Deck 5: Overall Audit Strategy, Audit Program, Audit of the Sales and Collection Cycle, Audit Sampling for Tests of Controls and Substantive Tests of Transactions

Question 1

Shown below (1 through 5) are the five types of tests which auditors use to determine whether financial statements are fairly stated. Which three are substantive tests?

A) 3, 4, and 5.
B) 2, 3, and 4.
C) 1, 2, and 3.
D) 2, 3, and 5.

Answer 1

3, 4, and 5.

Question 2

Which of the following procedures are frequently performed in response to the auditor's assessment of the risk of material misstatement?

A) Tests of controls.
B) Risk assessment procedures.
C) Tests of details of balances.
D) Ratio analysis.

Answer 2

Tests of details of balances.

Question 3

Tests of controls may include which of the following types of evidence?

Answer 3

D

Question 4

Which of the following is not a useful risk assessment procedure for obtaining an understanding of internal controls?

A) Make inquiries of the client's personnel.
B) Examine documents and records.
C) Read industry trade magazines.
D) Observe client activities and operations.

Question 5

Which of the following is not appropriate for purposes of testing the effectiveness of controls?

A) Reperform client procedures.
B) Evaluate prior experience with the client.
C) Observe control- related activities.
D) Make inquiries of client personnel.

Question 6

Analytical procedures are defined in the auditing standards as:

A) helpful procedures not possessing the validity of other tests available to the auditor.
B) tests of controls.
C) substantive tests.
D) compliance tests.

Question 7

Tests of transactions are used to determine whether _ ________ have been satisfied.

A) compliance test requirements.
B) transaction- related audit objectives.
C) balance coverage requirements.
D) existence assertions.

Question 8

Which of the following audit tests is usually the least costly to perform?

A) Tests of controls.
B) Substantive tests of transactions.
C) Analytical procedures.
D) Tests of balances.

Question 9

Which of the following relationships between types of tests and audit evidence is not correct?

A) Tests of controls and observation.
B) Tests of details and inspection.
C) Substantive tests of transactions and reperformance.
D) Tests of details and observation.

Question 10

Which of the following types of procedures will be performed in an audit of internal control over financial reporting?

Question 11

Tests of details of balances focus on:

A) end of the year balances.
B) beginning of the year balances.
C) accounting cycles.
D) transaction details for the period under audit.

Question 12

When an auditor believes that analytical procedures indicate a reasonable possibility of misstatement, the auditor usually would:

Question 13

When controls are deemed ineffective and assessed control risk is at the maximum for a private company, there will be _ ________ emphasis placed on tests of controls.

A) heavy
B) moderate
C) no
D) relatively little

Question 14

Tests of controls address each of the following questions except:

A) Why were the procedures performed?
B) Who performed the procedures?
C) Were the necessary procedures performed?
D) How were the procedures performed?

Question 15

At what point in the audit are tests of details most appropriately designed?

A) Testing.
B) Communication of material weaknesses.
C) Engagement evaluation.
D) Planning.

Question 16

Which of the following is/are performed in an audit of internal control over financial reporting?

Question 17

Only ________ involve physical examination and confirmation.

A) tests of controls
B) tests of transactions
C) tests of balances
D) analytical procedures

Question 18

Inspection is used in every type of test except:

A) analytical procedures.
B) tests of details.
C) tests of transactions.
D) tests of controls.

Question 19

An exception in a test of control indicates the ________ of misstatements.

A) the amount, likelihood, and classification
B) the amount and the classification
C) the amount
D) the likelihood

Question 20

Must auditors always perform tests of controls?

Question 21

Consider the audit risk model and the five types of audit tests. Which tests provide evidence pertinent to the various elements of the audit risk model?

Question 22

Discuss the major determinants of the extent of tests of details of balances.

Question 23

Auditing standards encourage, but do not require, a written audit program.

Question 24

Substantive tests of transactions are the most expensive type of audit test to perform.

Question 25

Tests of details of balances focus on beginning and ending of the year balances.

Question 26

Substantive tests of transactions and substantive tests of details of balances are often conducted simultaneously.

Question 27

Which of the following is not an account affected by the sales and collection cycle?

A) Sales returns and allowances.
B) Cash receipts.
C) Allowance for uncollectible accounts.
D) Gross margin.

Question 28

What critical event must take place before goods can be shipped?

A) Determination of correct delivery address.
B) Receipt of cash.
C) Credit approval.
D) Receipt of sales order from the customer.

Question 29

At what point in the sales and collection cycle does the company first give up assets?

A) Credit approval.
B) Shipment of goods.
C) Sales approval.
D) Cash collection.

Question 30

Most companies recognize sales revenue when:

A) customer orders are received.
B) sales are invoiced.
C) goods are shipped.
D) customer orders are approved.

Question 31

The document that supports reductions in accounts receivable is the:

A) bill of lading.
B) sales invoice.
C) monthly statement.
D) credit memo.

Question 32

In which of the following will sales return and allowances not be recorded?

A) Sales returns and allowances transaction file.
B) Accounts receivable master file.
C) Cash receipts journal.
D) Sales returns and allowances will be recorded in all of the above.

Question 33

When posting items from the sales journal, details of the journal and journal totals are posted to which items?

Question 34

A document used to indicate authority to write off an account receivable as uncollectible is the:

A) debit memo.
B) credit memo.
C) voucher.
D) uncollectible account authorization form.

Question 35

Management's assertions for sales and collection activities are ________ when sales are generated via e- commerce activities.

A) expanded
B) mitigated
C) decreased
D) unchanged

Question 36

To prevent fraud, management should deny cash access to anyone responsible for:

Question 37

Which of the following is a point at which the auditor deems authorization to be critical?

Question 38

Prenumbered documents are intended to help:

Question 39

At which point in an ordinary sales transaction would a lack of specific authorization be of least concern to the auditor?

A) Determination of discounts.
B) Selling of goods for cash.
C) Granting of credit.
D) Shipment of goods.

Question 40

Explain each of the following types of documents and indicate the class of transactions in which they are commonly used.1. Customer order2. Shipping document3. Remittance advice4. Sales returns and allowance journal5. Uncollectible account authorization form

Question 41

When testing the occurrence objective for sales, the auditor is concerned with the possibility of three types of misstatements. One type is sales being included in the journal for which no shipment was made. Discuss the other two types of misstatements.

Question 42

When designing substantive tests of transaction for sales, the auditor is concerned with several types of misstatements. What are these types of misstatements and are they intentional or unintentional?

Question 43

If sales invoices are automatically calculated and posted by a company's computer system, can the auditor reduce substantive tests of transactions for the accuracy objective?

Question 44

Describe the three basic steps an auditor should follow when designing tests of controls and substantive tests of transactions.

Question 45

Match each of the descriptions with the following terms for each of the documents and records

-A schedule prepared by an independent person when cash is received. It is used to verify whether cash received was recorded and deposited at the correct amounts and on a timely basis.

A) Customer order form
B) Sales order
C) Bill of lading
D) Sales invoice
E) Summary sales report
F) Accounts receivable master file
G) Monthly statement
H) Remittance advice
I) Prelisting of cash receipts
J) Credit memo
K) Uncollectible account authorization form

Question 46

Match each of the descriptions with the following terms for each of the documents and records

-An internal document for communicating the description, quantity, and related information for goods ordered by a customer. This is frequently used to indicate credit approval and authorization for shipment.

A) Customer order form
B) Sales order
C) Bill of lading
D) Sales invoice
E) Summary sales report
F) Accounts receivable master file
G) Monthly statement
H) Remittance advice
I) Prelisting of cash receipts
J) Credit memo
K) Uncollectible account authorization form

Question 47

Match each of the descriptions with the following terms for each of the documents and records

-A document that accompanies the sales invoice mailed to the customer and which can be returned to the seller with the cash payment.

A) Customer order form
B) Sales order
C) Bill of lading
D) Sales invoice
E) Summary sales report
F) Accounts receivable master file
G) Monthly statement
H) Remittance advice
I) Prelisting of cash receipts
J) Credit memo
K) Uncollectible account authorization form

Question 48

Testing from source documents to the journal is useful for testing nonexistent transactions.

Question 49

In practice, auditors ________ know if a sample is truly a representative one.

A) sometimes
B) often
C) routinely
D) never

Question 50

One cause of nonsampling risk is:

A) testing less than the entire population.
B) use of extensive tests of controls.
C) the possibility that a properly- selected sample still may not be representative.
D) ineffective use of audit procedures.

Question 51

An auditor can increase the likelihood that a sample is representative by using care in:

Question 52

Sampling risk may be controlled by:

Question 53

Which of the following is not one of the basic phases in audit sampling?

A) Selecting the sample and performing the tests.
B) Evaluating the results of the sample.
C) Planning the sample.
D) Each of the above is a phase in audit sampling.

Question 54

Which of the following methods of sample selection is appropriately used when selecting a random sample?

Question 55

The acceptable risk of assessing control risk too low will normally be assessed at a ________ level when auditing a public company.

A) nominal
B) higher
C) lower
D) compensating

Question 56

Which of the following is not one of the types of computer tools used to generate random samples?

A) Random application search software.
B) Random number generators.
C) Generalized audit software.
D) Electronic spreadsheet programs.

Question 57

In using audit sampling for exception rates, the auditor is primarily interested in determining the

A) average range in which
B) lowest
C) highest
D) none of the above

Question 58

Place the following steps in their proper order:1. Analyze exceptions2. Select the sample3. Define attributes and exception conditions4. State the objectives of the audit test5. Specify the tolerable exception rate

A) 4,3,5,2,1.
B) 1,3,2,4,5.
C) 1,2,3,4,5.
D) 4,3,1,2,5.

Question 59

________ represents the auditor's measure of sampling risk.

A) SER
B) EPER
C) ARACR
D) TER

Question 60

Which of the following is not determined until after a sample is tested and evaluated?

A) Tolerable exception rate.
B) Computed exception rate.
C) Sample exception rate.
D) Estimated population exception rate.

Question 61

The acceptable risk of assessing control risk too low is:

Question 62

A means of reducing the potential bias in systematic sample selection is to:

A) include a large block of the population.
B) use multiple starts.
C) include only the high- dollar- value items.
D) use a random number table.

Question 63

When selecting a sample, random numbers may be obtained either with replacement or without replacement. Although both selection methods are theoretically sound, auditors rarely use replacement sampling.