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he correct answer for each question is indicated by a .
1 INCORRECT Nonaudit clients sometime engage public accounting firms to perform a
specified set of audit procedures rather than a complete audit of the financial statements taken as a whole. This type of engagement is called a(n)
A)Individual account engagement.
B)Agreed-upon procedures engagement.
C)Assurance service.
D)Compliance audit.
Feedback: Incorrect. There is no service provided to that is named Individual Account engagement.
2 INCORRECT Even though Sarbanes-Oxley only applies to publicly traded companies,
private companies and organizations may request that public accounting firms attest to the effectiveness of their internal controls. Several conditions must be met before a public accounting firm can undertake such an engagement. Which of the following is NOT one of the necessary conditions?
A)
Management accepts responsibility for the effectiveness of its internal control.
B)Management's evaluation of control is based on reasonable criteria.
C)
Management's evaluation of control is be supported by an internal audit review.
D)
Management presents a written assertion about the effectiveness of its internal control.
Feedback: Incorrect. This condition is required.
3 INCORRECT Which of the following statements is true concerning a compliance audit?
A)Compliance audits are only performed by governmental auditors.
B)
Risks such as inherent risk, control risk, and detection risk are not appropriate in the planning and performance of a compliance audit.
C)Materiality is difficult to measure in a compliance audit.
D)A report on compliance can only include negative assurance.
Feedback: Incorrect. While governmental auditors do perform compliance audits as a major part of their assurance responsibilities, public accountants also provide compliance audits to their clients.
4 INCORRECT A review of unaudited financial states consists of
Conducting internal control evaluation and obtaining a management
A) representation letter.
B)
Conducting inquiry of management and documenting internal controls.
C)
Performing analytical procedures and determining compliance with laws and regulations.
D)
Conducting inquiry of management, performing analytical procedures, and obtaining a management representation letter.
Feedback: Incorrect. Reviews require conducting inquiry of management, performing analytical procedures, and obtaining a management representation letter.
5 INCORRECT A compilation report should include all of the following except
A)
A statement that the compilation has been performed in accordance with Statement of Standards for Accounting and Review Services.
B)
A statement that the financial statements are the representation of management.
C)
A statement that adequate disclosure has been made concerning accounting policy and practice.
D)
A statement that the financial statements have not been audited or reviewed.
Feedback: Incorrect. This statement is included in the compilation report.
6 INCORRECT Which of the following statements is true concerning interim financial
information?
A)
An audit of interim financial information is required for SEC companies.
B)
The accountant needs to obtain sufficient knowledge of the entity's business and industry before undertaking an engagement on interim financial information.
C)
An accountant may not report on financial information presented separately from audited financial statements.
D)
Interim financial information may not be included as part of a note to the audited financial statements.
Feedback: Incorrect. A review is normally performed of interim financial information.
7 CORRECTAccording to AU 915, "Reports on Application of Requirements of an Appropriate Financial Reporting Framework", which of the following is NOT allowed when writing a report in response to a request for consultation regarding the application of requirements of an appropriate financial reporting framework?
A)Providing a written report on a hypothetical transaction.
B)Identification of the entity requesting the information.
C)
A statement that the entity's management is responsible for proper accounting treatment in consultation with its own auditors.
A statement that the report is for the sole use of specified parties.
D)Feedback: Correct. A written report on hypothetical transactions is prohibited.
8 INCORRECT A business that executes or records transactions on behalf of a client is
called a(n)
A)Third-party provider.
B)Service organization.
C)Outsourcer.
D)Profit center.
Feedback: Incorrect. The correct term is service organization.
9 INCORRECT The AICPA Special Committee on Assurance Services (SCAS) identified
eight mega trends that can affect a CPA's business. Which of the following is not one of these mega trends identified by the SCAS?
A)Information technology.
B)Demands for transparency.
C)New social structures.
D)All of the above were identified as mega trends.
Feedback: Incorrect. Information technology was identified as a mega trend.
10 INCORRECT Which of the following would not be included in an auditor's report on
financial statements prepared under a special purpose framework?
A)A sentence that identifies the special purpose framework.
B)Referral to the special purpose framework in the opinion sentence.
C)
A statement that the financial statements were prepared in accordance with accounting principles generally accepted in the United States of America.
D)All of the above would be included in the report.
Feedback: Incorrect. A sentence that identifies the special purpose framework must be included in the auditor's report
The correct answer for each question is indicated by a .
1 INCORRECT The ethical philosophy that considers the consequences of similar
persons acting in the same manner under similar circumstances is called the
A)Utilitarian Principle.
B)Imperative Principle.
C)Categorical Imperative.
D)Generalization Argument.
Feedback: Incorrect. The utilitarian principle emphasizes the consequences of an action such that the greatest good is done for the greatest number of people.
2 INCORRECT Which of the following is NOT one of the AICPA's Code of Professional
Conduct principles?
A)The public interest.
B)Integrity.
C)Quality control.
D)Scope and nature of services.
Feedback: Incorrect. The second principle is the public interest which recognizes an obligation to the public by the profession.
3 INCORRECT The fundamental issues related to independence require that the auditor
avoid
A)
Financial connections with the client and financial connections with the client's competitors.
B)Representing the shareholders interests.
C)Responsibility for auditing the client's internal control system.
D)Financial connections with the firm and acting as management.
Feedback: Incorrect. An auditor may have a financial interest in a client's competitor.
4 CORRECTAccording to Sarbanes-Oxley, what party is responsible for assuring auditor independence?
A)Audit committee.
B)Engagement partner.
C)Shareholders.
D)Public Company Accounting Oversight Board (PCAOB).
Feedback: Correct. The Sarbanes-Oxley act requires the audit committee to insure the auditors are independent by meeting with the auditors and approving all services performed by the auditors.
5 INCORRECT Rule 102, Integrity and Objectivity applies to
A)Only audit services.
B)All attestation services.
C)All accounting and audit services.
D)All professional services.
Feedback: Incorrect. An accountant must maintain integrity and objectivity in all professional services that the accountant performs. This would include non-accounting services such as consultations, training, or computer services.
6 INCORRECT Rule 201, General Standards, requires a member in public practice to a
follow all of the following standards except
A)Professional competence.
B)Due professional care.
C)Integrity and objectivity.
D)Sufficient relevant data.
Feedback: Incorrect. This statement is included in Rule 201.
7 INCORRECT Rule 301, Confidentiality, allows an auditor to disclose client information
under several different conditions. Which of the following statements is NOT one of the conditions where an auditor is allowed to disclose client information?
A)In response to a subpoena from a court of law.
B)In response to an inquiry by a state licensing board.
C)In response to a peer review.
D)In response to a request from a major shareholder.
Feedback: Incorrect. An auditor must respond to subpoenas.
8 INCORRECT Which of the following is NOT considered an act discreditable to the
profession when auditing an SEC client?
A)Withholding a client's records.
B)Discrimination in employment.
C)Performing audit and other services prohibited by the SEC.
D)Failure to follow government audit standards in a government audit.
Feedback: Incorrect. Withholding client records is an act discreditable.
9 INCORRECT According to Rule 502, Advertising and Other Forms of Solicitation, CPAs
practicing public accounting may
A)Only advertise in professional publications.
B)
Use advertisements that contain statements from clients regarding the quality of work performed by the firm.
C)
Obtain clients by hiring a marketing firm to try and circumvent the rule.
D)Only advertise services other than audit services.
Feedback: Incorrect. There is no prohibition on where a CPA can advertise.
10 INCORRECT According to Rule 503, Commissions and Referral Fees, a commission is
acceptable if it is disclosed to the client and
A)The accountant performs an audit of the financial statements.
B)
The accountant performs a review of financial statements rather than an audit.
C)
The accountant performs a compilation of financial statements that is for internal use only.
D)
The accountant performs an examination of prospective financial information.
Feedback: Incorrect. Receiving a commission when the accountant performs an audit is prohibited
1 INCORRECT Actions initiated by third-party users of financial statements who seek
damages because of auditor negligence or other inappropriate performance are called
A)Malfeasance.
B)Tort.
C)Breach of contract.
D)Constructive fraud.
Feedback: Incorrect. Malfeasance is a generic term that involves a wrongdoing or misconduct, usually related to a public official.
2 INCORRECT Under common law liability, which of the following must be
demonstrated to prevail against auditors in a claim for ordinary negligence?1. A loss was suffered.2. Auditors owed the plaintiffs a duty to perform.3. Plaintiffs relied on the financial statements.4. The loss was caused by reliance on the financial statements.
A)1, 2, 3
B)1, 3, 4
C)2, 3, 4
D)1, 2, 3, 4
Feedback: Incorrect. In addition to these three items, plaintiffs must demonstrate that the loss was caused by reliance on the financial statements.
3 INCORRECT Mike wishes to assert a claim against auditors because he sold products
on credit to MUT Company based on reliance on MUT's audited financial statements. MUT subsequently went bankrupt and Mike was unable to collect the amounts owed to him. For Mike to be successful, the case must be brought in a jurisdiction that supports auditors' liability for ordinary negligence to:
A)Parties that are in privity of the contract.
B)Primary beneficiaries.
C)Foreseen parties.
D)Clients.
Feedback: Incorrect. For Mike to be in privity of the contract he would need to have a contractual relationship with the auditors. The contract is between MUT and its auditors; therefore, Mike is not in privity of the contract.
4 CORRECTThe legal doctrine that states that a successful plaintiff can recover the full amount of damages from any defendant that has the ability to pay is called
A)Joint and several liability.
B)Proportionate liability.
C)Complete liability.
D)Total liability.
Feedback: Correct. Joint and several liability is the doctrine that requires any defendant to be held liable for the full amount of a loss, even if other parties were involved.
5 INCORRECT The SEC regulation that governs disclosures in annual reports other then
financial statements is
A)Securities Act of 1933.
B)Securities Exchange Act of 1934.
C)Regulation S-X.
D)Regulation S-K.
Feedback: Incorrect. The Securities Act of 1933 regulates the issuance of new securities and disclosures in the financial statements related to the issuing entity.
6 CORRECTAs a direct response to the financial frauds in Enron and WorldCom, the Sarbanes-Oxley Act
A)
Requires CEOs and CFOs to certify financial statements and related disclosures.
B)Prohibits CEOs from being chairman of the Board of Directors.
C)
Requires audit committees to be comprised entirely of individuals with accounting and auditing expertise.
D)Requires all annual and quarterly financial information to be audited.
Feedback: Correct. CEOs and CFOs are now required to certify financial statements for all registered entities.
7 INCORRECT Auditors have greater liability under the Securities Act of 1933 than
under either common law or the Securities Exchange Act of 1934. Which of the following is an explanation for this greater liability?
A)
The auditor is liable for treble damages under the Securities Act of 1933.
B)
The plaintiff does not have to prove that the financial statements were misstated.
C)
The plaintiff does not have to prove that they relied on the financial statements.
D)The plaintiff does not have to prove that damages were suffered.
Feedback: Incorrect. There is no requirement for treble damages under the 1933 Act.
8 INCORRECT Which of the following cases provides auditors with the greatest
exposure to liability to nonshareholder third parties under common law?Ultramares Corp. v. Touche.
A)
B)Credit Alliance v. Arthur Andersen.
C)Rosenblum v. Adler.
D)Escott v. BarChris Construction Corp.
Feedback:Incorrect. The Ultramares case only holds auditors liable to nonshareholder third parties for gross negligence or fraud.
9 INCORRECT In order to prevail against auditors under the Securities Exchange Act of
1934, the plaintiff must prove the auditor acted in such a manner as to:
A)Breach the terms of the engagement letter.
B)Violate the AICPA Code of Conduct.
C)Demonstrate intention to deceive (scienter).
D)Demonstrate ordinary negligence during the audit examination.
Feedback: Incorrect. Plaintiffs under the Securities Exchange Act of 1934 will ordinarily not be in a contractual relationship with auditors.
10 CORRECT The primary litigation reform contained in the Private Securities
Litigation Reform Act is
A)
Limiting auditor exposure to judgments based on the doctrine of proportionate liability.
B)
Establishing legal requirements for privileged communications between auditors and clients.
C)
Shifting the burden of proof in the 1934 Act to auditors, rather than investors in securities.
D)Limiting monetary damages to certain levels.
Feedback:Correct. The Private Securities Litigation Uniform Act provides for proportionate liability
The correct answer for each question is indicated by a .
1 INCORRECT An internal auditor is considered independent when the internal audit
department
A)Is comprised of qualified individuals.
B)
Reports to an appropriate level in the company and individuals have an impartial and unbiased mental attitude.
Has an approved audit charter.
C)
D)Is outsourced to a CPA firm or other qualified organization.
Feedback: Incorrect. The Institute of Internal Auditors defines independence in terms of organizational status and independence in mental attitude. The qualifications of the individuals, while important, do not affect independence.
2 INCORRECT Of the following:
W. Financial auditsX. Compliance auditsY. Operational auditsZ. Governance auditsWhich of these is performed by internal auditors?
A)W, X, and Y.
B)W, Y, and Z.
C)X, Y and Z
D)W, X, Y, and Z
Feedback: Incorrect. Internal auditors may perform financial audits, compliance audits, operational audits, governance audits.
3 INCORRECT Internal audit standards are divided into three categories. These
categories are
A)Quality, performance, and ethics.
B)Performance, operation and ethics.
C)Attribute, operation, and implementation.
D)Attribute, performance, and implementation.
Feedback: Incorrect. The three categories of the Institute of Internal Auditors standards are: attribute, performance, and implementation.
4 INCORRECT In an internal audit report the auditor must communicate the audit
findings to management. To effectively communicate audit findings, the internal auditor must include in the report all of the following except
A)The condition that was identified.
B)The criteria that renders the condition inappropriate.
C)The person responsible for the condition.
D)The cause of the condition.
Feedback:
Incorrect. In reporting a finding the internal auditor should report:
The condition the auditor identified The criteria that renders the condition inappropriate The cause of the condition The effect of the condition The recommendation that may eliminate or mitigate the
condition There is no accusation on the part of the auditor as to who
might be responsible for the condition.
5 CORRECTAn objective and systematic examination of a program against its objective criteria are known as
A)Performance audits.
B)Compliance audits.
C)Operational audit.
D)Government audit.
Feedback: Correct. A performance audit looks at the performance of a program and measures it against established criteria.
6 INCORRECT When a government auditor performs a financial audit they must issue
A)An audit report on the use of tax dollars.
B)
An audit report on the compliance of the entity with grant requirements.
C)A report in compliance with the Single Audit Act.
D)
A report on the financial statements, a report on compliance with laws and regulations, and a report on internal controls.
Feedback: Incorrect. An audit report for a compliance audit or performance audit might include the use of tax dollars.
7 INCORRECT Once a fraud examiner determines that a fraud exists, the examiner
must determine
A)If it is material to the financial statements.
B)If the fraud should be reported to the audit committee.
C)The scope of the fraud.
D)The appropriate law enforcement organization to notify.
Feedback: Incorrect. At this point the dollar amount is not known and the determination of its materiality in relation to the financial
statements is not determinable.
8 INCORRECT Most fraud examiners do not believe that fraud can be immaterial
because
A)Most of the fraud may be hidden.
B)Fraud which is not address tends to grow.
C)Many small frauds can accumulate into considerable money.
D)All of the above.
Feedback: Incorrect. Fraud examiners usually pursue even small frauds because often small frauds turn out to be larger than expected because a majority of the fraud was not evident; small frauds grow as the perpetrators become more bold and confident in their ability to go undetected; several frauds involve stealing small amounts of money at regular intervals, which, over time, result in a considerable amount of loss to the company.
9 INCORRECT During an audit an auditor notes a large number of void checks in the
cash disbursement account. Which of the following would most likely lead the auditor to suspect this might be a fraud?
A)
The response by management to the auditor's inquiry about the void checks is that a new clerk was hired that made many errors in preparing checks.
B)The bank reconciliation should several inter-bank transfers.
C)The voided checks could not be located.
D)
The cashier made deposits to the bank on a daily basis on her way home from the office.
Feedback: Incorrect. This may be an acceptable explanation provided the auditors can get other information including copies of the voided checks.
10 INCORRECT The application of accounting and auditing evidence to a legal problem is
called
A)Fraud investigation.
B)Performance auditing.
C)Forensic accounting.
D)Judicial support.
Feedback: Incorrect. Fraud investigation relates to the misuse or theft of company assets or manipulation of data for ones personal gain. While evidence is gather during a fraud audit and may result in litigation or criminal proceedings, fraud audit is only one type of service under the topic of forensic accounting
he correct answer for each question is indicated by a .
1 INCORRECT If you were trying to randomly select 20 names from two pages in a local
telephone directory (which contains approximately 250 names per page), which of the following approaches would be most illustrative of systematic random selection?
A)
Identifying 20 random numbers and selecting the corresponding name from the telephone directory.
B)
Identifying a random starting point and selecting every 25th name for examination.
C)Selecting the first and last five names on each of the two pages.
D)
Identifying the first 20 names on these two pages that have the letter "a" in the last name.
Feedback: Incorrect. This approach is characteristic of unrestricted random selection.
2 INCORRECT In which of the following situations would the use of sampling ordinarily
be considered most appropriate?
A)The population is comprised of a relatively small number of items.
B)
It is important that a very precise response is provided in answering the question of interest.
C)
The population is comprised of a large number of relatively homogenous items.
D)
The selection of a subset of items is a difficult and time-consuming process.
Feedback: Incorrect. Sampling is most appropriate when the population has a relatively large number of items.
3 INCORRECT Sampling ordinarily results in a sacrifice of _______________ to gain
_______________.
A)Accuracy; validity.
B)Validity; accuracy.
C)Efficiency; effectiveness.
D)Effectiveness; efficiency.
Feedback: Incorrect. Sampling is not related to accuracy or validity.
4 INCORRECT The precision interval is that range of values that has a _______________
likelihood of containing the _______________.
A)Sampling risk; true population value.
Sampling risk; sample estimate.
B)
C)One minus sampling risk; true population value.
D)One minus sampling risk; sample estimate.
Feedback: Incorrect. The precision interval has a one minus sampling risk (not sampling risk) likelihood of containing the true population value.
5 INCORRECT Which of the following would not be an example of the application of
sampling?
A)
Examining a subset of students in a class to determine if the average age of a student is greater than some specified level.
B)
Examining a subset of passengers on an airplane to determine whether the average number of miles flown per year is greater than some specified level.
C)
Examining all members of a graduating class at a university to determine whether their average starting salary is greater than some specified level.
D)
Examining a subset of households in a neighborhood to determine if the average family size is greater than some specified level.
Feedback: Incorrect. Since a conclusion about the population is being drawn based on a subset of that population, this would be an example of sampling.
6 INCORRECT Which of the following is the most logical reason for the use of sampling
to answer a question of interest?
A)
Sampling results in a time savings, particularly if the size of the population is large.
B)
Sampling provides a more accurate response to the question of interest.
C)Sampling restricts certain items from being selected.
D)
Sampling allows more sophisticated measurement and evaluation techniques to be utilized.
Feedback: Correct. Because only a subset of the population is examined, sampling results in a time savings.
7 INCORRECT Assume that you are interested in determining if the average weight of
students in your class exceeds 140 pounds. Which of the following sets of conditions would expose you to sampling risk?
A)Sample estimate = 130 pounds; true average = 139 pounds.
B)Sample estimate = 145 pounds; true average = 142 pounds.
C)Sample estimate = 135 pounds; true average = 145 pounds.
D)(b) and (c) above.
Feedback: Incorrect. Sampling risk occurs when the sample estimate
and true average are inconsistent with respect to being greater than or less than the criterion level. Because both the sample estimate and true average are less than the criterion level (140 pounds), the auditor is not exposed to sampling risk.
8 INCORRECT Sampling risk has a(n) _______________ relationship with sample size; that
is, as the sampling risk increases, sample size _______________.
A)direct; increases.
B)direct; decreases.
C)inverse; increases.
D)inverse; decreases.
Feedback: Incorrect. Sampling risk and sample size have an inverse (not direct) relationship; that is, as the sampling risk increases, sample size decreases (not increases).
9 CORRECTA method of sample selection in which a series of contiguous units are selected is referred to as:
A)Block selection.
B)Haphazard selection.
C)Systematic random selection.
D)Unrestricted random selection.
Feedback: Correct. This is a description of block selection.
10 CORRECT The precision interval is determined by adding and subtracting precision
from the _______________.
A)Sample estimate.
B)Sample standard deviation.
C)Sampling risk.
D)True population value.
Feedback: Correct. The precision interval is determined by adding and subtracting precision from the sample estimate.
11 INCORRECT Audit sampling used for tests of controls is known as:
A)Random sampling
Statistical sampling
B)
C)Attributes sampling
D)Haphazard selection
Feedback:Incorrect. Random selection is a method for selecting a sample.
12 CORRECT When using variables sampling, auditors are primarily concerned with:
A)Risk of incorrect acceptance.
B)Risk of incorrect rejection.
C)Risk of overreliance
D)Risk of underreliance
Feedback: Correct. Risk of incorrect acceptance exposes auditors to a decrease in effectiveness, which could lead to an improper audit opinio
The correct answer for each question is indicated by a .
1 CORRECTWhich of the following factors is most likely established based on the results of prior years' audit examinations?
A)Expected population deviation rate.
B)Population size.
C)Risk of overreliance.
D)Tolerable rate of deviation.
Feedback: Correct. The expected population deviation rate is established based on the auditor's prior experience with the client (in a recurring engagement) or a pilot sample of controls (in a first-year engagement).
2 INCORRECT If the risk of overreliance is 5%, the tolerable rate of deviation is 8%, and
the expected population deviation rate is 1%, the necessary sample size is:
A)28
B)36
C)48
D)58
Feedback: Incorrect. The correct sample size is 58 items.
3 CORRECTWhich of the following combination of factors would yield the largest sample size (ROO = Risk of overreliance, TRD = Tolerable rate of deviation, EPDR = Expected population deviation rate)?
A)ROO = 5%, TRD = 2%, EPDR = 0%
B)ROO = 10%, TRD = 2%, EPDR = 0%
C)ROO = 5%, TRD = 6%, EPDR = 0%
D)ROO = 10%, TRD = 6%, EPDR = 0%
Feedback: Correct. From the sample size tables, the appropriate sample size is 149, which is larger than that in choices (b), (c), and (d).
4 INCORRECT If the auditor cannot locate a sample item, he or she should:
A)Replace the item in the sample with another item.
B)Classify the missing item as a deviation.
C)Reselect the entire sample and begin examining sample items.
D)Issue a qualified opinion on the client's financial statements.
Feedback: Incorrect. The auditor would not replace the item, since there is some possibility that the missing item represents a deviation.
5 INCORRECT If the sample rate of deviation is 6.2%, the upper limit deviation rate is
8%, the tolerable rate of deviation is 7%, and the risk of overreliance is 5%, which of the following statements is not true?
A)The auditor is unable to rely on internal control is planned.
B)
There is a 95% chance that the true deviation rate is less than or equal to 8%.
C)The allowance for sampling risk is 1%.
D)All of the above are true.
Feedback: Incorrect. Because the upper limit deviation rate deviation rate exceeds the tolerable rate of deviation, the auditor could not rely on internal control as planned.
6 INCORRECT If the auditor examined 60 items and found 6 deviations, which of the
following is not true (assuming a risk of overreliance of 5%)?The sample rate of deviation is 10%.
A)
B)The upper limit deviation rate is 18.8%.
C)The allowance for sampling risk is 8.8%.
D)All of the above statements are true.
Feedback: Incorrect. While the sample rate of deviation equals the number of deviations (6) divided by the sample size (60), or 10%.
7 INCORRECT Which of the following has a direct relationship with the upper limit
deviation rate?
A)A
B)B
C)C
D)D
Feedback: Incorrect. The risk of overreliance has an inverse relationship with the upper limit deviation rate.
8 INCORRECT A form of sampling that is used when deviations from controls are critical
yet are expected to occur at a relatively low rate is referred to as:
A)Attribute sampling.
B)Discovery sampling.
C)Statistical sampling.
D)Variables sampling.
Feedback: Incorrect. Attribute sampling is used to examine the effectiveness of the client's internal control. While general attribute sampling can be used in this scenario, the auditor would more likely use discovery sampling.
9 INCORRECT How is the tolerable rate of deviation established by the auditor?
A)
Based on the necessary level of detection risk determined from the use of the audit risk model.
Based on the level used in prior years' audits.
B)
C)Based on the desired level of control risk.
D)
Based on the sample rate of deviation calculated after the sample items are examined.
Feedback: Incorrect. The risk of incorrect acceptance is based on the necessary level of detection risk.
10 CORRECT The rate of deviations that has a one minus risk of overreliance
probability of equaling or exceeding the true deviation rate is the:
A)Upper limit deviation rate.
B)Expected population deviation rate.
C)Sample rate of deviation.
D)Tolerable rate of deviation.
Feedback: Correct. This is the definition of the upper limit deviation rate.
11 INCORRECT When using nonstatistical attributes sampling the audit team accepts the
controls as being reliable if:
A)
The sample rate of deviation equals or exceeds the tolerable rate of deviation.
B)
The tolerable rate of deviation equals or exceeds the sample rate of deviation.
C)
The sample deviation rate exceeds the expected population deviation rate.
D)None of the above are true.
Feedback: Incorrect. If the sample rate of deviation exceeds the tolerable rate of deviation, the audit team could not rely on the controls as planned
The correct answer for each question is indicated by a .
1 INCORRECT In which of the following situations would the use of variables sampling
be least appropriate?
A)Confirming accounts receivable with the client's customers.
B)
Observing inventory items to determine if recorded quantities are correct.
C)Examining purchase orders for evidence of proper approval.
D)
Selecting items of property, plant and equipment for physical inspection
Feedback: Incorrect. Variables sampling would be used to confirm accounts receivable, as this is substantive procedure.
2 INCORRECT How does the auditor establish tolerable misstatement in a variables
sampling application?
A)
Based on prior assessments of audit risk, control risk, inherent risk, and analytical procedures risk.
B)
Based on the recorded amount of the account balance as well as the relationship of the account balance with important financial statement subtotals.
C)
Based on his or her findings in prior years' audits or based on a small sample taken during the current year.
D)
Based on the anticipated cost of conducting additional substantive testing procedures.
Feedback: Incorrect. This is the procedure for establishing the risk of incorrect acceptance.
3 CORRECTWhich of the following would not result in a lower level of the risk of incorrect acceptance?
A)An increase in the desired level of audit risk from 3% to 5%.
B)The inability of the auditor to rely on the internal control as planned.
C)
An increase in the susceptibility of the account balance to misstatement.
D)
An inability to appropriately use analytical procedures in the audit examination.
Feedback: Correct. Increasing the level of audit risk will increase the necessary level of test of details risk.
4 CORRECTWhich of the following factors is most likely established based on the results of prior years' audit examinations?
A)Expected misstatement.
B)Population size.
C)Risk of incorrect acceptance.
D)Tolerable misstatement.
Feedback: Correct. Expected misstatement is established based on the results of prior years' examinations (in a recurring engagement) or a pilot sample of transactions or components (in a first-year engagement).
5 INCORRECT Under monetary unit sampling, the projected misstatement is
determined by multiplying the _____________ by the _____________.
A)Sampling interval; incremental reliability factor
B)Sample size; incremental reliability factor
C)Sampling interval; tainting percentage
D)Sample size; tainting percentage
Feedback: Incorrect. The projected misstatement is determined by multiplying the sampling interval by the tainting percentage (not the incremental reliability factor).
6 INCORRECT Which of the following factors has a direct relationship with sample size
in a variables sampling application?
A)A
B)B
C)C
D)D
Feedback: Incorrect. Tolerable misstatement has an inverse relationship with sample size.
7 INCORRECT Which of the following is not a difference in the application of monetary
unit sampling (MUS) and classical variables sampling?
A)
MUS methods are more likely to select transactions or components reflecting relatively large dollar amounts.
B)
MUS does not explicitly consider the risk of incorrect rejection in calculating sample size.
C)
MUS provides an estimate of the amount of misstatement in an account balance or class of transactions, while classical variables sampling provides an estimate of the recorded account balance.
D)
Classical variables sampling considers the standard deviation in determining sample size and evaluating sample results.
Feedback: Incorrect. MUS methods are more likely than classical variables sampling to select transactions or components reflecting relatively large dollar amounts.
8 INCORRECT Which of the following statements is not true with respect to the risk of
incorrect acceptance?
A)
The risk of incorrect acceptance occurs when the auditor's evidence suggest that the account balance is not materially misstated.
B)
The risk of incorrect acceptance is normally of greater concern to the audit team than the risk of incorrect rejection.
C)
The risk of incorrect acceptance occurs when the client's true (but unknown) account balance is not materially misstated.
D)
The risk of incorrect acceptance results in an effectiveness loss to the auditor.
Feedback: Incorrect. The risk of incorrect acceptance occurs when the auditor's evidence suggests that the account balance is not materially misstated.
9 INCORRECT Which of the following steps would ordinarily be done first in a monetary
unit sampling (MUS) application?
A)
Project detected misstatements to the sampling interval from which they were drawn.
B)Calculate the incremental allowance for sampling risk.
C)Determine the upper error limit.
D)Calculate the tainting percentage.
Feedback: Incorrect. Prior to projecting detected misstatements to the sampling interval, the auditor would need to calculate the tainting percentage [choice (d)].
10 INCORRECT Which of the following types of populations would be most suited to the
use of monetary unit sampling?
A)
A client's accounts receivable balance is comprised of individual customer accounts ranging from $2,000 to $8,000 that contain numerous misstatements.
B)
A client's accounts receivable balance is comprised of individual customer accounts ranging from $1,000 to $10,000,000 that contain few misstatements.
C)
Sales invoices on which client personnel are required to provide an indication that quantities were verified.
D)
Applications of an important control policy that has a relatively low rate of expected deviations, each of which could result in a significant financial statement misstatement.
Feedback: Incorrect. MUS sampling is most effective when an account balance or class of transactions is comprised of components that contain some very large items and have few expected misstatements.
11 CORRECT Which of the following is not true of nonstatistical variables sampling?
A)
It normally results in smaller sample sizes than other forms of variables sampling.
B)It does not require random methods of selection to be used.
C)
An allowance for sampling risk should be added to the projected misstatement before the audit team can determine the balance is acceptable.
D)All of these are true
Feedback: Correct. This is not true. Sample sizes under nonstatistical sampling should be comparable to those determined by statistical
methods
The correct answer for each question is indicated by a .
1 INCORRECT Examples of general controls would include all of the following except:
A)Echo checks built into the hardware by the manufacturer.
B)
The use of the systems development life cycle approach for implementing new programs.
C)The use of check digits when inputting customer information.
D)The use of grandfather-father-son techniques of file reconstruction.
Feedback: Incorrect. Echo checks are a type of hardware control.
2 INCORRECT Which of the following is a correct statement with regard to the job
responsibilities of individuals in a computerized processing environment?
A)
Systems analysts prepare flowcharts and code the logic of the computer program.
B)
Programmers prepare data for input by converting them from manual format into machine-readable format.
C)
The control group maintains control over data files and programs used in processing transactions.
D)
Computer operators oversee the operation of the computer for each accounting application system.
Feedback: Incorrect. Programmers are responsible for preparing flowcharts and coding the logic of the computer program.
3 INCORRECT Which of the following input controls is primarily related to ensuring that
all transactions are input and transactions are not input more than once?
A)Limits and reasonableness tests.
B)Check digits.
C)Batch totals.
D)Valid character tests.
Feedback: Incorrect. Limits and reasonableness tests are primarily related to ensuring the accuracy of input data.
4 INCORRECT Which of the following statements is correct with respect to the parallel
simulation approach?
A)
In parallel simulation, the result of the audit team's manual processing of transactions is compared with the result of processing these transactions through the client's normal system.
B)
To test the operating effectiveness of automated application controls, the audit team creates a fictitious program.
C)
Parallel simulation may use prepackaged routines and computer-assisted audit techniques.
D)Parallel simulation is an example of auditing around the computer.
Feedback: Incorrect. In parallel simulation, the audit team would process transactions through a program that attempts to replicate the client's normal system.
5 INCORRECT Which of the following procedures would not be effective in testing
controls restricting access to specific computer programs and files?
A)
Inquiring as to whether programs and files are restricted to authorized personnel.
B)
Attempting to access programs and files through the client's computerized system.
C)
Identifying whether the distribution of computer output is restricted to authorized personnel.
D)
Reviewing the access log and identifying whether access to programs and files has been limited to authorized personnel.
Feedback: Incorrect. This would be an effective method of testing the identified controls.
6 INCORRECT Controls that are built into the computer to provide reasonable
assurance that data are not altered or modified as they are transmitted within the system are known as:
A)Control totals.
B)File and operator controls.
C)Hardware controls.
D)Run-to-run totals.
Feedback: Incorrect. Control totals are used to ensure that data input and computerized processing is accurate.
7 INCORRECT Which of the following is not a difference that is introduced when an
entity uses the computer in processing its transactions?
A)
Audit teams must consider the existence and operating effectiveness of computerized controls in their assessment of control risk.
B)
Audit teams are not required to obtain an overall understanding of the entity's internal control in a computerized processing environment.
C)
Audit teams can limit their tests of controls because random errors do not exist in a computerized processing environment.
D)
Audit teams are not permitted to use inquiry as a method of testing controls in a computerized processing environment.
Feedback: Incorrect. The use of a computerized processing environment does require audit teams to consider and evaluate computerized controls.
8 INCORRECT When audit teams verify the processing accuracy of a client's
computerized processing system by comparing input data to processing results, this approach is known as:
A)Integrated test facility.
B)Parallel simulation.
C)Auditing around the computer.
D)Auditing through the computer.
Feedback: Incorrect. An integrated test facility processes transactions created by the audit team through the client's normal system.
9 INCORRECT Which of the following personnel is responsibility for preparing and
entering data into an entity's computerized processing system?
A)Programmers.
B)Data conversion operators.
C)Librarians.
D)Computer operators.
Feedback: Incorrect. Programmers code the logic in the computer program.
10 INCORRECT Which of the following controls involves manually calculating a
mathematical total of a field prior to input and comparing that to a total of that field from transactions processed by the client's system?
A)A
B)B
C)C
D)D
Feedback: Incorrect. While both hash totals and batch totals involve these calculations, check digits operate on an individual transaction level and do not involve manually calculating a total of a field prior to
input and comparing that to a total of that field from transactions processed by the client's system
