homework help 37606

1.      If the predominantly substantive approach preliminary audit strategy is used, planned detection risk will be:

1. moderate or high.
2. at the higher level.
3. high or very high.
4. low or very low.

The correct option is .

Feedback: Section 12.2 Determining detection risk

2.      If the lower assessed level of control risk approach preliminary audit strategy is used, planned detection risk will be:

1. at the lower level.
2. moderate or high.
3. at the higher level.
4. high or very high.

The correct option is .

Feedback: Section 12.2 Determining detection risk

3.      If the predominantly substantive approach preliminary audit strategy is used, the planned level of substantive procedures will be:

1. at the lower level.
2. moderate or high.
3. at the higher level.
4. low or very low.

The correct option is .

Feedback: Section 12.3 Designing substantive procedures

4.      If the lower assessed level of control risk approach preliminary audit strategy is used, the planned level of substantive procedures will be:

a.       at the lower level.

b.      moderate or high.

c.       at the higher level.

d.      high or very high.

The correct option is .

Feedback: Section 12.3 Designing substantive procedures

5.      Which of these would be a reason for adopting a predominantly substantive approach?

1. accounts are affected by more than one transaction class.
2. detection risk has been assessed as high.
3. there are no significant control procedures that pertain to the assertion.
4. control risk has been assessed as low.

The correct option is .

Feedback: Section 12.2 Determining detection risk

6.      For small clients it is often more efficient to adopt the predominantly substantive approach. Which of the following is a reason for this:

1. they may not have adequate resources to implement all appropriate controls.
2. controls may not be effective.
3. the size of the entity may make it inefficient for the auditor to rely on these controls.
4. all of the above.

The correct option is .

Feedback: Section 12.2 Determining detection risk

7.      Which of these would not necessarily be considered to be a risk factor for potential misstatements?

1. there is intense price competition in the industry of operation.
2. profit margin has increased and inventory turnover days has decreased
3. an employee in the cash office was passed over for a promotion.
4. segregation of duties is not practiced.

The correct option is .

Feedback: Section 12.1 Assessing the risk of material misstatement

8.      For a particular account balance assertion, the auditor is most likely to be able to avoid substantive tests of details with which of these set of risk assessments?

Inherent

Control

Results of analytical procedures

A.

Maximum

Maximum

Unexpected

B.

Maximum

Maximum

Expected

C.

Low

Low

Expected

D.

Low

Low

Unexpected

1. A
2. B

c.  C

d.  D

The correct option is .

Feedback: Section 12.3 Designing substantive procedures

9.      Which of these is not considered a substantive procedure?

1. analytical procedures.
2. tests of controls.
3. tests of detail of transactions.
4. tests of detail of balances.

The correct option is .

Feedback: Section 12.3 Designing substantive procedures

10.   The least costly form of testing is usually:

a.  analytical procedures.

b. tests of controls.

c. tests of detail of transactions.

d. tests of detail of balances.

The correct option is .

Feedback: Section 12.3 Designing substantive procedures

11.   Which of these is not normally a distinct phase involved in using generalised audit software?

a.       using the primarily substantive approach in planning the audit.

b.      identification of the relevant audit objective and tests to be performed.

c.       designing the application and form of the output.

d.      processing the application and reviewing the results.

The correct option is .

Feedback: Section 12.3 Designing substantive procedures

12.   Generalised audit software can be used for:

a.       performing calculations.

b.      selecting samples.

c.       identifying records meeting specified criteria.

d.  any of the above.

The correct option is .

Feedback: Section 12.3 Designing substantive procedures

13.   Tests of details of income statement account are likely when?

1. inherent risk is less than high.
2. control risk is moderate to low.
3. analytical procedures indicate no unusual fluctuations.
4. the account requires analysis e.g. directors’ remuneration, income tax

The correct option is .

Feedback: Section 12.5 Special considerations when designing substantive procedures

14.   Tests of details of transactions primarily involve:

1. confirmation with outsiders.
2. tracing and vouching.
3. observation and inquiry.
4. income statement accounts.

The correct option is .

Feedback: Section 12.3 Designing substantive procedures

15.   An auditor is examining the detailed debit and credit activity in an account. The auditor is most likely performing:

1. analytical procedures.
2. tests of controls.
3. tests of details of transactions.
4. tests of details of balances.

The correct option is .Feedback: Section 12.3 Designing substantive procedures

16.   Tests of details of transactions generally use evidence from:

a.       documents found in the entity’s files.

b.      documents obtained directly from external sources.

c.   direct observation on the part of the auditor.

d.   inquiry directed to top management personnel.

The correct option is .

Feedback: Section 12.3 Designing substantive procedures

17.   Tests of details of balances focus on obtaining evidence:

a.       directly from an outside source.

b.      in the least costly manner.

c.  directly about an account balance.

d.  to refute instead of support an assertion.

The correct option is .

Feedback: Section 12.3 Designing substantive procedures

18.   Which of these would not be considered to be a test of details of balances?

1. accounts receivable confirmations.
2. tracing an invoice to the sales journal.
3. observing the entity’s stocktake.
4. inspecting plant assets.

The correct option is .

Feedback: Section 12.3 Designing substantive procedures

19.   Confirmation and direct knowledge by the auditor are most associated with:

1. analytical procedures.
2. tests of details of balances.
3. tests of details of transactions.
4. tests of controls.

The correct option is .

Feedback: Section 12.3 Designing substantive procedures

20.   Which of the following is not true in regards to cut-off tests?

a.       they are related more to the transaction than to the closing balance.

b.      they ensure completeness.

c.       they ensure occurrence.

d.      they affect the income report and the balance sheet

Chapter 13

Audit Sampling

Multiple Choice

1.      Audit sampling is involved whenever an auditor:

a.       examines 100% of the population.

b.      forms a conclusion about the population from which the sample is drawn.

c.       performs tests of controls.

d.      performs substantive tests.

The correct answer is .

Feedback: Section 13.1 Basic concepts of sampling

2.      The statement that is most accurate about the terminology applied to errors identified when applying tests of controls or substantive testing to an audit sample is:

a.       an error identified in substantive testing is referred to as an irregularity.

b.      an error identified in substantive testing is referred to as a control deviation.

c.       an error identified in a test of controls is referred to as a misstatement.

d.      an error identified in a test of controls is referred to as a control deviation.

The correct answer is .

Feedback: Section 13.1 Basic concepts of sampling

3.      The justification for the wide use of non-statistical sampling in auditing is due to:

a.       cost/benefit considerations.

b.      classical decision theory.

c.       the concept of due care.

d.      professional scepticism.

The correct answer is .

Feedback: Section 13.3 Statistical sampling techniques

4.      Which of the following is not a type of sampling risk?

a.       risk of overreliance.

b.      risk of incorrect decision.

c.       risk of sample size.

d.      risk of underreliance.

The correct answer is .

Feedback: Section 13.1 Basic concepts of sampling

5.      Whenever sampling is used in an audit procedure, uncertainty will be present. The two sources of this uncertainty are:

a.       audit risk and detection risk.

b.      inherent risk and control risk.

c.       sampling risk and non-sampling risk.

d.      detection risk and control risk.

The correct answer is .

Feedback: Section 13.1 Basic concepts of sampling

6.      The risk of concluding control risk is lower than it actually is, is also known as:

a.          risk of overreliance.

b.         risk of underreliance.

c. risk of incorrect acceptance.

d. risk of incorrect rejection.

The correct answer is .

Feedback: Section 13.1 Basic concepts of sampling

7.      The risk of concluding a material error does not exist when in fact it does, is also known as:

a.       risk of overreliance.

b.      risk of underreliance.

c.       risk of incorrect acceptance.

d.      risk of incorrect rejection.

The correct answer is .

Feedback: Section 13.1 Basic concepts of sampling

8.      Which of these would not be considered to be a source of non-sampling risk?

a.       human mistakes.

b.      inappropriate audit procedures.

c.       inappropriate sample size.

d.      reliance on erroneous information.

The correct answer is .

Feedback: Section 13.1 Basic concepts of sampling

9.      The statement that is inaccurate is: The choice between non-statistical sampling and statistical sampling:

a.       does not affect the selection of auditing procedures to be applied to the sample.

b.      does affect the appropriateness of the evidence obtained about individual sample items.

c.       does not affect the appropriate response by the auditor to errors found in the sample.

d.      does not impact on the need to exercise professional judgement.

The correct answer is .

Feedback: Section 13.1 Basic concepts of sampling

10.  If the sample supports the conclusion that the recorded account balance is materially misstated when it is actually not materially misstated, this is the:

a.       risk of assessing control risk too low.

b.      risk of assessing control risk too high.

c.       risk of incorrect acceptance.

d.  risk of incorrect rejection.

The correct answer is .

Feedback: Section 13.1 Basic concepts of sampling

11.  The steps in planning the sample are listed as follows:

A

Define what errors are being sought

B

Identify the population and sampling unit

C

Determine the objectives of the test

D

Decide the size of the sample

E

Specify tolerable error, expected error and required confidence level

Which one of the following shows steps A through E in the correct order?

a.       B, E, D, A and C.

b.      C, A, D, E and B.

c.       A, B, C, D and E.

d.  C, A, B, E and D.

The correct answer is .

Feedback: Section 13.2 Use of samples for audit tests

12.  The greatest impact on audit effectiveness comes from the risk(s) of:

a.       overreliance and incorrect rejection.

b.      underreliance and incorrect acceptance.

c.       overreliance and incorrect acceptance.

d.      underreliance and incorrect rejection.

The correct answer is .

Feedback: Section 13.1 Basic concepts of sampling

13.  The greatest impact on audit efficiency comes from the risk(s) of:

a.       overreliance and incorrect rejection.

b.      underreliance and incorrect acceptance.

c.       overreliance and incorrect acceptance.

d.      underreliance and incorrect rejection.

The correct answer is .

Feedback: Section 13.1 Basic concepts of sampling

14.  If the sample supports the conclusion that the recorded account balance is materially misstated when in fact it is, this is:

a.       the risk of incorrect acceptance.

b.      the risk of incorrect rejection.

c.       the correct decision.

d.      the risk of overreliance.

The correct answer is .

Feedback: Section 13.1 Basic concepts of sampling

15.  The least effective means of controlling non-sampling risk is:

a.       adequate supervision.

b.      proper planning.

c.       adherence to quality control standards.

d.      increasing the sample size.

The correct answer is .

Feedback: Section 13.1 Basic concepts of sampling

16.  The critical difference between statistical and non-statistical sampling is the:

a.       required use of judgement in non-statistical sampling

b.      sampling risk can be quantified in statistical sampling

c.       elimination of non-sampling risk with statistical sampling

d.      added precision attained with statistical sampling

The correct answer is .

Feedback: Section 13.1 Basic concepts of sampling

17.  An auditor may use sampling to obtain information about many different characteristics of a population. However, most audit samples lead either to an estimate of:

a.       a dollar rate or a deviation amount.

b.      the number of items in the population or the dollar amount of the population.

c.       size of the population or the distribution of the population.

d.      a deviation rate or a dollar amount.

The correct answer is .

Feedback: Section 13.2 Use of samples for audit tests

18.  Which of these would not be considered a method of audit sampling?

a.       random selection.

b.      systematic selection.

c.       haphazard selection.

d.      block selection.

The correct answer is .

Feedback: Section 13.2 Use of samples for audit tests

19.  The incorrect statement in relation to systematic selection is:

a.       it is not appropriate for populations with a fixed pattern.

b.      the results cannot be evaluated statistically.

c.       it is not possible to measure the probability of an item being selected.

d.      none of the above is incorrect

The correct answer is .

Feedback: Section 13.2 Use of samples for audit tests

20.  The sampling unit is:

a.       the physical location of the population from which the sample will be drawn.

b.      an individual item in the population.

c.       the individual control procedure being tested.

d.      a population expressed as an attribute of interest.

The correct answer is .

Feedback: Section 13.2 Use of samples for audit tests

Chapter 14

Auditing sales and receivables

Multiple Choice

1. The account balance audit objective, “Accounts receivable represent gross claims on customers at balance date and agree with the sum of the accounts receivable subsidiary ledger”, is derived from the assertion category of:

1. existence or occurrence.
2. completeness.
3. rights and obligations.
4. valuation and allocation.

The correct answer is .

Feedback: Section 14.2 Audit objectives

2. Which of these is not a specific audit objective for sales and receivables?

1. existence or occurrence.
2. completeness.
3. representation.
4. presentation and disclosure.

The correct answer is .

Feedback: Section 14.2 Audit objectives

3. In a credit sales environment, the document that usually initiates the activity in the sales cycle is:

1. customer order.
2. sales order.
3. dispatch note.
4. sales invoice.

The correct answer is .

Feedback: Section 14.3 Sales, cash receipts and sales adjustment transactions

4. Which of the following is not normally considered a step in the credit sales functions?

1. accepting customer orders.
2. approving credit.
3. acquiring goods to fill the order.
4. billing customers.

The correct answer is .

Feedback: Section 14.3 Sales, cash receipts and sales adjustment transactions

5. In a credit sales environment, the documents that serves as the basis for internal processing of an order is:

1. customer order.
2. sales order.
3. dispatch note.
4. sales invoice.

The correct answer is .

Feedback: Section 14.3 Sales, cash receipts and sales adjustment transactions

6. In a credit sales environment, the best place to vest credit approval is in:

1. accounts receivable.
2. the sales department.
3. the cashier area where receipts will eventually be sent.
4. an independent credit department.

The correct answer is .

Feedback: Section 14.3 Sales, cash receipts and sales adjustment transactions

7. Controls over approving credit relate to the:

1. existence or occurrence assertion.
2. completeness assertion.
3. accuracy, valuation or allocation assertion.
4. rights and obligations assertion.

The correct answer is .

Feedback: Section 14.3 Sales, cash receipts and sales adjustment transactions

8. To enhance controls in the credit sales area, the warehouse should be instructed not to release (or dispatch) goods until:

1. they received a faxed copy of the sales requisition.
2. they have a completed sales invoice.
3. they receive an approved sales order.
4. the shipping department requests the goods.

The correct answer is .

Feedback: Section 14.3 Sales, cash receipts and sales adjustment transactions

9. Accounting for the numerical sequence of dispatch notes used in tracing will primarily meet the:

1. existence or occurrence assertion.
2. completeness assertion.
3. accuracy, valuation or allocation assertion.
4. presentation or disclosure assertion.

The correct answer is

Feedback: Section 14.3 Sales, cash receipts and sales adjustment transactions

10. From the following which would not be an appropriate control procedure for the invoicing of customers?

1. checking the existence of a dispatch note matching the approved sales order before an invoice is prepared.
2. using an authorised price list when preparing the invoice.
3. comparing totals for dispatch notes with totals for invoices.
4. segregating filling and dispatching sales orders.

The correct answer is .

Feedback: Section 14.3 Sales, cash receipts and sales adjustment transactions

11. Use of an authorised price list in preparing the sales invoices meets primarily the:

1. existence or occurrence assertion.
2. completeness assertion.
3. accuracy, valuation or allocation assertion.
4. rights and obligations assertion.

The correct answer is .

Feedback: Section 14.3 Sales, cash receipts and sales adjustment transactions

12. The main control objective of the recording of sales function is:

1. that only actual deliveries are invoiced.
2. that sales are recorded accurately and in the proper period.
3. that cash will be received for the sale.
4. to produce a monthly customer statement.

The correct answer is .

Feedback: Section 14.3 Sales, cash receipts and sales adjustment transactions

13. Access controls should permit read-only access to transaction and master files except for authorised individuals. Which of the following illustrates such an exception?

1. credit controller can override marginal breaches of a customer’s credit limit.
2. sales manager can amend a price for a sales transaction.
3. sales manager can amend a discount for a customer.
4. any of the above.

The correct answer is .

Feedback: Section 14.3 Sales, cash receipts and sales adjustment transactions

14. Which of the following is not an example of a programmed application control?

1. numerical continuity of documents is assured.
2. unreasonable quantities, amounts and dates are queried.
3. only orders for goods in the entity’s product range are accepted.
4. duplicate document numbers are accepted.

The correct answer is .

Feedback: Section 14.3 Sales, cash receipts and sales adjustment transactions

15. Use of point-of-sale terminals to record over-the-counter cash sales provides all of the following except:

1. assurance that all cash sales are processed through the system.
2. an immediate visual display for the customer to verify the accuracy of price and cash tendered.
3. a printed receipt for the customer.
4. printed control totals of the day’s receipts processed on the device.

The correct answer is .

Feedback: Section 14.3 Sales, cash receipts and sales adjustment transactions

16. Standard control procedures over customer remittances received through the mail include having the mailroom personnel:

a.       forward the remittances, unopened, directly to the accounts receivable clerk.

b.      open the mail, restrictively endorse the cheques and then forward the remittances directly to the cashier.

c.       open the mail, restrictively endorse the cheques and then forward the remittances directly to the accounts receivable clerk.

d.      open the mail, restrictively endorse the cheques and then list each remittance on a prelist.

The correct answer is .

Feedback: Section 14.3 Sales, cash receipts and sales adjustment transactions

17. After making the deposit, the daily cash summary should be forwarded by the cashier directly to:

1. the chief financial officer.
2. the accounts receivable clerk.
3. general accounting.
4. the cash receipts clerk.

The correct answer is .

Feedback: Section 14.3 Sales, cash receipts and sales adjustment transactions

18. In most credit sales audits, the auditor’s concern over sales adjustment transactions is based upon the:

1. sheer number and value of these transactions.
2. lack of proper authorisation for these transactions.
3. potential use of these transactions to conceal a theft of cash.
4. poor controls normally found over these transactions and the inherent lack of documentation.

The correct answer is .

Feedback: Section 14.4 Developing the audit plan

19. The write-off of accounts receivable should be authorised by the:

1. cashier
2. controller.
3. accounts receivable clerk.
4. chief financial officer.

The correct answer is .

Feedback: Section 14.4 Developing the audit plan

20. The best procedure for dealing with a non-response to a third positive request for confirmation of an accounts receivable is:

1. assume that the debtor’s value is correct
2. write-off the balance as a bad debt
3. examine subsequent cash collections
4. involve the client in chasing up the debtor

The correct answer is .

Feedback: Section 14.5 Substantive procedures

Chapter 15

Auditing purchases, payables and payroll

Multiple Choice

1.      Which of these is not directly affected by purchases and payments transactions?

a.       plant assets.

b.      work-in-process inventory.

c.       accounts payable.

d.      prepaid expenses.

The correct answer is .

Feedback: Section 15.1 Brief summary of audit procedures

2.         The specific audit objective “accounts payable are liabilities of the entity at the balance date” is derived from the:

a.          completeness assertion.

b.         valuation or measurement assertion.

c.          presentation or disclosure assertion.

d.         rights and obligations assertion.

The correct answer is .

Feedback: Section 15.2 Audit objectives

3.      Purchase requisitions may originate from:

a.       personnel manager, for plant and equipment.

b.      the warehouse, for inventory.

c.       purchases for a delivery vehicle

d.      b. and c.

The correct answer is .

Feedback: Section 15.3 Purchase, payment and purchase adjustment transactions

4.              Purchase orders become part of the transaction trail of documentary evidence that directly supports which assertion for purchase transactions?

a.         existence or occurrence.

b.        rights and obligations.

c.         accuracy or valuation.

d.   presentation and disclosure.

The correct answer is .

Feedback: Section 15.3 Purchase, payment and purchase adjustment transactions

5.         The quantity ordered may not be displayed on the copy of the purchase order sent directly to the:

a.       requesting department.

b.      vouchers payable department.

c.       receiving department.

d.      accounts receivable department.

The correct answer is .

Feedback: Section 15.3 Purchase, payment and purchase adjustment transactions

6.         The receiving department should be instructed to accept no goods without having on file a properly authorised:

a.       purchase requisition.

b.      invoice.

c.       receiving report.

d.      purchase order.

The correct answer is .

Feedback: Section 15.3 Purchase, payment and purchase adjustment transactions

7.              A copy of the receiving report should be sent directly by the receiving department to the:

a.       accounts (receivable) department.

b.      chief financial controller

c.       purchasing department.

d.      accounts (payable) department.

The correct answer is .

Feedback: Section 15.3 Purchase, payment and purchase adjustment transactions

8.              A check by the auditor on the numeric sequence of prenumbered receiving reports to determine that a supplier’s invoice was recorded for each relates to the:

a.       existence or occurrence assertion.

b.      completeness assertion.

c.       presentation or disclosure assertion.

d.      rights and obligations assertion.

The correct answer is .

Feedback: Section 15.3 Purchase, payment and purchase adjustment transactions

9.              A responsibility not normally assigned to receiving department personnel is to:

a.       compare goods received with description of goods ordered.

b.      prepare a prenumbered receiving report for every order received.

c.       enter cheque requisition data and verify the batch total.

d.      file the purchase order copy pending arrival of goods.

The correct answer is .

Feedback: Section 15.3 Purchase, payment and purchase adjustment transactions

10.          Prior to recording purchases transactions, supplier’s invoices are checked and approved in the accounts department. Controls over this function include all of the following except:

a.       marking all supporting documentation as “paid”.

b.      approving the supplier’s invoice for payment by having an authorised person sign the invoice.

c. agreeing the details of the supplier’s invoice with the related receiving report and purchase order.

d. determining the mathematical accuracy of the supplier’s invoice.

The correct option is .

Feedback: Section 15.3 Purchase, payment and purchase adjustment transactions

11.     For the purchasing firm the processing of purchases and payment transactions requires all of the following functions except:

a.       requisitioning goods and services.

b.      preparing purchase invoices.

c.       preparing the cheque requisition.

d.      all of the functions are required.

The correct answer is .

Feedback: Section 15.3 Purchase, payment and purchase adjustment transactions

12.     Responsibility for determining that unpaid supplier’s invoices are processed for payment on their due dates generally lies with the:

a.       warehouse department.

b.      accounts department.

c.       purchasing department.

d.      internal audit department.

The correct answer is .

Feedback: Section 15.3 Purchase, payment and purchase adjustment transactions

13.          Segregation of the functions of payroll and personnel do all of the following, except:

a.       reduce the risk of payments to fictitious employees.

b.      reduce the risk of payments to terminated employees.

c.       restrict the recording of new employee data to the payroll department.

d.      restrict the payment of wages to the payroll department.

The correct answer is .

Feedback: Section 15.4 Payroll transactions

14.          Controls over the preparation and signing of cheques include all of the following except:

a.       authorised personnel in the accounting department should be responsible for signing the cheques.

b.      the cheque requisition and supporting documents should be cancelled (stamped) when the cheque is signed.

c.       the signed cheque and the supporting documents should be returned to the accounts payable clerk for review and mailing.

d.      prenumbered cheques should be used.

The correct answer is .

Feedback: Section 15.3 Purchase, payment and purchase adjustment transactions

15.          Controls specific to the recording of cash payments include which of the following?

a.       an independent check by the accounting supervisor of the agreement of the amounts journalised and posted to accounts payable with the cheque summary received from the general accounts department

b.      an independent check of the agreement of the total of cheques issued with a batch total of the vouchers processed for payment.

c.       limits on access to blank cheques

d.      all of the above.

The correct answer is .

Feedback: Section 15.3 Purchase, payment and purchase adjustment transactions

16.          Payroll functions include all of the following except:

a.       hiring employees.

b.      deciding on the number of workers required to work on a particular day.

c.       preparing the payroll.

d.      protecting unclaimed wages.

The correct answer is .

Feedback: Section 15.4 Payroll transactions

17.          Payroll functions include all of the following except:

a.       preparing attendance and timekeeping data.

b.      authorising payroll changes.

c.       terminating employees.

d.      all of the above are payroll functions

The correct answer is .

Feedback: Section 15.4 Payroll transactions

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