QUESTION 254
An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor to:
A. Eliminatetheriskofnonsamplingerrors.
B. Reducethelevelofauditriskandmaterialitytoarelativelylowamount. C. Measure the sufficiency of the audit evidence obtained.
D. Minimize the failure to detect errors and fraud.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Statistical sampling helps the auditor to measure the sufficiency of the audit evidence because the auditor can quantify the audit risk, thus assisting in limiting it to an acceptable level.
Choice "a" is incorrect. Nonsampling errors relate to the improper evaluation of evidence by the auditor and are not dependent on the sampling method used. Choice "b" is incorrect. Audit risk can be reduced to a relatively low level with non-statistical sampling.
Materiality is not affected by the sampling method used. Choice "d" is incorrect. The use of statistical sampling does not necessarily minimize the failure to detect errors and fraud.
QUESTION 255
In determining the sample size for a test of controls, an auditor should consider the likely rate of deviations, the allowable risk of assessing control risk too low, and the:
A. T olerable deviation rate.
B. Riskofincorrectacceptance.
C. Nature and cause of deviations.
D. Population size.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The auditor should consider the tolerable rate of deviation from the control structure policies or procedures being tested, the likely rate of
deviations, and the allowable risk of assessing control risk too low.
Choice "b" is incorrect. The risk of incorrect acceptance is relevant for substantive tests of details rather than tests of controls. Choice "c" is incorrect. The nature and cause of the deviation is not considered in determining a sample size for tests of controls. Choice "d" is incorrect. The population size is generally not considered in determining a sample size for tests of controls.
QUESTION 256
An advantage of using statistical over nonstatistical sampling methods in tests of controls is that the statistical methods:
A. Canmoreeasilyconvertthesampleintoadual-purposetestusefulforsubstantivetesting. B. Eliminatetheneedtousejudgmentindeterminingappropriatesamplesizes.
C. Afford greater assurance than a nonstatistical sample of equal size.
D. Provide an objective basis for quantitatively evaluating sample risk.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. By using statistical sampling, the auditor can quantify sampling risk to assist in limiting it to a level considered acceptable.
Choice "a" is incorrect. Statistical sampling does not provide any advantage with respect to converting the test into a dual-purpose test.
Choice "b" is incorrect. Statistical sampling still requires judgment to determine sample sizes. The tolerable rate of deviation, the likely rate of deviation, and the allowable risk of assessing control risk too low are all determined by the auditor's professional judgment. Choice "c" is incorrect. Statistical sampling does not afford greater assurance than a nonstatistical sample of the same size. It only provides the auditor with a better measure of the sufficiency of the evidence found, and helps to evaluate the results found.
QUESTION 257
The use of the ratio estimation sampling technique is most effective when:
A. Thecalculatedauditamountsareapproximatelyproportionaltotheclient'sbookamounts.
B. Arelativelysmallnumberofdifferencesexistinthepopulation.
C. Estimating populations whose records consist of quantities, but not book values.
D. Large overstatement differences and large understatement differences exist in the population.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Ratio estimation is most effective if there is a correlation between book values and audit amounts.
Choice "b" is incorrect. A relatively small number of differences do not improve the effectiveness of ratio estimation sampling relative to other techniques. Choice "c" is incorrect. Whether populations are stated in terms of quantities or book values is irrelevant in determining the effectiveness of ratio estimation. Choice "d" is incorrect. Large overstatement and understatement errors do not give the ratio estimation sampling technique an advantage in effectiveness relative to other sampling techniques.
QUESTION 258
Which of the following statements is correct concerning statistical sampling in tests of controls?
A. Asthepopulationsizeincreases,thesamplesizeshouldincreaseproportionately.
B. Deviationsfromspecificcontrolactivitiesatagivenrateordinarilyresultinmisstatementsatalowerrate. C. There is an inverse relationship between the expected population deviation rate and the sample size.
D. In determining tolerable rate, an auditor considers detection risk and the sample size.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Deviations from control activities do not necessarily result in misstatements. Therefore, deviations from pertinent control activities at a given rate would ordinarily be expected to result in misstatements at a lower rate.
Choice "a" is incorrect. In tests of controls, population size has virtually no effect on sample size unless the population is small.
Choice "c" is incorrect. There is a direct relationship between expected deviation rate and sample size. Choice "d" is incorrect. Detection risk and sample size are not factors in determining the tolerable deviation rate in a test of controls. The tolerable rate is simply the maximum rate that the auditor is willing to accept without altering his or her planned level of reliance.
QUESTION 259
The likelihood of assessing control risk too high is the risk that the sample selected to test controls:
A. Doesnotsupporttheauditor'splannedassessedlevelofcontrolriskwhenthetrueoperatingeffectivenessofinternalcontroljustifiessuchanassessment.
B. Containsmisstatementsthatcouldbematerialtothefinancialstatementswhenaggregatedwithmisstatementsinotheraccountbalancesortransactions classes.
C. Contains proportionately fewer monetary errors or deviations from prescribed internal controls than exist in the balance or class as a whole. D. Does not support the tolerable error for some or all of management's assertions.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The risk of assessing control risk too high is the risk that the assessed level of control risk based on the sample is greater than the true risk based on the actual operating effectiveness of the control.
Choice "b" is incorrect. Tests of controls are not designed to directly detect misstatements. Tests of controls directed toward the operating effectiveness of an internal control are concerned with how the control was applied, the consistency with which it was applied during the audit period, and by whom it was applied. Choice "c" is incorrect. The risk that the sample contains proportionately fewer monetary errors or deviations than exist in the class as a whole is the risk of assessing control risk too low. Choice "d" is incorrect. Tolerable misstatements (errors) are related to the results of substantive tests of details, not tests of controls.
QUESTION 260
Which of the following courses of action would an auditor most likely follow in planning a sample of cash disbursements if the auditor is aware of several unusually large cash disbursements?
A. Setthetolerablerateofdeviationatalowerlevelthanoriginallyplanned.
B. Stratifythecashdisbursementspopulationsothattheunusuallylargedisbursementsareselected. C. Increase the sample size to reduce the effect of the unusually large disbursements.
D. Continue to draw new samples until all the unusually large disbursements appear in the sample.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Stratification involves the grouping of transactions sharing some characteristic (such as recorded amounts). The goal of stratification is to ensure selection of items for which potential misstatements may individually equal or exceed tolerable misstatement. Thus, the auditor should stratify the sample such that the unusually large transactions are selected. Choice "a" is incorrect. The tolerable rate of deviation refers to test of controls, rather than substantive tests.
Choice "c" is incorrect. Certain items should be individually examined; for example, the auditor should examine those items for which potential misstatements may individually equal or exceed tolerable misstatement. Stratifying the sample is more efficient than increasing the sample size. Choice "d" is incorrect. By stratifying the sample, the auditor can examine each of the unusual transactions and also reduce the sample size.
QUESTION 261
For which of the following audit tests would an auditor most likely use attribute sampling? A. MakinganindependentestimateoftheamountofaLIFOinventory.
B. Examininginvoicesinsupportofthevaluationoffixedassetadditions. C. Selecting accounts receivable for confirmation of account balances. D. Inspecting employee time cards for proper approval by supervisors.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Attribute sampling examines the rate of occurrence in a sample: the attribute either exists or does not exist. Therefore, attribute sampling is more useful for tests of controls, such as the examination of time cards for proper approval.
Choice "a" is incorrect. Attribute sampling is not appropriate for this substantive test of details. Classical variables sampling or Probability-Proportionate-to-Size (PPS) sampling, also known as dollar-unit sampling, is more appropriate.
Choice "b" is incorrect. Attribute sampling is not appropriate for this substantive test of details. Classical variables sampling or Probability-Proportionate-to-Size (PPS) sampling, also known as dollar-unit sampling, is more appropriate.
Choice "c" is incorrect. Attribute sampling is not appropriate for this substantive test of details. Classical variables sampling or Probability-Proportionate-to-Size (PPS) sampling, also known as dollar-unit sampling, is more appropriate.
QUESTION 262
The sample size of a test of controls varies inversely with:
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The sample size for a test of controls varies directly with the expected deviation rate and inversely with the tolerable rate. If the auditor expects more errors, he or she would increase sample size; conversely, if the tolerable rate of deviation increases, not as many items need to be selected. Choices "a", "b", and "c" are incorrect, per the above Explanation: .
QUESTION 263
As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses control risk lower than appropriate. The most likely Explanation: for this situation is that:
A. Thedeviationratesofboththeauditor'ssampleandthepopulationexceedthetolerablerate.
B. Thedeviationratesofboththeauditor'ssampleandthepopulationislessthanthetolerablerate.
C. The deviation rate in the auditor's sample is less than the tolerable rate, but the deviation rate in the population exceeds the tolerable rate. D. The deviation rate in the auditor's sample exceeds the tolerable rate, but the deviation rate in the population is less than the tolerable rate.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The situation given is an example of sampling risk, or the probability that the sample chosen is not representative of the population as a whole. This is illustrated by the fact that the sample deviation rate is less than the tolerable rate, but the true deviation rate exceeds the tolerable rate.
Choice "a" is incorrect. If both the deviation rates of the sample and the population exceed the tolerable rate, the auditor would assess control risk at the appropriate level. Choice "b" is incorrect. If both the deviation rates of the sample and the population are less than the tolerable rate, the auditor would assess control risk at the appropriate level. Choice "d" is incorrect. If the sample deviation rate exceeds the tolerable rate, but the deviation rate in the population does not, this would also result in sampling risk. In this case, however, the auditor would assess control risk at a level higher than appropriate.
QUESTION 264
In performing tests of controls over authorization of cash disbursements, which of the following statistical sampling methods would be most appropriate?
A. Variables. B. Stratified. C. Ratio.
D. Attributes.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Attributes sampling is the statistical sampling method used when testing controls. Choice "a" is incorrect. Variables sampling is used in substantive testing, not in tests of controls. Choice "b" is incorrect. Stratified sampling is used in conjunction with variables sampling, and is therefore used in substantive testing, not in tests of controls. Choice "c" is incorrect. Ratio estimation is used in conjunction with variables sampling, and is therefore used in substantive testing, not in tests of controls.
QUESTION 265
Which of the following most likely would be an advantage in using classical variables sampling rather than probability-proportional-to-size (PPS) sampling?
A. Anestimateofthestandarddeviationofthepopulation'srecordedamountsisnotrequired.
B. Theauditorrarelyneedstheassistanceofacomputerprogramtodesignanefficientsample.
C. Inclusion of zero and negative balances generally does not require special design considerations. D. Anyamountthatisindividuallysignificantisautomaticallyidentifiedandselected.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Inclusion of zero and negative balances requires special design considerations with PPS sampling, but it does not require special design considerations with classical variables sampling.
Choice "a" is incorrect. An estimate of the standard deviation of the population's recorded amounts is required for classical variables sampling, but not for PPS sampling. Choice "b" is incorrect. The auditor is less likely to need a computer program to design an efficient sample for PPS sampling than for classical variables sampling. Choice "d" is incorrect. Any amount that is individually significant is more likely to be identified and selected when using PPS sampling than when using classical variables sampling.
QUESTION 266
An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide 1% risk of assessing control risk too low (99% confidence) that not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience that about 2 1/2% of the sales invoices lacked approval. A sample of 200 invoices was examined and 7 of them were lacking approval. The auditor then determined the upper deviation rate to be 8%.
In the evaluation of this sample, the auditor decided to increase the level of the preliminary assessment of control risk because the: A. Tolerablerate(7%)waslessthantheupperdeviationrate(8%).
B. Expecteddeviationrate(7%)wasmorethanthepercentageoferrorsinthesample(3.5%). C. Upper deviation rate (8%) was more than the percentage of errors in the sample (3.5%).
D. Expected deviation rate (2.5%) was less than the tolerable rate (7%).
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The auditor decided to increase the level of the preliminary assessment of control risk because the 7% tolerable rate (maximum rate of deviations that an auditor would be willing to accept without altering his/her planned reliance on the control) was less than the 8% upper deviation rate.
Choice "b" is incorrect. The expected deviation rate was 2.5%, not 7%. Choice "c" is incorrect. The upper deviation rate is always more than the percentage of errors in the sample since the sum of the percentage of the errors and the allowance for sampling risk equals the upper deviation rate.
Choice "d" is incorrect. The expected deviation rate is not used in evaluating the sample. It is the upper deviation rate that is compared to the tolerable rate in evaluating a sample.
QUESTION 267
An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide 1% risk of assessing control risk too low (99% confidence) that not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience that about 2.5% of the sales invoices lacked approval. A sample of 200 invoices was examined and 7 of them were lacking approval. The auditor then determined the upper deviation rate to be 8%.
The allowance for sampling risk was:
A. 5.5% B. 4.5% C. 3.5% D. 1%
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The allowance for sampling risk is the excess of the 8% upper deviation rate over Choices "a", "c", and "d" are incorrect, based on the above Explanation: .
QUESTION 268
What is an auditor's evaluation of a statistical sample for attributes when a test of 50 documents results in 3 deviations if tolerable rate is 7%, the expected population deviation rate is 5%, and the allowance for sampling risk is 2%.
A. Modifytheplannedassessedlevelofcontrolriskbecausethetolerablerateplustheallowanceforsamplingriskexceedstheexpectedpopulationdeviation rate.
B. Acceptthesampleresultsassupportfortheplannedassessedlevelofcontrolriskbecausethesampledeviationrateplustheallowanceforsamplingrisk exceeds the tolerable rate.
C. Accept the sample results as support for the planned assessed level of control risk because the tolerable rate less the allowance for sampling risk equals the expected population deviation rate.
D. Modify the planned assessed level of control risk because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The auditor's evaluation would be to modify the planned assessed level of control risk because the sample deviation rate of 6% (3/50) plus the allowance for sampling risk of 2% (the sum of which is called the upper deviation rate) exceeded the tolerable rate of 7%. Choice "a" is incorrect. This option does not consider the actual results of the sample. The sample deviation rate plus the allowance for sampling risk is compared to the tolerable rate. Choice "b" is incorrect. The sample results cannot be accepted because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate. Choice "c" is incorrect. The tolerable rate (7%) less the allowance (2%) should be compared to the actual deviation rate (6%).
QUESTION 269
An auditor is selecting vouchers for testing an entity's internal control activities related to the proper approval of vouchers before checks are prepared. The auditor is matching random numbers with voucher numbers to determine which vouchers to inspect. If a random number matches a voided voucher, that voucher ordinarily would be replaced by another voucher in the random sample if the voided voucher:
A. Cannotbelocatedinthevoucherfile.
B. Representsadollaramountthatismaterial.
C. Indicates a deviation from the prescribed activity. D. Has been properly voided.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. If a random number matches a properly voided voucher, the auditor would ordinarily replace this with another voucher in order to attain the desired sample size. Choice "a" is incorrect. A voucher that cannot be located is normally considered a deviation. Choice "b" is incorrect. The auditor would be particularly concerned with a voided voucher that represents a material amount, but this fact alone would not cause selection of another voucher. Determination of whether to select another voucher or to instead consider this a deviation would depend on whether the voucher was properly voided.
Choice "c" is incorrect. If the voided voucher indicates a control deviation, then it would be counted as such.
QUESTION 270
An auditor examining inventory most likely would use variables sampling rather than attributes sampling to:
A. Identifywhetherinventoryitemsareproperlypriced.
B. Estimatewhetherthedollaramountofinventoryisreasonable. C. Discover whether misstatements exist in inventory records.
D. Determine whether discounts for inventory are properly recorded.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Variables sampling is used to determine whether a given account balance is reasonable.
Choice "a" is incorrect. Attribute sampling is used to test the attributes, or characteristics, of each item in a sample. In this case, attribute sampling would be used to determine if proper procedures with respect to pricing were followed for each item in the sample. Choice "c" is incorrect. Attribute sampling is used to test the attributes, or characteristics, of each item in a sample. In this case, attribute sampling would be used to determine if inventory was properly recorded for each item in the sample.
Choice "d" is incorrect. Attribute sampling is used to test the attributes, or characteristics, of each item in a sample. In this case, attribute sampling would be used to determine if discounts were properly applied to inventory for each item in the sample.
QUESTION 271
As a result of tests of controls, an auditor assesses control risk too high. This incorrect assessment most likely occurred because:
A. Controlriskbasedontheauditor'ssampleislessthanthetrueoperatingeffectivenessoftheclient'scontrolactivity.
B. Theauditorbelievesthatthecontrolactivityrelatestotheclient'sassertionswhen,infact,itdoesnot.
C. The auditor believes that the control activity will reduce the extent of substantive testing when, in fact, it will not.
D. Control risk based on the auditor's sample is greater than the true operating effectiveness of the client's control activity.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The risk of assessing control risk too high is the risk that the assessed level of control risk based on the sample is greater than the true risk based on the actual operating effectiveness of the control.
Choice "a" is incorrect. The risk of assessing control risk too low is the risk that the assessed level of control risk based on the sample is less than the true risk based on the actual operating effectiveness of the control.
Choice "b" is incorrect. Assessing control risk too high relates to an incorrect evaluation of risk by the auditor, not to whether the control activity relates to the client's assertions. Choice "c" is incorrect. If the auditor believes that a control activity will reduce the extent of substantive testing when, in fact, it will not, this implies that the control risk based on the auditor's sample was less than the true risk based on the actual operating effectiveness of the control. This would be an example of assessing control risk too low, not too high.
QUESTION 272
Which of the following characteristics most likely would be an advantage of using classical variables sampling rather than probability-proportional-to-size (PPS) sampling?
A. Theselectionofnegativebalancesrequiresnospecialdesignconsiderations. B. Thesamplingprocesscanbeginbeforethecompletepopulationisavailable. C. The auditor need not consider the preliminary judgments about materiality.
D. The sample will result in a smaller sample size if few errors are expected.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Inclusion of negative balances requires special design considerations with PPS sampling, but it does not require special design considerations with classical variables sampling. Choice "b" is incorrect. All items in the population should have an equal chance to be included in the sample. Therefore, the sampling process should not begin before the complete population is available, regardless of whether classical variables sampling or PPS sampling is used. Choice "c" is incorrect. When planning a particular sample for a substantive test of details, the auditor should consider preliminary estimates of materiality. Choice "d" is incorrect. If no errors are expected, PPS sampling generally requires a smaller sample than other methods.
QUESTION 273
For which of the following audit tests would a CPA most likely use attribute sampling?
A. Identifyingentriespostedtoincorrectaccounts.
B. Estimatingtheamountinanexpenseaccount.
C. Evaluating the reasonableness of depreciation expense. D. Selecting receivables for confirmation of account balances.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Attribute sampling is used to estimate a rate of occurrence, and often involves a yes-no question. Attribute sampling could be used to determine the error rate in posting journal entries, perhaps by asking, "Is the entry posted to the proper account?" Choice "b" is incorrect. Variables sampling is typically used to estimate a numerical quantity, such as the amount in an expense account.
Choice "c" is incorrect. Variables sampling is typically used to estimate a numerical quantity, such as a reasonable amount for depreciation expense.
Choice "d" is incorrect. Attribute sampling is used to estimate a rate of occurrence, not to select the items to include in a sample.
QUESTION 274
Which of the following statements is correct about the sample size in statistical sampling when testing internal controls?
A. Theauditorshouldconsiderthetolerablerateofdeviationfromthecontrolsbeingtestedindeterminingsamplesize. B. Asthelikelyrateofdeviationdecreases,theauditorshouldincreasetheplannedsamplesize.
C. The allowable risk of assessing control risk too low has no effect on the planned sample size.
D. Of all the factors to be considered, the population size has the greatest effect on the sample size.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. There is an inverse relationship between the tolerable deviation rate and sample size: as the auditor is willing to accept a greater deviation rate, a smaller sample size can be used. Choice "b" is incorrect. There is a direct relationship between expected deviation rate and sample size:
as the likely rate of deviation decreases, a smaller sample size can be used. Choice "c" is incorrect. There is an inverse relationship between the risk of assessing control risk too low and sample size: as the allowable level of risk increases, the sample size decreases. Choice "d" is incorrect. Population size has a relatively small effect on sample size, especially in large populations.
The Effect of Information Technology on the Audit
QUESTION 275
Which of the following is the primary reason that many auditors hesitate to use embedded audit modules?
A. Embeddedauditmodulescannotbeprotectedfromcomputerviruses.
B. Auditorsarerequiredtomonitorembeddedauditmodulescontinuouslytoobtainvalidresults. C. Embedded audit modules can easily be modified through management tampering.
D. Auditors are required to be involved in the system design of the application to be monitored.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Embedded audit modules are sections of the application program code that collect transaction data for the auditor. Embedded audit modules are usually built into the application program when the program is developed. This would require that the auditors be involved in the system design of the application to be monitored.
Choice "a" is incorrect. Embedded audit modules can be protected from computer viruses the same way any other application program would be protected. Choice "b" is incorrect. Auditors are not required to monitor embedded audit modules continuously to obtain valid results.
Choice "c" is incorrect. As long as there are appropriate controls in place, embedded audit modules cannot easily be modified through management tampering.
QUESTION 276
An auditor who wishes to capture an entity's data as transactions are processed and continuously test the entity's computerized information system most likely would use which of the following techniques?
A. Snapshotapplication.
B. Embeddedauditmodule. C. Integrated data check. D. Test data generator.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Embedded audit modules are sections of an application program code that collect transaction data for the auditor. Such modules allow the auditor to capture specific data as transactions are being processed.
Choices "a", "c", and "d" are incorrect, based on the above Explanation: .
QUESTION 277
Which of the following is an engagement attribute for an audit of an entity that processes most of its financial data in electronic form without any paper documentation?
A. Discretephasesofplanning,interim,andyear-endfieldwork. B. Increasedefforttosearchforevidenceofmanagementfraud. C. Performance of audit tests on a continuous basis.
D. Increased emphasis on the completeness assertion.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Continuous performance of audit tests is required when financial data is processed electronically, without provision of paper documentation, to ensure that controls are operating effectively throughout the period under audit. Choice "a" is incorrect. Discrete phases of planning, interim, and year-end fieldwork are not effective when there is no audit trail, because no evidence is then available to support the operation of the controls or the accuracy of the financial records for periods when the auditor was not present to conduct tests.
Choice "b" is incorrect. Consideration of the risk of management fraud is required in all audits, regardless of the method used to process financial data or the adequacy of the paper documentation provided.
Choice "d" is incorrect. The completeness assertion must be tested in all audit engagements, regardless of the method used to process financial data or the adequacy of the paper documentation provided.
QUESTION 278
Which of the following strategies would a CPA most likely consider in auditing an entity that processes most of its financial data only in electronic form, such as a paperless system?
A. Continuousmonitoringandanalysisoftransactionprocessingwithanembeddedauditmodule. B. Increasedrelianceoninternalcontrolactivitiesthatemphasizethesegregationofduties.
C. Verification of encrypted digital certificates used to monitor the authorization of transactions.
D. Extensive testing of firewall boundaries that restrict the recording of outside network traffic.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. In a paperless system, the CPA would most likely need to continuously monitor and analyze transaction processing to ensure that controls were operating effectively throughout the period under audit. An embedded audit module is one way to achieve this goal. Choice "b" is incorrect. While segregation of duties is an important control, there would be no reason to increase reliance on such controls in a paperless system. Choice "c" is incorrect. Verification of encrypted digital certificates used to monitor the authorization of transactions would be used in all computerized systems. Choice "d" is incorrect. Testing of firewall boundaries that restrict the recording of outside network traffic by itself does not ensure the completeness and accuracy of the financial data.
QUESTION 279
When an auditor tests a computerized accounting system, which of the following is true of the test data approach?
A. Severaltransactionsofeachtypemustbetested.
B. Testdataareprocessedbytheclient'scomputerprogramsundertheauditor'scontrol. C. Test data must consist of all possible valid and invalid conditions.
D. The program tested is different from the program used throughout the year by the client.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Test data consists of "dummy" data run through the client's computer system. The data should be processed under the auditor's control. Choice "a" is incorrect. Only transactions that the auditor wishes to test must be used. Choice "c" is incorrect. While the auditor will frequently use many valid and invalid conditions, it is not feasible to test every possible valid and invalid condition using a test data approach. Choice "d" is incorrect. The objective of the test data approach is to test programs that the client uses to process data. Using different programs defeats the primary purpose of the test.
QUESTION 280
Which of the following statements most likely represents a disadvantage for an entity that keeps microcomputer-prepared data files rather than manually prepared files?
A. Attentionisfocusedontheaccuracyoftheprogrammingprocessratherthanerrorsinindividualtransactions. B. Itisusuallyeasierforunauthorizedpersonstoaccessandalterthefiles.
C. Random error associated with processing similar transactions in different ways is usually greater.
D. It is usually more difficult to compare recorded accountability with physical count of assets.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E)
Explanation Explanation/Reference:
Explanation:
Choice "b" is correct. It is easier to access and alter microcomputer data files than manually prepared data files. Microcomputer access security is difficult to maintain because of the increased number of data entry points and the potential ability to defeat access controls. Choice "a" is incorrect. Once the programs are written, the focus will still be on the accuracy of the transactions.
Choice "c" is incorrect. One of the benefits of an automated system over a manual system is the removal of random errors from the process. (Instead, systematic errors are more common.) Choice "d" is incorrect. There is no significant difference between comparing physical counts with accounting records kept either manually or on an automated system.
QUESTION 281
An auditor most likely would introduce test data into a computerized payroll system to test internal controls related to the:
A. Existenceofunclaimedpayrollchecksheldbysupervisors. B. Earlycashingofpayrollchecksbyemployees.
C. Discovery of invalid employee I.D. numbers.
D. Proper approval of overtime by supervisors.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Test data allows the auditor to determine whether adequate controls exist over data processing. Test data consists of fictitious entries or inputs that are processed through the client's computer system under the control of the auditor. The client's computerized payroll system should have adequate controls to prevent input of invalid employee I.D. numbers. Choice "a" is incorrect. This control does not involve the client's computer system and therefore cannot be tested using test data.
Choice "b" is incorrect. This control does not involve the client's computer system and therefore cannot be tested using test data. Choice "d" is incorrect. This control does not involve the client's computer system and therefore cannot be tested using test data.
QUESTION 282
Using microcomputers in auditing may affect the methods used to review the work of staff assistants because:
A. Theauditfieldworkstandardsforsupervisionmaydiffer.
B. Documentingthesupervisoryreviewmayrequireassistanceofconsultingservicespersonnel.
C. Supervisory personnel may not have an understanding of the capabilities and limitations of microcomputers.
D. Auditdocumentationmaynotcontainreadilyobservabledetailsofcalculations.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. When using microcomputers in an auditing task, audit documentation may not contain readily observable details of calculations (e.g., present value calculations). In order to review assistants' work, a supervisor may have to examine the formulas used on the microcomputer rather than simply examining the audit documentation.
Choice "a" is incorrect. The standards of fieldwork, specifically planning and supervision, would not change with the use of microcomputers on the audit.
Choice "b" is incorrect. Consulting service personnel should not be necessary to document the supervisory review.
Choice "c" is incorrect. The familiarity of supervisory personnel with the capabilities and limitations of microcomputers would not have an effect on the review process.
QUESTION 283
Which of the following statements is not true of the test data approach to testing an accounting system?
A. Testdataareprocessedbytheclient'scomputerprogramsundertheauditor'scontrol.
B. Thetestdataneedconsistofonlythosevalidandinvalidconditionsthatinteresttheauditor. C. Only one transaction of each type need be tested.
D. The test data must consist of all possible valid and invalid conditions.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. While the auditor will frequently use many valid and invalid conditions, it is not feasible to test every possible valid and invalid condition using a test data approach. Choice "a" is incorrect. Test data consists of a set of fictitious entries or inputs that are processed through the client's computer system under the control of the auditor. Choice "b" is incorrect. The auditor need only include valid and invalid conditions that interest the auditor.
Choice "c" is incorrect. Only one transaction of each type need be tested, as the system should process similar transactions in a consistent manner.
QUESTION 284
An auditor would least likely use computer software to:
A. Constructparallelsimulations. B. Accessclientdatafiles.
C. Prepare spreadsheets.
D. Assess EDP control risk.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The assessment of control risk is based on auditor judgment. A computer cannot replace professional auditor judgment in assessing control risk. Choice "a" is incorrect. Computer software would be used when constructing parallel simulations. Parallel simulation involves taking the client's data and reprocessing it using the auditor's equipment and software.
Choice "b" is incorrect. The auditor would use generalized audit software or retrieval package software to access client data files.
Choice "c" is incorrect. The auditor would most likely use some sort of software to prepare spreadsheets.
QUESTION 285
CORRECT TEXT
In parallel simulation, actual client data are reprocessed using an auditor software program. An advantage of using parallel simulation, instead of performing tests of controls without a computer, is that:
A. B. C. D.
Correct Answer:
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
The test includes all types of transaction errors and exceptions that may be encountered. Answer:
The client's computer personnel do not know when the data are being tested.
Answer:
There is no risk of creating potentially material errors in the client's data. Answer:
The size of the sample can be greatly expanded at relatively little additional cost.
Answer:
D Explanation:
Choice "d" is correct. Use of computer assisted audit techniques typically allows a greater number of items to be tested at relatively little additional cost. For example, once the auditor has created the software program, it takes little effort to reprocess additional transactions. Manual tests, on the other hand, must be applied separately to each individual transaction, making it more costly to increase sample size.
Choice "a" is incorrect. Reprocessing of actual client data may not include all types of transaction errors and exceptions. Only errors or exceptions in the actual data would be included. Choice "b" is incorrect. The client's computer personnel likely would be providing the actual client data, and so would have some knowledge of when the data was being tested. Choice "c" is incorrect. Neither manual testing nor parallel processing includes a risk of corrupting the client's data, since neither one of them affects the client's live data or files.
QUESTION 286
A client that recently installed a new accounts payable system assigned employees a user identification code (UIC) and a separate password. Each UIC is a person's name, and the individual's password is the same as the UIC. Users are not required to change their passwords at initial log-in nor do passwords ever expire. Which of the following statements does not reflect a limitation of the client's computer access control?
A. Employeescaneasilyguessfellowemployees'passwords. B. Employeesarenotrequiredtochangepasswords.
C. Employees can circumvent procedures to segregate duties. D. Employees are not required to take regular vacations.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The requirement that employees take regular vacations is a good internal control, but it is unrelated to computer-access controls.
Choice "a" is incorrect. Using employee's names as their passwords is an ineffective computer-access control, because passwords are easily guessed.
Choice "b" is incorrect. It would be acceptable to assign employee names as passwords, as long as the employees were required to change their passwords at initial log-in as well as periodically in the future. The fact that this requirement is not in place is a limitation of the client's computer-access controls. Choice "c" is incorrect. If password controls are used to segregate the duties of individual employees, using employee names as passwords allows an employee to circumvent this segregation by logging in with another employee's password.
QUESTION 287
When conducting field work for a physical inventory, an auditor cannot perform which of the following steps using a generalized audit software package? A. Observinginventory.
B. Selectingsampleitemsofinventory.
C. Analyzing data resulting from inventory.
D. Recalculating balances in inventory reports.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. A generalized audit software package (GASP) is used to perform tests directly on a client's system. Since observing inventory involves personal observations made by the auditor, and is unrelated to the client's system, a GASP would not be useful in this regard. Choice "b" is incorrect. Generalized audit software packages (GASPs) are used to perform tests directly on a client's system. Tasks typically performed by GASPs include selecting items that meet specified criteria.
Choice "c" is incorrect. Generalized audit software packages (GASPs) are used to perform tests directly on a client's system. Tasks typically performed by GASPs include performing statistical analysis of data.
Choice "d" is incorrect. Generalized audit software packages (GASPs) are used to perform tests directly on a client's system. Tasks typically performed by GASPs include recalculating amounts and totals.
QUESTION 288
When an auditor tests the internal controls of a computerized accounting system, which of the following is true of the test data approach?
A. Testdataarecodedtoadummysubsidiarysotheycanbeextractedfromthesystemunderactualoperatingconditions. B. Testdataprogramsneednotbetailor-madebytheauditorforeachclient'scomputerapplications.
C. Test data programs usually consist of all possible valid and invalid conditions regarding compliance with internal controls. D. Test data are processed with the client's computer and the results are compared with the auditor's predetermined results.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The test data approach refers to a technique in which the client's application program is used to process a set of test data, the results of which are already known by the auditor. If the client's program is operating effectively, it should generate the same results determined by the auditor.
Choice "a" is incorrect. An integrated test facility (not a test data approach) utilizes dummy accounts. For example, using an integrated test facility (ITF) approach, test data is initially commingled with live data, but coding to a dummy account allows later extraction from the system under actual operating conditions.
Choice "b" is incorrect. Test data programs should be tailor-made by the auditor for each client's computer applications, to ensure that the data is in an appropriate
form for that client's system, and that it includes the types of invalid conditions in which the auditor is interested. Choice "c" is incorrect. Test data contains the types of valid and invalid conditions in which the auditor is interested (it is not necessary to test all combinations of valid and invalid conditions).
Certified Public Accountant CPA Questions + Answers Part 42
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