Deck 9: Substantive Procedures and the Financial Statement Audit

Question 1

When using sample results to estimate unknown error, the auditor may construct a confidence interval to determine if the estimated error is within the bounds set by the tolerable misstatement amount.

Answer 1

True

Question 2

The lead schedule is the client's working trial balance.

Answer 2

True

Question 3

Sampling errors are caused when the auditor tests the wrong documentation.

Answer 3

False

Question 4

The substantive testing is organized around the transaction cycles.

Question 5

Which of the following is NOT a transaction cycle?

A) Cash receipts.
B) Inventory.
C) Cash disbursements.
D) All are transaction cycles.

Question 6

Incorrect rejection is an audit effectiveness issue.

Question 7

Statistical analyses are required whenever an auditor estimates the unknown error for an account balance.

Question 8

If the unadjusted difference resulting from projecting the error rate to the account balance is less than the tolerable misstatement, the auditor may choose to ignore the error.

Question 9

Replacement value is used to estimate fair value.

Question 10

Testing accounts receivable requires inquiry of existing creditors as to amount payable accuracy.

Question 11

Detail schedules need to tie to the lead schedule.

Question 12

When assessing accounts for misstatement, the auditor frequently sets tolerable limits to guide her decisions regarding the need for adjusting journal entries.

Question 13

AU 328 requires the use of fair value for certain accounts.

Question 14

There are seven separate assertions in the audit of cash.

Question 15

The term audit objectives refers to:

A) what must be accomplished during the audit of a particular account to be persuaded about management assertions.
B) the work that must be performed by the auditor.
C) the goal of the overall audit.
D) All of the above.

Question 16

Use of statistical sampling:

A) prevents errors.
B) is easier to defend in court.
C) allows the auditor to infer conclusions about the sample.
D) None of the above.

Question 17

Which is the correct order for the tests listed below?

A) Substantive analytical procedures, dual purpose tests, detail tests of balances.
B) Detail tests of balances, substantive analytical procedures, dual purpose tests.
C) Dual purpose tests, detail tests of balances, substantive analytical procedures.
D) None of the above.

Question 18

Obsolete inventory is an example of inherent risk.

Question 19

The first step in substantive testing is assessing internal control.

Question 20

Which of the following is an example of sampling error?

A) Selection of the wrong transactions.
B) Misapplication of random sampling.
C) Selecting transactions not representative of the population.
D) All of the above are examples of sampling errors.

Question 21

You are assigned to audit accounts payable for a manufacturing client. As part of the planning, your manager sets a tolerable misstatement amount of+/- $125,000. Your review of unpaid invoices indicates an understatement error of $25,253 from a sample of $675,467. The population value of A/P is $5,241,687 at October 31st. The estimated error rate is:

A) 6%.
B) 0.001%.
C) 3%.
D) Cannot be determined.

Question 22

You are assigned to audit accounts payable for a manufacturing client. As part of the planning, your manager sets a tolerable misstatement amount of+/- $125,000. Your review of unpaid invoices indicates an understatement error of $25,253 from a sample of $675,467. The population value of A/P is $5,241,687 at October 31st. The minimum amount of the adjustment (rounded) is:

A) $125,000.
B) $25,253.
C) $157,251.
D) $32,251.

Question 23

You are assigned to audit accounts payable for a manufacturing client. As part of the planning, your manager sets a tolerable misstatement amount of+/- $125,000. Your review of unpaid invoices indicates an understatement error of $25,253 from a sample of $675,467. The population value of A/P is $5,241,687 at October 31st. The estimate of true balance(rounded) is:

A) $5,398,938.
B) $5,266,940.
C) $5,391,940.
D) $5,241,940.

Question 24

Incorrect acceptance can occur when:

A) there is an efficiency problem.
B) the sample size is too small.
C) there is a sampling error.
D) All of the above.

Question 25

The auditor selects 25 invoices for testing and detects no errors. As a result, she concludes that the expense account is fairly stated. Unbeknown to the auditor, the client has altered some of the invoices to reduce the amount reported as expense. This is an example of:

A) an efficiency problem.
B) incorrect acceptance.
C)
C) a sampling error.
D) Both b and

Question 26

You are assigned to audit accounts payable for a manufacturing client. As part of the planning, your manager sets a tolerable misstatement amount of+/- $125,000. Your review of unpaid invoices indicates an understatement error of $25,253 from a sample of $675,467. The population value of A/P is $5,241,687 at October 31st. The upper amount of the tolerable misstatement assuming the client booked an adjusting entry for the known errors (rounded) is:

A) $5,241,687.
B) $5,266,940.
C) $5,141,940.
D) $5,391,940.

Question 27

You are assigned to audit accounts payable for a manufacturing client. As part of the planning, your manager sets a tolerable misstatement amount of+/- $125,000. Your review of unpaid invoices indicates an understatement error of $25,253 from a sample of $675,467. The population value of A/P is $5,241,687 at October 31st. The lower amount of the tolerable misstatement assuming the client booked an adjusting entry for the known errors (rounded) is:

A) $5,391,940.
B) $5,241,687.
C) $5,141,940.
D) $5,266,940.

Question 28

Comparing the current year balance to the prior year's balance is an example of:

A) a substantive analytical procedure.
B)
B) a fluctuation analysis.
C) change analysis.
D) Both a and

Question 29

The tolerable misstatement affects:

A) whether or not an unadjusted balance is recorded.
B) the determination of materiality.
C) the amount of the unadjusted balance to record.
D) All of the above.

Question 30

A sampling unit:

A) is an individual account.
B) is an individual transaction.
C) is an individual unit.
D) can be any of the above depending on the sampling frame.

Question 31

Estimated misstatements are:

A) always recorded by the auditor.
B) always recorded by the client.
C) may be recorded by the auditor.
D) None of the above.

Question 32

Inherent risk is greatest for:

A) accounts with large balances.
B) accounts with large numbers of transactions.
C) accounts whose balance requires estimation.
D) All of the above.

Question 33

Sampling risk:

A) is a function of statistical procedures.
B)
B) is a function of the statistical method chosen.
C) is a function of the audit, regardless whether statistical methods are used or not.
D) Both a and

Question 34

Which of the below is considered a sampling frame?

A) Individual accounts receivable accounts.
B) Individual inventory accounts.
C) A transaction file.
D) None of the above.

Question 35

An audit efficiency occurs when:

A) the auditor concludes there is no material misstatement when in fact there is.
B) the auditor concludes there is a material misstatement when in fact there is not.
C) the auditor concludes that the transactions need to be reperformed.
D) None of the above are audit efficiency problems.

Question 36

You are assigned to audit accounts payable for a manufacturing client. As part of the planning, your manager sets a tolerable misstatement amount of+/- $125,000. Your review of unpaid invoices indicates an understatement error of $25,253 from a sample of $675,467. The population value of A/P is $5,241,687 at October 31st. The remaining unadjusted difference (rounded) is:

A) $6,998.
B) $150,253.
C) $131,998.
D) $12,998.

Question 37

What are the initial steps for a test of details of balances when using a sample?

A) Determine the sampling method.
B) Determine which assertion is being tested.
C)
C) Determine which account is being tested.
D) Both b and

Question 38

You are assigned to audit accounts payable for a manufacturing client. As part of the planning, your manager sets a tolerable misstatement amount of+/- $125,000. Your review of unpaid invoices indicates an understatement error of $25,253 from a sample of $675,467. The population value of A/P is $5,241,687 at October 31st. The amount of any additional adjustment required by the auditor (rounded) is:

A) $0.
B) $131,998.
C) $6,998.
D) $125,000.

Question 39

When using a statistical sampling plan, the auditor calculates a precision interval around the population estimate. This involves:

A) setting the tolerable misstatement amount.
B) differentiating between known and estimated misstatements.
C) determining the amount of the adjustment.
D) All of the above.

Question 40

Which of the following accounts presents the greatest inherent risk?

A) Cash.
B) Marketable securities.
C) Accounts receivable.
D) Sales.

Question 41

FASB codification 850-10:

A) requires different treatment for related party transactions.
B) requires disclosure of related party transactions.
C)
C) requires the same treatment for related party transactions as it does for non related party transactions.
D) Both b and

Question 42

The auditor sends positive confirmations to the client's suppliers in order to fulfill which assertion?

A) Existence.
B) Disclosure.
C) Presentation.
D) Completeness.

Question 43

Which of the following procedures would you perform for an audit of accounts receivable at year-end?

A) Determine if any accounts have been factored or used as collateral for a loan.
B) Determine the adequacy of the allowance account.
C) Determine if there are any related party transactions.
D) All of the above.

Question 44

An auditor would search for unrecorded liabilities by:

A) examining paid invoices for inclusion in the proper accounting period.
B) examining bank statements for outstanding checks written to vendors.
C) examining the cash disbursements journal for the period subsequent to year-end but prior to issuance of the financial statements for payments made but not properly recorded as a liability in the correct period.
D) All of the above.

Question 45

The initials "PBC" mean:

A) paid by client.
B) prepared by client.
C) prepared before client.
D) None of the above.

Question 46

A lead schedule should include which of the following?

A) The client's general ledger.
B) An line item for each account in the client's working trial balance.
C) Reference to sample sizes used.
D) All of the above.

Question 47

Which of the following procedures would you perform for an audit of cash and cash equivalents at year-end?

A) Obtain the cut-off bank statement from the client.
B) Trace deposits in transit to the bank statement and to the books for proper recording.
C) Perform the bank reconciliation.
D) All of the above.

Question 48

Cut-off procedures:

A) can be tested at interim and rolled forward.
B) can be tested at any point in the audit.
C) apply only to balance sheet accounts.
D) can only be tested at year-end.

Question 49

The auditor's responsibility for fraud:

A) ends as of the balance sheet date.
B) ends as of the date of the audit report.
C) ends as of the withdrawal from the client.
D) essentially never ends.

Question 50

Allmark, the client, is a small manufacturing company currently in need of cash in order to stay in business. Loan payments exceeding its cash on hand are due in 60 days and if Allmark defaults, its bank says it will foreclose on the assets used as collateral. Allmark's only recourse then would be to file bankruptcy. One solution is to seek outside financing from vendors eager to keep Allmark in business, although the availability of financing will not be known until the next fiscal year. The auditor should:

A) audit the financial statements and disclose the possibility that Allmark may not be able to continue as a going concern.
B) withhold the audit report until financing has been secured.
C) disclaim an opinion on the financial statements.
D) ignore the issue as it does not affect the current year under audit.

Question 51

The lead schedule should refer to:

A) the financial statements.
B) the lead schedule for each account listed in the working trial balance.
C)
C) the person preparing the schedule.
D) Both b and

Question 52

The major advantage to using statistical techniques is:

A) it limits the risk of incorrect acceptance.
B) it relate sample size to audit risk.
C) it limits the risk of inefficiency.
D) it limits sample size to the smallest appropriate size.

Question 53

A test for revenue is:

A) analyzing the gross margin for the current and prior periods.
B)
B) analyzing the changes in inventory, accounts receivable, and cash for any indication that their trend differs from that implied by the change in sales year over year.
C) analyzing sales returns and allowances for proper disclosure.
D) Both a and

Question 54

Which of the following procedures would you perform for an audit of inventory?

A) Determine its existence through physical inspection.
B) Count physical inventory and reconcile it to the perpetual inventory.
C) Observe how inventory is valued.
D) All of the above.

Question 55

The presence of material related party transactions:

A) can increase the risk associated with a client.
B) can increase the time needed for performing adequate testing.
C) can cause the auditor to be ill.
D) All of the above.

Question 56

An example of a substantive analytical test for a hotel would be:

A) determine if the occupancy rate exceeded 100% for a given time period.
B) determine if the rate charged is in excess of that published.
C) determine if the food and beverage charges correspond to the occupancy rate.
D) All of the above.

Question 57

Going concern affects:

A) the scope of the audit.
B) the audit opinion.
C) the decision whether or not to accept a client.
D) All of the above.

Question 58

Which of the following audit procedures can be used as a substitute for confirmations not returned?

A) Subsequent account activity.
B) Subsequent account adjustments.
C) Subsequent payments.
D) All of the above.

Question 59

Generally, as acceptable risk is reduced, sample size:

A) decreases.
B) increases.
C) can either increase or decrease depending on the circumstances.
D) can increase or decrease depending on the risk.

Question 60

Investments are a greater risk to auditors now as opposed to in the past because:

A) they can be carried at market value.
B) entity risk has increased.
C) valuation methods are numerous.
D) All of the above.

Question 61

In deciding on sampling technique, the auditor will:

A) choose sampling with replacement for a smaller sample size.
B) choose sampling without replacement for a smaller sample size.
C) It doesn't matter which method is used as the auditor can ignore duplicates.
D) None of the above.

Question 62

Classical variables sampling can:

A) be applied to overstatements.
B)
B) be applied to understatements.
C) is easier to use than other methods.
D) Both a and

Question 63

A client has a large number of small account balances, with an equal likelihood of over and understatement. Which of the following sampling techniques would be most appropriate?

A) Monetary unit sampling.
B) Classical variables sampling.
C) Attribute sampling.
D) All of the above, depending on the circumstances.

Question 64

A client has a small number of large account balances, with a greater likelihood of over rather than understatement. Which of the following sampling techniques would be most appropriate?

A) Monetary unit sampling.
B) Classical variables sampling.
C) Attribute sampling.
D) All of the above, depending on the circumstances.
MATCHING

Question 65

When using monetary unit sampling,

A) smaller amounts are more likely to be sampled.
B) larger amounts are more likely to be sampled.
C)
C) offers automatic stratification.
D) both b and