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Wiley CPA Exam Review Problems And Solutions Vol 2 2011-2012 38th Edition O. Ray Whittington, Patrick R. Delaney - Solutions
An auditor is determining the sample size for an inventory observation using mean-per-unit estimation, which is a variables sampling plan. To calculate the required sample size, the auditor usually determines the Variability in the dollar amounts of inventory items Risk of incorrect acceptancea.
In a probability-proportional-to-size sample with a sampling interval of $5,000, an auditor discovered that a selected account receivable with a recorded amount of $10,000 had an audit amount of $8,000. If this were the only error discovered by the auditor, the projected error of this sample would
Hill has decided to use probability-proportional-to-size(PPS) sampling, sometimes called dollar-unit sampling, in the audit of a client’s accounts receivable balances. Hill plans to use the following PPS sampling table:TABLE Reliability Factors for Overstatements Number of over- Risk of incorrect
Which of the following statements is correct concerning probability-proportional-to-size (PPS) sampling, also known as dollar unit sampling?a. The sampling distribution should approximate the normal distribution.b. Overstated units have a lower probability of sample selection than units that are
An auditor established a $60,000 tolerable misstatement for an asset with an account balance of $1,000,000. The auditor selected a sample of every twentieth item from the population that represented the asset account balance and discovered overstatements of $3,700 and understatements of$200. Under
In estimation sampling for variables, which of the following must be known in order to estimate the appropriate sample size required to meet the auditor’s needs in a given situation?a. The qualitative aspects of errors.b. The total dollar amount of the population.c. The acceptable level of
A number of factors influences the sample size for a substantive test of details of an account balance. All other factors being equal, which of the following would lead to a larger sample size?a. Greater reliance on internal control.b. Greater reliance on analytical procedures.c. Smaller expected
When planning a sample for a substantive test of details, an auditor should consider tolerable misstatement for the sample. This consideration shoulda. Be related to the auditor’s business risk.b. Not be adjusted for qualitative factors.c. Be related to preliminary judgments about materiality
Which of the following sample planning factors would influence the sample size for a substantive test of details for a specific account?Expected Measure of amount of tolerable misstatements misstatementa. No Nob. Yes Yesc. No Yesd. Yes No
Which of the following courses of action would an auditor most likely follow in planning a sample of cash disbursements if the auditor is aware of several unusually large cash disbursements?a. Set the tolerable rate of deviation at a lower level than originally planned.b. Stratify the cash
How would increases in tolerable misstatement and assessed level of control risk affect the sample size in a substantive test of details?Increase in tolerable misstatement Increase in assessed level of control riska. Increase sample size Increase sample sizeb. Increase sample size Decrease sample
When an auditor has chosen a random sample and is using nonstatistical attributes sampling, that auditora. Need not consider the risk of assessing control risk too low.b. Has committed a nonsampling error.c. Will have to use discovery sampling to evaluate the results.d. Should compare the deviation
Which of the following statements is correct concerning statistical sampling in tests of controls?a. The population size has little or no effect on determining sample size except for very small populations.b. The expected population deviation rate has little or no effect on determining sample size
The allowance for sampling risk wasa. 5 1/2%b. 4 1/2%c. 3 1/2%d. 1%
In the evaluation of this sample, the auditor decided to increase the level of the preliminary assessment of control risk because thea. Tolerable rate (7%) was less than the achieved upper precision limit (8%).b. Expected deviation rate (7%) was more than the percentage of errors in the sample (3
What is an auditor’s evaluation of a statistical sample for attributes when a test of fifty documents results in three deviations if tolerable rate is 7%, the expected population deviation rate is 5%, and the allowance for sampling risk is 2%?a. Modify the planned assessed level of control risk
Which of the following statements is correct concerning statistical sampling in tests of controls?a. As the population size increases, the sample size should increase proportionately.b. Deviations from specific internal control procedures at a given rate ordinarily result in misstatements at a
An auditor should consider the tolerable rate of deviation when determining the number of check requests to select for a test to obtain assurance that all check requests have been properly authorized. The auditor should also consider The average dollar value of the check requests The allowable risk
In determining the number of documents to select for a test to obtain assurance that all sales have been properly authorized, an auditor should consider the tolerable rate of deviation from the control activity. The auditor should also consider the I. Likely rate of deviations.II. Allowable risk of
If the auditor is concerned that a population may contain exceptions, the determination of a sample size sufficient to include at least one such exception is a characteristic ofa. Discovery sampling.b. Variables sampling.c. Random sampling.d. Dollar-unit sampling.
The tolerable rate of deviations for a test of a control is generallya. Lower than the expected rate of errors in the related accounting records.b. Higher than the expected rate of errors in the related accounting records.c. Identical to the expected rate of errors in related accounting records.d.
The objective of the tolerable rate in sampling for tests of controls of internal control is toa. Determine the probability of the auditor’s conclusion based upon reliance factors.b. Determine that financial statements taken as a whole are not materially in error.c. Estimate the reliability of
When assessing the tolerable rate, the auditor should consider that, while deviations from control procedures increase the risk of material misstatements, such deviations do not necessarily result in errors. This explains whya. A recorded disbursement that does not show evidence of required
An auditor plans to examine a sample of twenty purchase orders for proper approvals as prescribed by the client’s control procedures. One of the purchase orders in the chosen sample of twenty cannot be found, and the auditor is unable to use alternative procedures to test whether that purchase
An auditor is testing internal control procedures that are evidenced on an entity’s vouchers by matching random numbers with voucher numbers. If a random number matches the number of a voided voucher, that voucher ordinarily should be replaced by another voucher in the random sample if the
Which of the following combinations results in a decrease in sample size in a sample for attributes?Risk of assessing Expected control risk Tolerable population too low rate deviation ratea. Increase Decrease Increaseb. Decrease Increase Decreasec. Increase Increase Decreased. Increase Increase
In determining the sample size for a test of controls, an auditor should consider the likely rate of deviations, the allowable risk of assessing control risk too low, and thea. Tolerable deviation rate.b. Risk of incorrect acceptance.c. Nature and cause of deviations.d. Population size.
Which of the following statements is correct concerning statistical sampling in tests of controls?a. Deviations from control procedures at a given rate usually result in misstatements at a higher rate.b. As the population size doubles, the sample size should also double.c. The qualitative aspects
Which of the following factors is(are) considered in determining the sample size for a test of controls?Expected deviation rate Tolerable deviation ratea. Yes Yesb. No Noc. No Yesd. Yes No
As a result of tests of controls, an auditor assessed control risk too low and decreased substantive testing. This assessment occurred because the true deviation rate in the population wasa. Less than the risk of assessing control risk too low, based on the auditor’s sample.b. Less than the
What is the primary objective of using stratification as a sampling method in auditing?a. To increase the confidence level at which a decision will be reached from the results of the sample selected.b. To determine the occurrence rate for a given characteristic in the population being studied.c. To
When performing a test of a control with respect to control over cash receipts, an auditor may use a systematic sampling technique with a start at any randomly selected item. The biggest disadvantage of this type of sampling is that the items in the populationa. Must be systematically replaced in
If certain forms are not consecutively numbereda. Selection of a random sample probably is not possible.b. Systematic sampling may be appropriate.c. Stratified sampling should be used.d. Random number tables cannot be used.
Which of the following statistical sampling plans does not use a fixed sample size for tests of controls?a. Dollar-unit sampling.b. Sequential sampling.c. PPS sampling.d. Variables sampling.
Which of the following statistical selection techniques is least desirable for use by an auditor?a. Systematic selection.b. Stratified selection.c. Block selection.d. Sequential selection.
An underlying feature of random-based selection of items is that eacha. Stratum of the accounting population be given equal representation in the sample.b. Item in the accounting population be randomly ordered.c. Item in the accounting population should have an opportunity to be selected.d. Item
For which of the following audit tests would an auditor most likely use attribute sampling?a. Making an independent estimate of the amount of a LIFO inventory.b. Examining invoices in support of the valuation of fixed asset additions.c. Selecting accounts receivable for confirmation of account
Which of the following sampling methods would be used to estimate a numerical measurement of a population, such as a dollar value?a. Attribute sampling.b. Stop-or-go sampling.c. Variables sampling.d. Random-number sampling.
The expected population deviation rate of client billing errors is 3%. The auditor has established a tolerable rate of 5%. In the review of client invoices the auditor should usea. Stratified sampling.b. Variable sampling.c. Discovery sampling.d. Attribute sampling.
The size of a sample designed for dual purpose testing should bea. The larger of the samples that would otherwise have been designed for the two separate purposes.b. The smaller of the samples that would otherwise have been designed for the two separate purposes.c. The combined total of the samples
While performing a test of details during an audit, an auditor determined that the sample results supported the conclusion that the recorded account balance was materially misstated. It was, in fact, not materially misstated. This situation illustrates the risk ofa. Assessing control risk too
As a result of tests of controls, the auditor assesses control risk too high and thereby increases substantive testing.This is illustrated by situationa. I.b. II.c. III.d. IV.
In which of the situations would the auditor have properly concluded that control risk is at or below the planned assessed level?a. I.b. II.c. III.d. IV.
In assessing sampling risk, the risk of incorrect rejection and the risk of assessing control risk too high relate to thea. Efficiency of the audit.b. Effectiveness of the audit.c. Selection of the sample.d. Audit quality controls.
Which of the following best illustrates the concept of sampling risk?a. A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest.b. An auditor may select audit procedures that are not appropriate to achieve the specific objective.c. An
The risk of incorrect acceptance and the likelihood of assessing control risk too low relate to thea. Allowable risk of tolerable misstatement.b. Preliminary estimates of materiality levels.c. Efficiency of the audit.d. Effectiveness of the audit.
The likelihood of assessing control risk too high is the risk that the sample selected to test controlsa. Does not support the auditor’s planned assessed level of control risk when the true operating effectiveness of the control structure justifies such an assessment.b. Contains misstatements
An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor toa. Eliminate the risk of nonsampling errors.b. Reduce the level of audit risk and materiality to a relatively low amount.c. Measure the sufficiency of the evidential matter obtained.d.
An advantage of using statistical over nonstatistical sampling methods in tests of controls is that the statistical methodsa. Can more easily convert the sample into a dualpurpose test useful for substantive testing.b. Eliminate the need to use judgment in determining appropriate sample sizes.c.
An accountant who reviews the financial statements of a nonissuer should issue a report stating that a reviewa. Is substantially less in scope than an audit.b. Provides negative assurance that internal control is functioning as designed.c. Provides only limited assurance that the financial
During a review of the financial statements of a nonissuer, an accountant becomes aware of a lack of adequate disclosure that is material to the financial statements. If management refuses to correct the financial statement presentations, the accountant shoulda. Issue an adverse opinion.b. Issue an
Financial statements of a nonissuer that have been reviewed by an accountant should be accompanied by a report stating thata. The scope of the inquiry and analytical procedures performed by the accountant has not been restricted.b. All information included in the financial statements is the
An accountant’s standard report on a review of the financial statements of a nonissuer should state that the accountanta. Does not express an opinion or any form of limited assurance on the financial statements.b. Is not aware of any material modifications that should be made to the financial
Gole, CPA, is engaged to review the 20X8 financial statements of North Co., a nonissuer. Previously, Gole audited North’s 20X7 financial statements and expressed an unqualified opinion. Gole decides to include a separate paragraph in the 20X8 review report because North plans to present
An accountant who had begun an audit of the financial statements of a nonissuer was asked to change the engagement to a review because of a restriction on the scope of the audit. If there is reasonable justification for the change, the accountant’s review report should include reference to the
Financial statements of a nonissuer that have been reviewed by an accountant should be accompanied by a report stating that a reviewa. Provides only limited assurance that the financial statements are fairly presented.b. Includes examining, on a test basis, information that is the representation of
Each page of a nonissuer’s financial statements reviewed by an accountant should include the following reference:a. See Accompanying Accountant’s Footnotes.b. Reviewed, No Material Modifications Required.c. See Accountant’s Review Report.d. Reviewed, No Accountant’s Assurance Expressed.
In reviewing the financial statements of a nonissuer, an accountant is required to modify the standard report for which of the following matters?Inability to assess the risk of material misstatement due to fraud Discovery of significant deficiencies in the design of the entity’s internal
Smith, CPA, has been asked to issue a review report on the balance sheet of Cone Company, a nonissuer, and not on the other related financial statements. Smith may do so only ifa. Smith compiles and reports on the related statements of income, retained earnings, and cash flows.b. Smith is not aware
When providing limited assurance that the financial statements of a nonissuer (nonpublic entity) require no material modifications to be in accordance with generally accepted accounting principles, the accountant shoulda. Assess the risk that a material misstatement could occur in a financial
An accountant has been engaged to review a nonissuer’s financial statements that contain several departures from GAAP. If the financial statements are not revised and modification of the standard review report is not adequate to indicate the deficiencies, the accountant shoulda. Withdraw from the
When performing an engagement to review a nonissuer’s financial statements, an accountant most likely woulda. Confirm a sample of significant accounts receivable balances.b. Ask about actions taken at board of directors’meetings.c. Obtain an understanding of internal control.d. Limit the
Which of the following would the accountant most likely investigate during the review of financial statements of a nonissuer if accounts receivable did not conform to a predictable pattern during the year?a. Sales returns and allowances.b. Credit sales.c. Sales of consigned goods.d. Cash sales.
Which of the following procedures would most likely be included in a review engagement of a nonissuer?a. Preparing a bank transfer schedule.b. Inquiring about related-party transactions.c. Assessing internal control.d. Performing cutoff tests on sales and purchases transactions.
Which of the following inquiry or analytical procedures ordinarily is performed in an engagement to review a nonissuer’s financial statements?a. Analytical procedures designed to test the accounting records by obtaining corroborating audit evidence.b. Inquiries concerning the entity’s
An accountant should perform analytical procedures during an engagement to Compile a Review a nonissuer’s nonissuer’s financial statements financial statementsa. No Nob. Yes Yesc. Yes Nod. No Yes
Which of the following procedures should an accountant perform during an engagement to review the financial statements of a nonissuer?a. Communicating significant deficiencies discovered during the assessment of control risk.b. Obtaining a client representation letter from members of management.c.
Which of the following procedures would an accountant least likely perform during an engagement to review the financial statements of a nonissuer?a. Observing the safeguards over access to and use of assets and records.b. Comparing the financial statements with anticipated results in budgets and
Which of the following is not generally considered a procedure followed by an accountant in obtaining a reasonable basis for the expression of limited assurance for a review of financial statements?a. Apply analytical procedures.b. Assess fraud risk.c. Make inquiries of management.d. Obtain written
Baker, CPA, was engaged to review the financial statements of Hall Co., a nonissuer. During the engagement Baker uncovered a complex scheme involving client illegal acts that materially affect Hall’s financial statements. If Baker believes that modification of the standard review report is not
Moore, CPA, has been asked to issue a review report on the balance sheet of Dover Co., a nonissuer. Moore will not be reporting on Dover’s statements of income, retained earnings, and cash flows. Moore may issue the review report provided thea. Balance sheet is presented in a prescribed form of
If requested to perform a review engagement for a nonissuer in which an accountant has an immaterial direct financial interest, the accountant isa. Not independent and, therefore, may not be associated with the financial statements.b. Not independent and, therefore, may not issue a review report.c.
A compilation report is not required when compiled financial statements are expected to be used bya. Management only.b. Management and third parties.c. Third parties only.d. A compilation report is required whenever financial statements are compiled.
Which communication option(s) may be used when an accountant submits compiled financial statements to be used only by management?Compilation report Written engagement lettera. Yes Yesb. Yes Noc. No Yesd. No No
Which of the following is correct relating to compiled financial statements when third-party reliance upon those statements is anticipated?a. A compilation report must be issued.b. Omission of note disclosures is unacceptable.c. A written engagement letter is required.d. Each page of the financial
An accountant has compiled the financial statements of a nonissuer in accordance with Statements on Standards for Accounting and Review Services (SSARS). Does SSARS require that the compilation report be printed on the accountant’s letterhead and that the report be manually signed by the
An accountant’s compilation report should be dated as of the date ofa. Completion of fieldwork.b. Completion of the compilation.c. Transmittal of the compilation report.d. The latest subsequent event referred to in the notes to the financial statements.
How does an accountant make the following representations when issuing the standard report for the compilation of a nonissuer’s financial statements?The financial The accountant statements have has compiled the not been audited financial statementsa. Implicitly Implicitlyb. Explicitly
Which of the following statements should not be included in an accountant’s standard report based on the compilation of an entity’s financial statements?a. A statement that the compilation was performed in accordance with standards established by the American Institute of CPAs.b. A statement
Clark, CPA, compiled and properly reported on the financial statements of Green Co., a nonissuer, for the year ended March 31, 2008. These financial statements omitted substantially all disclosures required by generally accepted accounting principles (GAAP). Green asked Clark to compile the
When unaudited financial statements of a nonissuer are presented in comparative form with audited financial statements in the subsequent year, the unaudited financial statements should be clearly marked to indicate their status and I. The report on the unaudited financial statements should be
When an accountant is engaged to compile a nonissuer’s financial statements that omit substantially all disclosures required by GAAP, the accountant should indicate in the compilation report that the financial statements area. Not designed for those who are uninformed about the omitted
Miller, CPA, is engaged to compile the financial statements of Web Co., a nonissuer (nonpublic) entity, in conformity with the income tax basis of accounting. If Web’s financial statements do not disclose the basis of accounting used, Miller shoulda. Disclose the basis of accounting in the
When compiled financial statements are accompanied by an accountant’s report, that report should state thata. A compilation includes assessing the accounting principles used and significant management estimates, as well as evaluating the overall financial statement presentation.b. The accountant
While performing a compilation of financial statements, information indicating that the entity whose information is being compiled may lack the ability to continue as a going concern has come to the accountant’s attention. The client agrees that such a situation does exist, but refuses to add
One of the conditions required for an accountant to submit a written personal financial plan containing unaudited financial statements to a client without complying with the requirements of Statements on Standards of Accounting and Review Services, is that thea. Client agrees that the financial
Which of the following procedures is ordinarily performed by an accountant in a compilation engagement of a nonissuer (nonpublic) entity?a. Reading the financial statements to consider whether they are free of obvious mistakes in the application of accounting principles.b. Obtaining written
When engaged to compile the financial statements of a nonissuer (nonpublic) entity, an accountant is required to possess a level of knowledge of the entity’s accounting principles and practices. This requirement most likely will include obtaining a general understanding of thea. Stated
An accountant may compile a nonissuer’s financial statements that omit all of the disclosures required by GAAP only if the omission is I. Clearly indicated in the accountant’s report.II. Not undertaken with the intention of misleading the financial statement users.a. I only.b. II only.c. Both I
Davis, CPA, accepted an engagement to audit the financial statements of Tech Resources, a nonissuer. Before the completion of the audit, Tech requested Davis to change the engagement to a compilation of financial statements.Before Davis agrees to change the engagement, Davis is required to consider
Statements on Standards for Accounting and Review Services (SSARS) apply when an accountant hasa. Typed client-prepared financial statements, without modification, as an accommodation to the client.b. Provided a client with a financial statement format that does not include dollar amounts, to be
Kell engaged March, CPA, to submit to Kell a written personal financial plan containing unaudited personal financial statements. March anticipates omitting certain disclosures required by GAAP because the engagement’s sole purpose is to assist Kell in developing a personal financial plan. For
An accountant is required to comply with the provisions of Statements on Standards for Accounting and Review Services when I. Reproducing client-prepared financial statements, without modification, as an accommodation to a client.II. Preparing standard monthly journal entries for depreciation and
Which of the following statements is correct concerning both an engagement to compile and an engagement to review a nonissuer’s financial statements?a. The accountant does not contemplate obtaining an understanding of internal control.b. The accountant must be independent in fact and
May an accountant accept an engagement to compile or review the financial statements of a not-for-profit entity if the accountant is unfamiliar with the specialized industry accounting principles, but plans to obtain the required level of knowledge before compiling or reviewing the financial
Which of the following accounting services may an accountant perform without being required to issue a compilation or review report under the Statements on Standards for Accounting and Review Services?I. Preparing a working trial balance.II. Preparing standard monthly journal entries.a. I only.b.
The authoritative body designated to promulgate standards concerning an accountant’s association with unaudited financial statements of an entity that is not required to file financial statements with an agency regulating the issuance of the entity’s securities is thea. Financial Accounting
Statements on Standards for Accounting and Review Services establish standards and procedures for which of the following engagements?a. Assisting in adjusting the books of account for a partnership.b. Reviewing interim financial data required to be filed with the SEC.c. Processing financial data
A CPA has performed an examination of the generalpurpose financial statements of Big City. The examination scope included the additional requirements of the Single Audit Act. When reporting on Big City’s internal accounting and administrative controls used in administering a federal financial
When performing an audit of a city that is subject to the requirements of the Uniform Single Audit Act of 1984, an auditor should adhere toa. Governmental Accounting Standards Board General Standards.b. Governmental Finance Officers Association Governmental Accounting, Auditing, and Financial
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