdeficienciesininternalcontrol.
C. Auditinquirylettertolegalcounsel.
D. Lawyer's response to audit inquiry letter.
E. Communicationfromthosechargedwithgovernancetotheauditor.
F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).
G. Report on the application of accounting principles.
H. Auditor's engagement letter.
I. Letter for underwriters.
J. Accounts receivable confirmation request.
K. Requestforbankcutoffstatement.
L. Explanatory paragraph of an auditor's report on financial statements.
M. Partner's engagement review notes.
N. Management representation letter.
O. Successor auditor's communication with predecessor auditor.
P. Predecessorauditor'scommunicationwithsuccessorauditor.
Correct Answer: P
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "P" is correct. An audit of a new client may be facilitated by review of the predecessor's audit documentation. The predecessor should make it clear that they are not responsible for the sufficiency or appropriateness of the information in their audit documentation for the successor auditor's purposes.
QUESTION 232
This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.
Indicate in the space provided below whether this information agrees with your records. If there are exceptions, please provide any information that will assist the auditor in reconciling the difference.
A. Practitioner'sreportonmanagement'sassertionaboutanentity'scompliancewithspecifiedrequirements.
B. Auditor'scommunicationsonsignificantdeficienciesininternalcontrol.
C. Auditinquirylettertolegalcounsel.
D. Lawyer's response to audit inquiry letter.
E. Communicationfromthosechargedwithgovernancetotheauditor.
F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).
G. Report on the application of accounting principles.
H. Auditor's engagement letter.
I. Letter for underwriters.
J. Accounts receivable confirmation request.
K. Requestforbankcutoffstatement.
L. Explanatory paragraph of an auditor's report on financial statements.
M. Partner's engagement review notes.
N. Management representation letter.
O. Successor auditor's communication with predecessor auditor.
P. Predecessorauditor'scommunicationwithsuccessorauditor.
Correct Answer: J
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "J" is correct. Receivable confirmations request customers of the client to confirm balances and identify discrepancies.
QUESTION 233
This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.
Blank checks are maintained in an unlocked cabinet along with the check-signing machine. Blank checks and the check-signing machine should be locked in separate locations to prevent the embezzlement of funds.
A. Practitioner'sreportonmanagement'sassertionaboutanentity'scompliancewithspecifiedrequirements.
B. Auditor'scommunicationsonsignificantdeficienciesininternalcontrol.
C. Auditinquirylettertolegalcounsel.
D. Lawyer's response to audit inquiry letter.
E. Communicationfromthosechargedwithgovernancetotheauditor.
F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).
G. Report on the application of accounting principles.
H. Auditor's engagement letter.
I. Letter for underwriters.
J. Accounts receivable confirmation request.
K. Requestforbankcutoffstatement.
L. Explanatory paragraph of an auditor's report on financial statements.
M. Partner's engagement review notes.
N. Management representation letter.
O. Successor auditor's communication with predecessor auditor.
P. Predecessorauditor'scommunicationwithsuccessorauditor.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "B" is correct. Failure to lock blank checks and the check-signing machine in separate locations is a significant deficiency in the design or operation of internal control that could adversely affect the fairness of the financial statements.
QUESTION 234
This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.
Our audit cannot be relied upon to disclose significant deficiencies in the design or operation of internal control. Nevertheless, we will communicate to you all such significant deficiencies and potential areas for improvement that we become aware of during the course of our audit.
A. Practitioner'sreportonmanagement'sassertionaboutanentity'scompliancewithspecifiedrequirements.
B. Auditor'scommunicationsonsignificantdeficienciesininternalcontrol.
C. Auditinquirylettertolegalcounsel.
D. Lawyer's response to audit inquiry letter.
E. Communicationfromthosechargedwithgovernancetotheauditor.
F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).
G. Report on the application of accounting principles.
H. Auditor's engagement letter.
I. Letter for underwriters.
J. Accounts receivable confirmation request.
K. Requestforbankcutoffstatement.
L. Explanatory paragraph of an auditor's report on financial statements.
M. Partner's engagement review notes.
N. Management representation letter.
O. Successor auditor's communication with predecessor auditor.
P. Predecessorauditor'scommunicationwithsuccessorauditor.
Correct Answer: H
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "H" is correct. An understanding with the client should be established, and this understanding should be documented through an engagement letter. The understanding, and the letter, should include limitations of the engagement, including the fact that an audit is not designed to provide assurance on internal control or to identify significant deficiencies in internal control.
QUESTION 235
This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.
The timetable set by management to complete our audit was unreasonable considering the failure of the company's personnel to complete schedules on a timely basis and delays in providing necessary information.
A. Practitioner'sreportonmanagement'sassertionaboutanentity'scompliancewithspecifiedrequirements.
B. Auditor'scommunicationsonsignificantdeficienciesininternalcontrol.
C. Auditinquirylettertolegalcounsel.
D. Lawyer's response to audit inquiry letter.
E. Communicationfromthosechargedwithgovernancetotheauditor.
F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).
G. Report on the application of accounting principles.
H. Auditor's engagement letter.
I. Letter for underwriters.
J. Accounts receivable confirmation request.
K. Requestforbankcutoffstatement.
L. Explanatory paragraph of an auditor's report on financial statements.
M. Partner's engagement review notes.
N. Management representation letter.
O. Successor auditor's communication with predecessor auditor.
P. Predecessorauditor'scommunicationwithsuccessorauditor.
Correct Answer: F
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "F" is correct. The auditor should inform the audit committee of any serious difficulties encountered with management during the performance of the audit.
QUESTION 236
This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.
Several employees have disabled the anti-virus detection software on their PCs because the software slows the processing of data and occasionally rings false alarms. The company should obtain anti-virus software that runs continuously at all system entry points and that cannot be disabled by unauthorized personnel.
A. Practitioner'sreportonmanagement'sassertionaboutanentity'scompliancewithspecifiedrequirements.
B. Auditor'scommunicationsonsignificantdeficienciesininternalcontrol.
C. Auditinquirylettertolegalcounsel.
D. Lawyer's response to audit inquiry letter.
E. Communicationfromthosechargedwithgovernancetotheauditor.
F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).
G. Report on the application of accounting principles.
H. Auditor's engagement letter.
I. Letter for underwriters.
J. Accounts receivable confirmation request.
K. Requestforbankcutoffstatement.
L. Explanatory paragraph of an auditor's report on financial statements.
M. Partner's engagement review notes.
N. Management representation letter.
O. Successor auditor's communication with predecessor auditor.
P. Predecessorauditor'scommunicationwithsuccessorauditor.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "B" is correct. The ability for unauthorized personnel to disable anti-virus detection software is a significant deficiency in the design or operation of internal control that could adversely affect the fairness of the financial statements.
QUESTION 237
This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.
In connection with an audit of our financial statements, management has prepared, and furnished to our auditors, a description and evaluation of certain contingencies.
A. Practitioner'sreportonmanagement'sassertionaboutanentity'scompliancewithspecifiedrequirements.
B. Auditor'scommunicationsonsignificantdeficienciesininternalcontrol.
C. Auditinquirylettertolegalcounsel.
D. Lawyer's response to audit inquiry letter.
E. Communicationfromthosechargedwithgovernancetotheauditor.
F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).
G. Report on the application of accounting principles.
H. Auditor's engagement letter.
I. Letter for underwriters.
J. Accounts receivable confirmation request.
K. Requestforbankcutoffstatement.
L. Explanatory paragraph of an auditor's report on financial statements.
M. Partner's engagement review notes.
N. Management representation letter.
O. Successor auditor's communication with predecessor auditor.
P. Predecessorauditor'scommunicationwithsuccessorauditor.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "C" is correct. In an audit inquiry letter to legal counsel, management states that they have furnished to the auditors a description and evaluation of pending or threatened litigation and unasserted claims and assessments.
QUESTION 238
This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.
The company has no plans or intentions that may materially affect the carrying value or classification of assets and liabilities.
A. Practitioner'sreportonmanagement'sassertionaboutanentity'scompliancewithspecifiedrequirements.
B. Auditor'scommunicationsonsignificantdeficienciesininternalcontrol.
C. Auditinquirylettertolegalcounsel.
D. Lawyer's response to audit inquiry letter.
E. Communicationfromthosechargedwithgovernancetotheauditor.
F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).
G. Report on the application of accounting principles.
H. Auditor's engagement letter.
I. Letter for underwriters.
J. Accounts receivable confirmation request.
K. Requestforbankcutoffstatement.
L. Explanatory paragraph of an auditor's report on financial statements.
M. Partner's engagement review notes.
N. Management representation letter.
O. Successor auditor's communication with predecessor auditor.
P. Predecessorauditor'scommunicationwithsuccessorauditor.
Correct Answer: N
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "N" is correct. Management's discussion of plans or intentions that may materially affect the carrying value or classification of assets and liabilities provides information regarding recognition, measurement, and disclosure, and would be included in the management representation letter.
QUESTION 239
This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.
In planning the sampling application, was appropriate consideration given to the relationship of the sample to the audit objective and to preliminary judgments about materiality levels?
A. Practitioner'sreportonmanagement'sassertionaboutanentity'scompliancewithspecifiedrequirements. B. Auditor'scommunicationsonsignificantdeficienciesininternalcontrol.
C. Auditinquirylettertolegalcounsel.
D. Lawyer's response to audit inquiry letter.
E. Communicationfromthosechargedwithgovernancetotheauditor.
F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).
G. Report on the application of accounting principles.
H. Auditor's engagement letter.
I. Letter for underwriters.
J. Accounts receivable confirmation request.
K. Requestforbankcutoffstatement.
L. Explanatory paragraph of an auditor's report on financial statements.
M. Partner's engagement review notes.
N. Management representation letter.
O. Successor auditor's communication with predecessor auditor.
P. Predecessorauditor'scommunicationwithsuccessorauditor.
Correct Answer: M
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "M" is correct. The engagement partner has ultimate responsibility for the performance of the audit and the preparation of the report. He or she would therefore want to ensure that, in planning a sampling application, appropriate consideration was given to the relationship of the sample to the audit objective and to preliminary judgments about materiality levels.
QUESTION 240
An auditor discovered that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that:
A. Obsoleteinventoryhasnotyetbeenreducedtofairmarketvalue.
B. Therewasanimpropercutoffofsalesattheendoftheyear.
C. An unusually large receivable was written off near the end of the year.
D. The aging of accounts receivable was improperly performed in both years.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Accounts receivable turnover is calculated as sales / receivables. A decline in this ratio may indicate that there was an improper cutoff of sales at the end of the year. For example, if sales made at the beginning of the subsequent year were inadvertently recorded in the current year, both sales and receivables would be overstated by the same amount. This would generally result in a larger proportionate effect on receivables (since the receivables balance is smaller than sales for the year), and an overall decrease in the ratio.
Choice "a" is incorrect. Failure to write down obsolete inventory would not affect sales or receivables, and so would have no effect on accounts receivable turnover. Choice "c" is incorrect. Write-off of an unusually large receivable would reduce the receivables balance without affecting sales. This in turn would cause an increase in accounts receivable turnover. Choice "d" is incorrect. The aging of accounts receivable does not affect the overall receivable balance, and therefore would have no effect on accounts receivable turnover.
QUESTION 241
To obtain assurance that all inventory items in a client's inventory listing are valid, an auditor most likely would trace:
A. Inventorytagsnotedduringtheauditor'sobservationtoitemslistedinreceivingreportsandvendors'invoices. B. Itemslistedinreceivingreportsandvendors'invoicestotheinventorylisting.
C. Inventory tags noted during the auditor's observation to items in the inventory listing.
D. Items in the inventory listing to inventory tags and the auditor's recorded count sheets.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Tracing from the inventory listing to the inventory tags and the auditor's recorded count sheets verifies the validity (existence) of the items. Choice "a" is incorrect. Tracing inventory tags noted during the auditor's observation to items listed in receiving reports and vendors' invoices might be used to verify completeness of purchases or payables. Choice "b" is incorrect. Tracing from receiving reports and vendors' invoices to the inventory listing are cut-off procedures used to verify completeness of the inventory listing. Choice "c" is incorrect. Tracing from inventory tags to the inventory listing schedule verifies the completeness of the schedule, not the existence (or validity) of the items.
Audit Sampling
QUESTION 242
An audit partner is developing an office training program to familiarize his professional staff with statistical decision models applicable to the audit of dollar value balances. He wishes to demonstrate the relationship of sample sizes to population size and variability and the auditor's specifications as to tolerable misstatement and risk of incorrect acceptance. The partner prepared the following table to show comparative population characteristics and audit specifications of two populations.
You are to indicate for the specified case from the above table the required sample size to be selected from population 1 relative to the sample from population 2. In case 1 the required sample size from population 1 is:
A. Largerthantherequiredsamplesizefrompopulation2.
B. Equaltotherequiredsamplesizefrompopulation2.
C. Smaller than the required sample size from population 2.
D. Indeterminate relative to the required sample size from population 2.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. A lower risk of incorrect acceptance requires a greater sample size. Choices "b", "c", and "d" are incorrect, based on the above Explanation: .
QUESTION 243
An audit partner is developing an office training program to familiarize his professional staff with statistical decision models applicable to the audit of dollar value balances. He wishes to demonstrate the relationship of sample sizes to population size and variability and the auditor's specifications as to tolerable misstatement and risk of incorrect acceptance. The partner prepared the following table to show comparative population characteristics and audit specifications of two
populations.
You are to indicate for the specified case from the above table the required sample size to be selected from population 1 relative to the sample from population 2. In case 2 the required sample size from population 1 is:
A. Largerthantherequiredsamplesizefrompopulation2.
B. Equaltotherequiredsamplesizefrompopulation2.
C. Smaller than the required sample size from population 2.
D. Indeterminate relative to the required sample size from population 2.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The effect on sample size cannot be determined, because there is more than one change occurring. In this case, the increase in population variability results in an increase in sample size, whereas the larger tolerable misstatement results in a decrease in sample size. The overall effect on sample size will depend on which of the two effects is greater, but this cannot be determined from the information provided.
Choices "a", "b", and "c" are incorrect, based on the above Explanation: .
QUESTION 244
An audit partner is developing an office training program to familiarize his professional staff with statistical decision models applicable to the audit of dollar value balances. He wishes to demonstrate the relationship of sample sizes to population size and variability and the auditor's specifications as to tolerable misstatement and risk of incorrect acceptance. The partner prepared the following table to show comparative population characteristics and audit specifications of two populations.
You are to indicate for the specified case from the above table the required sample size to be selected from population 1 relative to the sample from population 2. In case 3 the required sample size from population 1 is:
A. Largerthantherequiredsamplesizefrompopulation2.
B. Equaltotherequiredsamplesizefrompopulation2.
C. Smaller than the required sample size from population 2.
D. Indeterminate relative to the required sample size from population 2.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The effect on sample size cannot be determined, because there is more than one change occurring. In this case, the smaller tolerable misstatement results in an increase in sample size, but the higher risk of incorrect acceptance results in a decrease in sample size. The overall effect on sample size will depend on which of the two effects is greater, but this cannot be determined from the information provided. Note that the number of items in the population is generally assumed to have virtually no effect on sample size.
Choices "a", "b", and "c" are incorrect, based on the above Explanation: .
QUESTION 245
An audit partner is developing an office training program to familiarize his professional staff with statistical decision models applicable to the audit of dollar value balances. He wishes to demonstrate the relationship of sample sizes to population size and variability and the auditor's specifications as to tolerable misstatement and risk of incorrect acceptance. The partner prepared the following table to show comparative population characteristics and audit specifications of two populations.
You are to indicate for the specified case from the above table the required sample size to be selected from population 1 relative to the sample from population 2. In case 4 the required sample size from population 1 is:
A. Largerthantherequiredsamplesizefrompopulation2.
B. Equaltotherequiredsamplesizefrompopulation2.
C. Smaller than the required sample size from population 2.
D. Indeterminate relative to the required sample size from population 2.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E)
Explanation Explanation/Reference:
Explanation:
Choice "c" is correct. There are two changes occurring, but they both have the same effect on sample size. A decrease in population variability and an increase in the risk of incorrect acceptance both result in a decrease in the required sample size. Note that the number of items in the population is generally assumed to have virtually no effect on sample size.
Choices "a", "b", and "d" are incorrect, based on the above Explanation: .
QUESTION 246
An audit partner is developing an office training program to familiarize his professional staff with statistical decision models applicable to the audit of dollar value balances. He wishes to demonstrate the relationship of sample sizes to population size and variability and the auditor's specifications as to tolerable misstatement and risk of incorrect acceptance. The partner prepared the following table to show comparative population characteristics and audit specifications of two populations.
You are to indicate for the specified case from the above table the required sample size to be selected from population 1 relative to the sample from population 2. In case 5 the required sample size from population 1 is:
A. Largerthantherequiredsamplesizefrompopulation2.
B. Equaltotherequiredsamplesizefrompopulation2.
C. Smaller than the required sample size from population 2.
D. Indeterminate relative to the required sample size from population 2.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. A lower risk of incorrect acceptance results in an increase in sample size. Note that the number of items in the population is generally assumed to have virtually no effect on sample size.
Choices "b", "c", and "d" are incorrect, based on the above Explanation: .
QUESTION 247
An auditor established a $60,000 tolerable misstatement for an asset with an account balance of $1,000,000. The auditor selected a sample of every twentieth item
from the population that represented the asset account balance and discovered overstatements of $3,700 and understatements of $200. Under these circumstances, the auditor most likely would conclude that:
A. Thereisanunacceptablyhighriskthattheactualmisstatementsinthepopulationexceedthetolerablemisstatementbecausethetotalprojectedmisstatement is more than the tolerable misstatement.
B. Thereisanunacceptablyhighriskthatthetolerablemisstatementexceedsthesumofactualoverstatementsandunderstatements.
C. The asset account is fairly stated because the total projected misstatement is less than the tolerable misstatement.
D. The asset account is fairly stated because the tolerable misstatement exceeds the net of projected actual overstatements and understatements.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Selection of every twentieth item results in a sample that is 5% (1/20 = .05) of the population. The sample results indicate a net overstatement of $3,500 (= $3,700 - $200), which is then
Since the projected misstatement of $70,000 exceeds the tolerable misstatement of $60,000, there is an unacceptably high risk that the actual misstatement in the population will exceed the tolerable misstatement.
Choice "b" is incorrect. Tolerable misstatement is compared to the projected misstatement, not to the actual error in the sample.
Choices "c" and "d" are incorrect. The asset account is not fairly stated because the projected misstatement exceeds the tolerable misstatement.
QUESTION 248
An auditor should consider the tolerable rate of deviation when determining the number of check requests to select for a test to obtain assurance that all check requests have been properly authorized.
The auditor should also consider:
A. Option A
B. OptionB C. Option C D. Option D
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The sample size in an attribute sampling application is affected by the allowable risk of assessing control risk too low, the tolerable deviation rate, and the expected deviation rate. The average dollar value of the check requests has no effect on the sample size. Choices "a", "b", and "d" are incorrect, per the above Explanation: .
QUESTION 249
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 the:
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The sample size in a variables sampling application is affected by the variability in the population (generally represented by the standard deviation), the acceptable level of risk (i.e., the risk of incorrect acceptance), the tolerable misstatement, and the expected misstatement. Choices "b", "c", and "d" are incorrect, per the above Explanation: .
QUESTION 250
The diagram below depicts an auditor's estimated maximum deviation rate compared with the tolerable rate, and also depicts the true population deviation rate compared with the tolerable rate.
As a result of tests of controls, the auditor assesses control risk too low and thereby decreases substantive testing. This is illustrated by situation:
A. I. B. II. C. III. D. IV.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. If the auditor assesses control risk too low, then the true population deviation rate exceeds the auditor's tolerable rate while the auditor's estimate of the maximum deviation rate (based on sample results) was less than the tolerable rate. Only cell III represents this set of conditions. Choices "a", "b", and "d" are incorrect, per the above Explanation: .
QUESTION 251
The risk of incorrect acceptance and the likelihood of assessing control risk too low relate to the:
A. Allowableriskoftolerablemisstatement. B. Preliminaryestimatesofmaterialitylevels. C. Efficiency of the audit.
D. Effectiveness of the audit.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Both the risk of incorrect acceptance and the risk of assessing control risk too low relate to the effectiveness of an audit in detecting an existing material misstatement. Choice "a" is incorrect. Allowable risk of tolerable misstatement does not exist. Choice "b" is incorrect. The risk of incorrect acceptance and risk of assessing control risk too low are unrelated to preliminary estimates of materiality.
Choice "c" is incorrect. The efficiency of the audit is related to the risk of incorrect rejection and the risk of assessing control risk too high.
QUESTION 252
Which of the following factors is (are) considered in determining the sample size for a test of controls?
A. Option A B. OptionB
C. Option C D. Option D
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. To determine the number of items to be selected for a particular sample for a test of controls, the auditor should consider the tolerable rate of deviation from the controls being tested, the likely rate of deviations (expected deviation rate), and the allowable risk of assessing control risk too low.
Choices "b", "c", and "d" are incorrect, per the above Explanation: .
QUESTION 253
How would increases in tolerable misstatement and assessed level of control risk affect the sample size in a substantive test of details?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. An increase in tolerable misstatement results in a smaller sample size. An increase in the assessed level of control risk leads to an increase in sample size. Choices "a", "b", and "d" are incorrect, per the above Explanation: .
This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.
Was the difference of opinion on the accrued pension liabilities that existed between the engagement personnel and the actuarial specialist resolved in accordance with firm policy and appropriately documented?
A. Practitioner'sreportonmanagement'sassertionaboutanentity'scompliancewithspecifiedrequirements.
B. Auditor'scommunicationsonsignificantdeficienciesininternalcontrol.
C. Auditinquirylettertolegalcounsel.
D. Lawyer's response to audit inquiry letter.
E. Communicationfromthosechargedwithgovernancetotheauditor.
F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).
G. Report on the application of accounting principles.
H. Auditor's engagement letter.
I. Letter for underwriters.
J. Accounts receivable confirmation request.
K. Requestforbankcutoffstatement.
L. Explanatory paragraph of an auditor's report on financial statements.
M. Partner's engagement review notes.
N. Management representation letter.
O. Successor auditor's communication with predecessor auditor.
P. Predecessorauditor'scommunicationwithsuccessorauditor.
Correct Answer: M
Section: Auditing and Attestation (II) (Volume E)
Explanation Explanation/Reference:
Explanation:
Choice "M" is correct. The engagement partner has ultimate responsibility for the performance of the audit and the preparation of the report. He or she would therefore want to ensure that any differences of opinion between engagement personnel and a specialist were resolved in accordance with firm policy and were appropriately documented.
QUESTION 224
This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.
Our audit is designed to provide reasonable assurance of detecting misstatements that, in our judgment, could have a material effect on the financial statements taken as a whole. Consequently, our audit will not necessarily detect all misstatements that exist due to error, fraudulent financial reporting, or misappropriation of assets.
A. Practitioner'sreportonmanagement'sassertionaboutanentity'scompliancewithspecifiedrequirements.
B. Auditor'scommunicationsonsignificantdeficienciesininternalcontrol.
C. Auditinquirylettertolegalcounsel.
D. Lawyer's response to audit inquiry letter.
E. Communicationfromthosechargedwithgovernancetotheauditor.
F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).
G. Report on the application of accounting principles.
H. Auditor's engagement letter.
I. Letter for underwriters.
J. Accounts receivable confirmation request.
K. Requestforbankcutoffstatement.
L. Explanatory paragraph of an auditor's report on financial statements.
M. Partner's engagement review notes.
N. Management representation letter.
O. Successor auditor's communication with predecessor auditor.
P. Predecessorauditor'scommunicationwithsuccessorauditor.
Correct Answer: H
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "H" is correct. An understanding with the client should be established, and this understanding should be documented through an engagement letter. The understanding, and the letter, should include the auditor's responsibilities, including the fact that an audit is designed to provide only reasonable assurance of detecting material misstatements, and therefore may not necessarily detect all misstatements that exist.
QUESTION 225
This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.
There have been no communications from regulatory agencies concerning noncompliance with or deficiencies in financial reporting practices.
A. Practitioner'sreportonmanagement'sassertionaboutanentity'scompliancewithspecifiedrequirements.
B. Auditor'scommunicationsonsignificantdeficienciesininternalcontrol.
C. Auditinquirylettertolegalcounsel.
D. Lawyer's response to audit inquiry letter.
E. Communicationfromthosechargedwithgovernancetotheauditor.
F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).
G. Report on the application of accounting principles.
H. Auditor's engagement letter.
I. Letter for underwriters.
J. Accounts receivable confirmation request.
K. Requestforbankcutoffstatement.
L. Explanatory paragraph of an auditor's report on financial statements.
M. Partner's engagement review notes.
N. Management representation letter.
O. Successor auditor's communication with predecessor auditor.
P. Predecessorauditor'scommunicationwithsuccessorauditor.
Correct Answer: N
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "N" is correct. Management's statement that there have been no communications from regulatory agencies concerning noncompliance with or deficiencies
in financial reporting practices provides information regarding the completeness of information, and would be included in the management representation letter.
QUESTION 226
This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.
Nothing came to our attention that caused us to believe that at October 31, 20XX, there was any change in the capital stock, increase in long-term debt, or decrease in consolidated net current assets or stockholders' equity as compared with the amounts shown in the September 30, 20XX unaudited condensed consolidated balance sheet.
A. Practitioner'sreportonmanagement'sassertionaboutanentity'scompliancewithspecifiedrequirements.
B. Auditor'scommunicationsonsignificantdeficienciesininternalcontrol.
C. Auditinquirylettertolegalcounsel.
D. Lawyer's response to audit inquiry letter.
E. Communicationfromthosechargedwithgovernancetotheauditor.
F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).
G. Report on the application of accounting principles.
H. Auditor's engagement letter.
I. Letter for underwriters.
J. Accounts receivable confirmation request.
K. Requestforbankcutoffstatement.
L. Explanatory paragraph of an auditor's report on financial statements.
M. Partner's engagement review notes.
N. Management representation letter.
O. Successor auditor's communication with predecessor auditor.
P. Predecessorauditor'scommunicationwithsuccessorauditor.
Correct Answer: I
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "I" is correct. In a comfort letter, negative assurance is provided with respect to changes in selected financial statement items during a period subsequent to the date and period of the latest financial statements included in the registration statement.
QUESTION 227
This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.
It is our opinion that the possible liability to the company in this proceeding is nominal in amount.
A. Practitioner'sreportonmanagement'sassertionaboutanentity'scompliancewithspecifiedrequirements.
B. Auditor'scommunicationsonsignificantdeficienciesininternalcontrol.
C. Auditinquirylettertolegalcounsel.
D. Lawyer's response to audit inquiry letter.
E. Communicationfromthosechargedwithgovernancetotheauditor.
F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).
G. Report on the application of accounting principles.
H. Auditor's engagement letter.
I. Letter for underwriters.
J. Accounts receivable confirmation request.
K. Requestforbankcutoffstatement.
L. Explanatory paragraph of an auditor's report on financial statements.
M. Partner's engagement review notes.
N. Management representation letter.
O. Successor auditor's communication with predecessor auditor.
P. Predecessorauditor'scommunicationwithsuccessorauditor.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "D" is correct. In response to an audit inquiry letter, a lawyer would provide corroboration regarding the likelihood of an unfavorable outcome to pending litigation and an estimate of any potential loss.
QUESTION 228
This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.
As discussed in Note 4 to the financial statements, the company experienced a net loss for the year ended July 31, 20XX, and is currently in default under substantially all of its debt agreements. In addition, on September 25, 20XX, the company filed a prenegotiated voluntary petition for relief under Chapter 11 of the
U.S. Bankruptcy Code. These matters raise substantial doubt about the company's ability to continue as a going concern.
A. Practitioner'sreportonmanagement'sassertionaboutanentity'scompliancewithspecifiedrequirements.
B. Auditor'scommunicationsonsignificantdeficienciesininternalcontrol.
C. Auditinquirylettertolegalcounsel.
D. Lawyer's response to audit inquiry letter.
E. Communicationfromthosechargedwithgovernancetotheauditor.
F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).
G. Report on the application of accounting principles.
H. Auditor's engagement letter.
I. Letter for underwriters.
J. Accounts receivable confirmation request.
K. Requestforbankcutoffstatement.
L. Explanatory paragraph of an auditor's report on financial statements.
M. Partner's engagement review notes.
N. Management representation letter.
O. Successor auditor's communication with predecessor auditor.
P. Predecessorauditor'scommunicationwithsuccessorauditor.
Correct Answer: L
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "L" is correct. When there is substantial doubt about an entity's ability to continue as a going concern, the auditor would state his or her concerns in an explanatory paragraph of the auditor's report.
QUESTION 229
This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.
During the year under audit, we were advised that management consulted with Better & Best, CPAs. The purpose of this consultation was to obtain another CPA firm's opinion concerning the company's recognition of certain revenue that we believe should be deferred to future periods. Better & Best's opinion was consistent with our opinion, so management did not recognize the revenue in the current year.
A. Practitioner'sreportonmanagement'sassertionaboutanentity'scompliancewithspecifiedrequirements.
B. Auditor'scommunicationsonsignificantdeficienciesininternalcontrol.
C. Auditinquirylettertolegalcounsel.
D. Lawyer's response to audit inquiry letter.
E. Communicationfromthosechargedwithgovernancetotheauditor.
F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).
G. Report on the application of accounting principles.
H. Auditor's engagement letter.
I. Letter for underwriters.
J. Accounts receivable confirmation request.
K. Requestforbankcutoffstatement.
L. Explanatory paragraph of an auditor's report on financial statements.
M. Partner's engagement review notes.
N. Management representation letter.
O. Successor auditor's communication with predecessor auditor.
P. Predecessorauditor'scommunicationwithsuccessorauditor.
Correct Answer: F
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "F" is correct. Unless all of those charged with governance are also involved with managing the entity, the auditor should discuss with those charged with governance significant accounting or auditing matters that were the subject of outside consultation.
QUESTION 230
This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.
The company believes that all material expenditures that have been deferred to future periods will be recoverable.
A. Practitioner'sreportonmanagement'sassertionaboutanentity'scompliancewithspecifiedrequirements.
B. Auditor'scommunicationsonsignificantdeficienciesininternalcontrol.
C. Auditinquirylettertolegalcounsel.
D. Lawyer's response to audit inquiry letter.
E. Communicationfromthosechargedwithgovernancetotheauditor.
F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).
G. Report on the application of accounting principles.
H. Auditor's engagement letter.
I. Letter for underwriters.
J. Accounts receivable confirmation request.
K. Requestforbankcutoffstatement.
L. Explanatory paragraph of an auditor's report on financial statements.
M. Partner's engagement review notes.
N. Management representation letter.
O. Successor auditor's communication with predecessor auditor.
P. Predecessorauditor'scommunicationwithsuccessorauditor.
Correct Answer: N
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "N" is correct. Management's discussion of its belief that all material expenditures that have been deferred to future periods will be recoverable provides information regarding recognition, measurement, and disclosure, and would be included in the management representation letter.
QUESTION 231
This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.
Our use of professional judgment and the assessment of audit risk and materiality for the purpose of our audit mean that matters may have existed that would have been assessed differently by you. We make no representation as to the sufficiency or appropriateness of the information in our audit documentation for your purposes.
A. Practitioner'sreportonmanagement'sassertionaboutanentity'scompliancewithspecifiedrequirements.
B. Auditor'scommunicationsonsignificantdeficienciesininternalcontrol.
C. Auditinquirylettertolegalcounsel.
D. Lawyer's response to audit inquiry letter.
E. Communicationfromthosechargedwithgovernancetotheauditor.
F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).
G. Report on the application of accounting principles.
H. Auditor's engagement letter.
I. Letter for underwriters.
J. Accounts receivable confirmation request.
K. Requestforbankcutoffstatement.
L. Explanatory paragraph of an auditor's report on financial statements.
M. Partner's engagement review notes.
N. Management representation letter.
O. Successor auditor's communication with predecessor auditor.
P. Predecessorauditor'scommunicationwithsuccessorauditor.
Correct Answer: P
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "P" is correct. An audit of a new client may be facilitated by review of the predecessor's audit documentation. The predecessor should make it clear that they are not responsible for the sufficiency or appropriateness of the information in their audit documentation for the successor auditor's purposes.
QUESTION 232
This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.
Indicate in the space provided below whether this information agrees with your records. If there are exceptions, please provide any information that will assist the auditor in reconciling the difference.
A. Practitioner'sreportonmanagement'sassertionaboutanentity'scompliancewithspecifiedrequirements.
B. Auditor'scommunicationsonsignificantdeficienciesininternalcontrol.
C. Auditinquirylettertolegalcounsel.
D. Lawyer's response to audit inquiry letter.
E. Communicationfromthosechargedwithgovernancetotheauditor.
F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).
G. Report on the application of accounting principles.
H. Auditor's engagement letter.
I. Letter for underwriters.
J. Accounts receivable confirmation request.
K. Requestforbankcutoffstatement.
L. Explanatory paragraph of an auditor's report on financial statements.
M. Partner's engagement review notes.
N. Management representation letter.
O. Successor auditor's communication with predecessor auditor.
P. Predecessorauditor'scommunicationwithsuccessorauditor.
Correct Answer: J
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "J" is correct. Receivable confirmations request customers of the client to confirm balances and identify discrepancies.
QUESTION 233
This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.
Blank checks are maintained in an unlocked cabinet along with the check-signing machine. Blank checks and the check-signing machine should be locked in separate locations to prevent the embezzlement of funds.
A. Practitioner'sreportonmanagement'sassertionaboutanentity'scompliancewithspecifiedrequirements.
B. Auditor'scommunicationsonsignificantdeficienciesininternalcontrol.
C. Auditinquirylettertolegalcounsel.
D. Lawyer's response to audit inquiry letter.
E. Communicationfromthosechargedwithgovernancetotheauditor.
F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).
G. Report on the application of accounting principles.
H. Auditor's engagement letter.
I. Letter for underwriters.
J. Accounts receivable confirmation request.
K. Requestforbankcutoffstatement.
L. Explanatory paragraph of an auditor's report on financial statements.
M. Partner's engagement review notes.
N. Management representation letter.
O. Successor auditor's communication with predecessor auditor.
P. Predecessorauditor'scommunicationwithsuccessorauditor.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "B" is correct. Failure to lock blank checks and the check-signing machine in separate locations is a significant deficiency in the design or operation of internal control that could adversely affect the fairness of the financial statements.
QUESTION 234
This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.
Our audit cannot be relied upon to disclose significant deficiencies in the design or operation of internal control. Nevertheless, we will communicate to you all such significant deficiencies and potential areas for improvement that we become aware of during the course of our audit.
A. Practitioner'sreportonmanagement'sassertionaboutanentity'scompliancewithspecifiedrequirements.
B. Auditor'scommunicationsonsignificantdeficienciesininternalcontrol.
C. Auditinquirylettertolegalcounsel.
D. Lawyer's response to audit inquiry letter.
E. Communicationfromthosechargedwithgovernancetotheauditor.
F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).
G. Report on the application of accounting principles.
H. Auditor's engagement letter.
I. Letter for underwriters.
J. Accounts receivable confirmation request.
K. Requestforbankcutoffstatement.
L. Explanatory paragraph of an auditor's report on financial statements.
M. Partner's engagement review notes.
N. Management representation letter.
O. Successor auditor's communication with predecessor auditor.
P. Predecessorauditor'scommunicationwithsuccessorauditor.
Correct Answer: H
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "H" is correct. An understanding with the client should be established, and this understanding should be documented through an engagement letter. The understanding, and the letter, should include limitations of the engagement, including the fact that an audit is not designed to provide assurance on internal control or to identify significant deficiencies in internal control.
QUESTION 235
This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.
The timetable set by management to complete our audit was unreasonable considering the failure of the company's personnel to complete schedules on a timely basis and delays in providing necessary information.
A. Practitioner'sreportonmanagement'sassertionaboutanentity'scompliancewithspecifiedrequirements.
B. Auditor'scommunicationsonsignificantdeficienciesininternalcontrol.
C. Auditinquirylettertolegalcounsel.
D. Lawyer's response to audit inquiry letter.
E. Communicationfromthosechargedwithgovernancetotheauditor.
F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).
G. Report on the application of accounting principles.
H. Auditor's engagement letter.
I. Letter for underwriters.
J. Accounts receivable confirmation request.
K. Requestforbankcutoffstatement.
L. Explanatory paragraph of an auditor's report on financial statements.
M. Partner's engagement review notes.
N. Management representation letter.
O. Successor auditor's communication with predecessor auditor.
P. Predecessorauditor'scommunicationwithsuccessorauditor.
Correct Answer: F
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "F" is correct. The auditor should inform the audit committee of any serious difficulties encountered with management during the performance of the audit.
QUESTION 236
This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.
Several employees have disabled the anti-virus detection software on their PCs because the software slows the processing of data and occasionally rings false alarms. The company should obtain anti-virus software that runs continuously at all system entry points and that cannot be disabled by unauthorized personnel.
A. Practitioner'sreportonmanagement'sassertionaboutanentity'scompliancewithspecifiedrequirements.
B. Auditor'scommunicationsonsignificantdeficienciesininternalcontrol.
C. Auditinquirylettertolegalcounsel.
D. Lawyer's response to audit inquiry letter.
E. Communicationfromthosechargedwithgovernancetotheauditor.
F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).
G. Report on the application of accounting principles.
H. Auditor's engagement letter.
I. Letter for underwriters.
J. Accounts receivable confirmation request.
K. Requestforbankcutoffstatement.
L. Explanatory paragraph of an auditor's report on financial statements.
M. Partner's engagement review notes.
N. Management representation letter.
O. Successor auditor's communication with predecessor auditor.
P. Predecessorauditor'scommunicationwithsuccessorauditor.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "B" is correct. The ability for unauthorized personnel to disable anti-virus detection software is a significant deficiency in the design or operation of internal control that could adversely affect the fairness of the financial statements.
QUESTION 237
This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.
In connection with an audit of our financial statements, management has prepared, and furnished to our auditors, a description and evaluation of certain contingencies.
A. Practitioner'sreportonmanagement'sassertionaboutanentity'scompliancewithspecifiedrequirements.
B. Auditor'scommunicationsonsignificantdeficienciesininternalcontrol.
C. Auditinquirylettertolegalcounsel.
D. Lawyer's response to audit inquiry letter.
E. Communicationfromthosechargedwithgovernancetotheauditor.
F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).
G. Report on the application of accounting principles.
H. Auditor's engagement letter.
I. Letter for underwriters.
J. Accounts receivable confirmation request.
K. Requestforbankcutoffstatement.
L. Explanatory paragraph of an auditor's report on financial statements.
M. Partner's engagement review notes.
N. Management representation letter.
O. Successor auditor's communication with predecessor auditor.
P. Predecessorauditor'scommunicationwithsuccessorauditor.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "C" is correct. In an audit inquiry letter to legal counsel, management states that they have furnished to the auditors a description and evaluation of pending or threatened litigation and unasserted claims and assessments.
QUESTION 238
This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.
The company has no plans or intentions that may materially affect the carrying value or classification of assets and liabilities.
A. Practitioner'sreportonmanagement'sassertionaboutanentity'scompliancewithspecifiedrequirements.
B. Auditor'scommunicationsonsignificantdeficienciesininternalcontrol.
C. Auditinquirylettertolegalcounsel.
D. Lawyer's response to audit inquiry letter.
E. Communicationfromthosechargedwithgovernancetotheauditor.
F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).
G. Report on the application of accounting principles.
H. Auditor's engagement letter.
I. Letter for underwriters.
J. Accounts receivable confirmation request.
K. Requestforbankcutoffstatement.
L. Explanatory paragraph of an auditor's report on financial statements.
M. Partner's engagement review notes.
N. Management representation letter.
O. Successor auditor's communication with predecessor auditor.
P. Predecessorauditor'scommunicationwithsuccessorauditor.
Correct Answer: N
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "N" is correct. Management's discussion of plans or intentions that may materially affect the carrying value or classification of assets and liabilities provides information regarding recognition, measurement, and disclosure, and would be included in the management representation letter.
QUESTION 239
This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.
In planning the sampling application, was appropriate consideration given to the relationship of the sample to the audit objective and to preliminary judgments about materiality levels?
A. Practitioner'sreportonmanagement'sassertionaboutanentity'scompliancewithspecifiedrequirements. B. Auditor'scommunicationsonsignificantdeficienciesininternalcontrol.
C. Auditinquirylettertolegalcounsel.
D. Lawyer's response to audit inquiry letter.
E. Communicationfromthosechargedwithgovernancetotheauditor.
F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).
G. Report on the application of accounting principles.
H. Auditor's engagement letter.
I. Letter for underwriters.
J. Accounts receivable confirmation request.
K. Requestforbankcutoffstatement.
L. Explanatory paragraph of an auditor's report on financial statements.
M. Partner's engagement review notes.
N. Management representation letter.
O. Successor auditor's communication with predecessor auditor.
P. Predecessorauditor'scommunicationwithsuccessorauditor.
Correct Answer: M
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "M" is correct. The engagement partner has ultimate responsibility for the performance of the audit and the preparation of the report. He or she would therefore want to ensure that, in planning a sampling application, appropriate consideration was given to the relationship of the sample to the audit objective and to preliminary judgments about materiality levels.
QUESTION 240
An auditor discovered that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that:
A. Obsoleteinventoryhasnotyetbeenreducedtofairmarketvalue.
B. Therewasanimpropercutoffofsalesattheendoftheyear.
C. An unusually large receivable was written off near the end of the year.
D. The aging of accounts receivable was improperly performed in both years.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Accounts receivable turnover is calculated as sales / receivables. A decline in this ratio may indicate that there was an improper cutoff of sales at the end of the year. For example, if sales made at the beginning of the subsequent year were inadvertently recorded in the current year, both sales and receivables would be overstated by the same amount. This would generally result in a larger proportionate effect on receivables (since the receivables balance is smaller than sales for the year), and an overall decrease in the ratio.
Choice "a" is incorrect. Failure to write down obsolete inventory would not affect sales or receivables, and so would have no effect on accounts receivable turnover. Choice "c" is incorrect. Write-off of an unusually large receivable would reduce the receivables balance without affecting sales. This in turn would cause an increase in accounts receivable turnover. Choice "d" is incorrect. The aging of accounts receivable does not affect the overall receivable balance, and therefore would have no effect on accounts receivable turnover.
QUESTION 241
To obtain assurance that all inventory items in a client's inventory listing are valid, an auditor most likely would trace:
A. Inventorytagsnotedduringtheauditor'sobservationtoitemslistedinreceivingreportsandvendors'invoices. B. Itemslistedinreceivingreportsandvendors'invoicestotheinventorylisting.
C. Inventory tags noted during the auditor's observation to items in the inventory listing.
D. Items in the inventory listing to inventory tags and the auditor's recorded count sheets.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Tracing from the inventory listing to the inventory tags and the auditor's recorded count sheets verifies the validity (existence) of the items. Choice "a" is incorrect. Tracing inventory tags noted during the auditor's observation to items listed in receiving reports and vendors' invoices might be used to verify completeness of purchases or payables. Choice "b" is incorrect. Tracing from receiving reports and vendors' invoices to the inventory listing are cut-off procedures used to verify completeness of the inventory listing. Choice "c" is incorrect. Tracing from inventory tags to the inventory listing schedule verifies the completeness of the schedule, not the existence (or validity) of the items.
Audit Sampling
QUESTION 242
An audit partner is developing an office training program to familiarize his professional staff with statistical decision models applicable to the audit of dollar value balances. He wishes to demonstrate the relationship of sample sizes to population size and variability and the auditor's specifications as to tolerable misstatement and risk of incorrect acceptance. The partner prepared the following table to show comparative population characteristics and audit specifications of two populations.
You are to indicate for the specified case from the above table the required sample size to be selected from population 1 relative to the sample from population 2. In case 1 the required sample size from population 1 is:
A. Largerthantherequiredsamplesizefrompopulation2.
B. Equaltotherequiredsamplesizefrompopulation2.
C. Smaller than the required sample size from population 2.
D. Indeterminate relative to the required sample size from population 2.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. A lower risk of incorrect acceptance requires a greater sample size. Choices "b", "c", and "d" are incorrect, based on the above Explanation: .
QUESTION 243
An audit partner is developing an office training program to familiarize his professional staff with statistical decision models applicable to the audit of dollar value balances. He wishes to demonstrate the relationship of sample sizes to population size and variability and the auditor's specifications as to tolerable misstatement and risk of incorrect acceptance. The partner prepared the following table to show comparative population characteristics and audit specifications of two
populations.
You are to indicate for the specified case from the above table the required sample size to be selected from population 1 relative to the sample from population 2. In case 2 the required sample size from population 1 is:
A. Largerthantherequiredsamplesizefrompopulation2.
B. Equaltotherequiredsamplesizefrompopulation2.
C. Smaller than the required sample size from population 2.
D. Indeterminate relative to the required sample size from population 2.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The effect on sample size cannot be determined, because there is more than one change occurring. In this case, the increase in population variability results in an increase in sample size, whereas the larger tolerable misstatement results in a decrease in sample size. The overall effect on sample size will depend on which of the two effects is greater, but this cannot be determined from the information provided.
Choices "a", "b", and "c" are incorrect, based on the above Explanation: .
QUESTION 244
An audit partner is developing an office training program to familiarize his professional staff with statistical decision models applicable to the audit of dollar value balances. He wishes to demonstrate the relationship of sample sizes to population size and variability and the auditor's specifications as to tolerable misstatement and risk of incorrect acceptance. The partner prepared the following table to show comparative population characteristics and audit specifications of two populations.
You are to indicate for the specified case from the above table the required sample size to be selected from population 1 relative to the sample from population 2. In case 3 the required sample size from population 1 is:
A. Largerthantherequiredsamplesizefrompopulation2.
B. Equaltotherequiredsamplesizefrompopulation2.
C. Smaller than the required sample size from population 2.
D. Indeterminate relative to the required sample size from population 2.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The effect on sample size cannot be determined, because there is more than one change occurring. In this case, the smaller tolerable misstatement results in an increase in sample size, but the higher risk of incorrect acceptance results in a decrease in sample size. The overall effect on sample size will depend on which of the two effects is greater, but this cannot be determined from the information provided. Note that the number of items in the population is generally assumed to have virtually no effect on sample size.
Choices "a", "b", and "c" are incorrect, based on the above Explanation: .
QUESTION 245
An audit partner is developing an office training program to familiarize his professional staff with statistical decision models applicable to the audit of dollar value balances. He wishes to demonstrate the relationship of sample sizes to population size and variability and the auditor's specifications as to tolerable misstatement and risk of incorrect acceptance. The partner prepared the following table to show comparative population characteristics and audit specifications of two populations.
You are to indicate for the specified case from the above table the required sample size to be selected from population 1 relative to the sample from population 2. In case 4 the required sample size from population 1 is:
A. Largerthantherequiredsamplesizefrompopulation2.
B. Equaltotherequiredsamplesizefrompopulation2.
C. Smaller than the required sample size from population 2.
D. Indeterminate relative to the required sample size from population 2.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E)
Explanation Explanation/Reference:
Explanation:
Choice "c" is correct. There are two changes occurring, but they both have the same effect on sample size. A decrease in population variability and an increase in the risk of incorrect acceptance both result in a decrease in the required sample size. Note that the number of items in the population is generally assumed to have virtually no effect on sample size.
Choices "a", "b", and "d" are incorrect, based on the above Explanation: .
QUESTION 246
An audit partner is developing an office training program to familiarize his professional staff with statistical decision models applicable to the audit of dollar value balances. He wishes to demonstrate the relationship of sample sizes to population size and variability and the auditor's specifications as to tolerable misstatement and risk of incorrect acceptance. The partner prepared the following table to show comparative population characteristics and audit specifications of two populations.
You are to indicate for the specified case from the above table the required sample size to be selected from population 1 relative to the sample from population 2. In case 5 the required sample size from population 1 is:
A. Largerthantherequiredsamplesizefrompopulation2.
B. Equaltotherequiredsamplesizefrompopulation2.
C. Smaller than the required sample size from population 2.
D. Indeterminate relative to the required sample size from population 2.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. A lower risk of incorrect acceptance results in an increase in sample size. Note that the number of items in the population is generally assumed to have virtually no effect on sample size.
Choices "b", "c", and "d" are incorrect, based on the above Explanation: .
QUESTION 247
An auditor established a $60,000 tolerable misstatement for an asset with an account balance of $1,000,000. The auditor selected a sample of every twentieth item
from the population that represented the asset account balance and discovered overstatements of $3,700 and understatements of $200. Under these circumstances, the auditor most likely would conclude that:
A. Thereisanunacceptablyhighriskthattheactualmisstatementsinthepopulationexceedthetolerablemisstatementbecausethetotalprojectedmisstatement is more than the tolerable misstatement.
B. Thereisanunacceptablyhighriskthatthetolerablemisstatementexceedsthesumofactualoverstatementsandunderstatements.
C. The asset account is fairly stated because the total projected misstatement is less than the tolerable misstatement.
D. The asset account is fairly stated because the tolerable misstatement exceeds the net of projected actual overstatements and understatements.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Selection of every twentieth item results in a sample that is 5% (1/20 = .05) of the population. The sample results indicate a net overstatement of $3,500 (= $3,700 - $200), which is then
Since the projected misstatement of $70,000 exceeds the tolerable misstatement of $60,000, there is an unacceptably high risk that the actual misstatement in the population will exceed the tolerable misstatement.
Choice "b" is incorrect. Tolerable misstatement is compared to the projected misstatement, not to the actual error in the sample.
Choices "c" and "d" are incorrect. The asset account is not fairly stated because the projected misstatement exceeds the tolerable misstatement.
QUESTION 248
An auditor should consider the tolerable rate of deviation when determining the number of check requests to select for a test to obtain assurance that all check requests have been properly authorized.
The auditor should also consider:
A. Option A
B. OptionB C. Option C D. Option D
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The sample size in an attribute sampling application is affected by the allowable risk of assessing control risk too low, the tolerable deviation rate, and the expected deviation rate. The average dollar value of the check requests has no effect on the sample size. Choices "a", "b", and "d" are incorrect, per the above Explanation: .
QUESTION 249
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 the:
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The sample size in a variables sampling application is affected by the variability in the population (generally represented by the standard deviation), the acceptable level of risk (i.e., the risk of incorrect acceptance), the tolerable misstatement, and the expected misstatement. Choices "b", "c", and "d" are incorrect, per the above Explanation: .
QUESTION 250
The diagram below depicts an auditor's estimated maximum deviation rate compared with the tolerable rate, and also depicts the true population deviation rate compared with the tolerable rate.
As a result of tests of controls, the auditor assesses control risk too low and thereby decreases substantive testing. This is illustrated by situation:
A. I. B. II. C. III. D. IV.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. If the auditor assesses control risk too low, then the true population deviation rate exceeds the auditor's tolerable rate while the auditor's estimate of the maximum deviation rate (based on sample results) was less than the tolerable rate. Only cell III represents this set of conditions. Choices "a", "b", and "d" are incorrect, per the above Explanation: .
QUESTION 251
The risk of incorrect acceptance and the likelihood of assessing control risk too low relate to the:
A. Allowableriskoftolerablemisstatement. B. Preliminaryestimatesofmaterialitylevels. C. Efficiency of the audit.
D. Effectiveness of the audit.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Both the risk of incorrect acceptance and the risk of assessing control risk too low relate to the effectiveness of an audit in detecting an existing material misstatement. Choice "a" is incorrect. Allowable risk of tolerable misstatement does not exist. Choice "b" is incorrect. The risk of incorrect acceptance and risk of assessing control risk too low are unrelated to preliminary estimates of materiality.
Choice "c" is incorrect. The efficiency of the audit is related to the risk of incorrect rejection and the risk of assessing control risk too high.
QUESTION 252
Which of the following factors is (are) considered in determining the sample size for a test of controls?
A. Option A B. OptionB
C. Option C D. Option D
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. To determine the number of items to be selected for a particular sample for a test of controls, the auditor should consider the tolerable rate of deviation from the controls being tested, the likely rate of deviations (expected deviation rate), and the allowable risk of assessing control risk too low.
Choices "b", "c", and "d" are incorrect, per the above Explanation: .
QUESTION 253
How would increases in tolerable misstatement and assessed level of control risk affect the sample size in a substantive test of details?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. An increase in tolerable misstatement results in a smaller sample size. An increase in the assessed level of control risk leads to an increase in sample size. Choices "a", "b", and "d" are incorrect, per the above Explanation: .