Questions and Answers of Principles Of Auditing And Other Assurance Services

In probability-proportional-to-size sampling, each invoice:a. Has an equal probability of being selected.b. Can be represented by no more than one dollar unit.c. Has an unknown probability of being
Which of the following is improper when using probability-proportional-to-size sampling?a. Combining negative and positive dollar error items.b. Using a sample selection technique in which the same
In a probability-proportional-to-size sampling plan with a $$10,000$ sampling interval, an auditor discovered that a selected account receivable with a recorded amount of $$5,000$ had an audited
A nonstatistical sampling plan can:a. Overstate the estimate of sampling risk.b. Misdirect an auditor to unreliable sampling units.c. Replicate the results of a statistical sampling plan.d.
Assume you are the newly assigned senior on a continuing audit engagement for the Ranson Corporation, and are meeting with Tom Porter, partner in charge of the engagement.Interim field work is
The risks of incorrect rejection and incorrect acceptance are related but involve two entirely different outcomes: Incorrect rejection means the risk of concluding that recorded book value is
When applying a classical variables sampling plan, such as ratio or difference estimation or MPU estimation, an auditor must estimate the risk of incorrect rejection, the risk of incorrect
Because there is no discernible relationship between the absolute amount of differences (i.e., audited value v. recorded book value) and recorded book value for 50 preliminary sample items, an
The following information is available for 50 sample items:Population size is 2,100 items, recorded book value is $$1,235,000,$ the risk of incorrect rejection is .10, the risk of incorrect
Following are data for four different audit populations to which variables sampling will be applied:Required: Calculate sample size for each population. Assume sampling without replacement and do
Following are data for four different audit populations. Mean-per-unit estimation will be applied to each population.Required: 1. Calculate an acceptable risk of incorrect acceptance for each
Because a client does not maintain perpetual records, an auditor elects to use mean- per-unit estimation to determine whether ending inventory is fairly stated. The follow- ing data are
An auditor expects no errors in an audit population but is concerned about potential monetary overstatement and, therefore, elects to use probability-proportional-to-size sampling. Recorded book
Assume your audit objective is to estimate the upper error limit for an audit population and, therefore, you select probability-proportional-to-size (PPS) sampling. From prior year working papers and
An auditor has no apparent need to quantify sampling risk and, therefore, uses a nonstatistical sampling plan for inventory price testing. From prior experience with the client and current
An auditor is selecting from among alternative variables sampling plans for accounts receivable and gathers the following information. The client, a Midwestern manufacturer of high-technology
When completing a variables sampling plan, an auditor's evaluation is based on the relationship between and among a number of factors, including recorded account balance, estimated total population
Applied widely first in the 1960s and 1970s, the use of statistical sampling was initially motivated largely by questions raised in legal liability cases involving public accounting firms, among
Owing to economical sample sizes and ease of application, probability-proportional to-size (PPS) sampling has become the most widely used statistical sampling plan in practice today, even by local
What are the major business functions and activities common to the revenue/receipt cycle?
How does a transaction cycle create an audit trail?
Explain why the billing function should be segregated from credit granting, cash collection, and accounting.
What potential errors or frauds could occur if customer credit were not approved by authorized personnel? Identify controls that management could implement to assure that a customer is creditworthy.
How can management assure that all shipped goods are billed?
Accurate recording within general ledger control accounts does not necessarily mean that billing, collection, and adjustment transactions will be posted accurately to individual customer accounts.
In most circumstances, management is more concerned with restricting employee access to cash than restricting access to inventory. But shouldn't management be more concerned with inventory, since
What is the primary focus of the tests of controls performed on an entity's selling and cash receipts activities?
Identify the two major errors or frauds that could result from weaknesses in shipping controls.
What is the primary source document from which most shipping-related tests of controls evolve?
In performing tests of controls, why would an auditor compare shipping documents with approved sales orders?
What is the focus of an auditor's tests of billing, and how do the tests complement tests of shipping controls?
What is the primary source document for an auditor's tests of billing?
If a credit memorandum were issued for returned goods, how might an auditor determine whether the goods were actually returned?
How does an auditor evaluate the effectiveness and reliability of a client's control procedures over revenue /receipt cycle activities?
Which of the following business functions is associated with the revenue /receipt cycle?a. Obligations are paid to vendors and employees.b. Resources are distributed to outsiders in exchange for
To test whether sales have been recorded, a sample should be drawn from a file of;a. Purchase orders.b. Sales orders.c. Sales invoices.d. Bills of lading.Choose the correct answer.
Tracing copies of sales invoices to shipping documents provides evidence that:a. Shipments were recorded as receivables.b. Billed sales were shipped.c. Debits to the accounts receivable were for
Tracing shipping documents to sales invoices provides evidence that:a. Shipments were billed.b. Shipments were recorded as sales.c. Recorded sales were shipped.d. Invoiced sales were shipped.Choose
Which of the following control procedures could prevent or detect errors or frauds arising from shipments made to unauthorized parties?a. Document policies and procedures for scheduling shipments.b.
Which of the following control procedures would most likely assure that access to shipping, billing, inventory control, and accounting records is restricted to personnel authorized by management?a.
An entity has implemented a control procedure which requires that authorized personnel reconcile the total of individual customer accounts receivable with control totals. This control relates to
A purpose of tests of controls over shipping is to determine whether:a. Billed goods are shipped.b. Shipments are made in accordance with approved sales and orders.c. Sales orders are properly
A purpose of tests of controls over billing is to determine whether:a. Billed goods have been shipped.b. Sales orders agree to shipping documents.c. Sales orders have been approved by Credit
What sequence of steps does an auditor undertake when identifying control procedures that are potentially reliable in assessing control risk below the maximum?a. Consider the errors or frauds that
Within the revenue /receipt cycle, several paper and computer image documents are typically used to create an accounting system and, correspondingly, an audit trail for credit sales and cash
Assume you are considering an entity's internal controls over credit sales and cash collection. System documentation was accomplished through a questionnaire and written narratives and, in
During your audit of Lish and Company's December 31, 1998 financial statements, you become aware of the following controls or procedures Lish has implemented over credit sales and cash collections:a.
A partially completed flowchart for the Bottom Manufacturing Corporation's credit sales is presented on the following page. When a customer's order is received, a sixpart sales order is prepared and
You are auditing trade accounts receivable for the Winston-McCabe Company, a farm equipment retailer doing business in three Midwestern cities. All accounting, shipping, billing, and receivables
Identifying Potential Frauds and Recommending Procedures to Improve Control You are auditing the Alaska branch of Far Distributing Co., a branch that has substantial annual sales, all of which are
You are auditing the financial statements of Fashionation, Inc., a retail clothing store, and have prepared the following narrative description for cash sales procedures:All sales are for cash; no
Trapan Retailing, Inc. has decided to diversify operations by selling through vending machines. Trapan plans on purchasing 312 vending machines to be placed in 78 different locations within one city,
Following are selected questions from internal control questionnaires about a company's customer order, credit, shipping, billing, and cash receipts functions. A yes response to any question
Within the revenue /receipt cycle, controls must be implemented not only for sales and shipments, but also for sales returns and allowances. Otherwise, sales could be overstated and the financial
The president of l&M Electric, a large regional utility, has asked that you perform a special engagement unrelated to the financial statement audit: Audit the customer payment system but with
Barry Hannah, CPA, plans to use attributes estimation to help assess control risk for the Oxford Company's control procedures over credit sales transactions. Hannah has begun to outline main steps in
Galway Kinnell plans to apply an attributes estimation sampling plan to the shipping controls used by the Raffel & Olds Corporation, a December 31, 1999 year end printing company in New York.
What are financial statement assertions, audit objectives, and audit procedures? How are they related?
How does an auditor test whether recorded accounts receivable exist?
Why does an auditor perform analytical procedures on receivables?
How does an auditor test whether recorded receivables represent bona fide rights of the client?
How does an auditor test the valuation of accounts receivable and sales?
Describe and distinguish between positive and negative confirmation requests.
Explain the purpose and nature of sales cutoff tests.
How does an auditor test whether cash balances actually exist?
Identify the internal and external documentation available to an auditor to test cutoff.
Explain the purpose and nature of cutoff tests of cash balances.
How and why does an auditor test intercompany and interbank transfers?
Describe some computer assisted substantive tests an auditor might apply to accounts receivable.
What conditions must an entity meet before recognizing revenue for financial statement reporting purposes?
What advantages do both franchisors and franchisees enjoy by entering into a franchise agreement, rather than conducting the entire scope of operations individually?
Which of the following might be detected by sales cutoff tests?a. Overstated receivables.b. Overstated sales.c. Kiting.d. Misappropriated inventory.Chooses the correct answer.
To test whether all sales transactions have been recorded, an auditor should test a sample drawn from an entity's file of:a. Receiving reports.b. Bills of lading.c. Sales orders.d. Sales
Positive accounts receivable confirmations are appropriate when:a. There is reason to believe that a substantial number of accounts may be in dispute.b. Control risk is low.c. Accounts receivable
An auditor requests a cutoff bank statement primarily to:a. Verify the cash balance reported on the bank confirmation.b. Verify reconciling items on the client's bank reconciliation.c. Detect
Which of the following procedures could reveal unrecorded sales at the balance sheet date?a. Comparing shipping documents with sales records.b. Applying gross profit percentages to inventory shipped
Which of the following cash transfers misstates cash at December 31, 1999?Chooses the correct answer. Interbank Transfers Disbursement Recorded in books Receipt Paid by bank Recorded in books
Which of the following accounting issues is most likely to raise an auditor's professional skepticism about earnings manipulation?a. Progress payments.b. Allowance for doubtful accounts.c. Sales
Which of the following is most likely to provide management with incentives to overstate earnings?a. Projected quarterly dividends.b. Issuance of preferred stock.c. Unbudgeted increases in materials
Under which of the following circumstances does management have some discretion in timing the recognition of revenue?a. The timing of revenue is not reasonably determinable and the earnings process
Following are errors, frauds, or other circumstances that an auditor might encounter as a result of applying year end substantive tests to accounts receivable as of December 31, 1999:a. Sales
An independent auditor is engaged to audit the financial statements of a manufacturing company that, consistent with prior years, maintains a significant balance in trade accounts receivable. The
You have audited the financial statements of the Heft Company, a December 31 year end client, for several years. The interim phase of the engagement, completed on August 31, included confirming
Martin Kline, engagement partner for RCT Manufacturing Company, a February 28, 1999, year end client, is performing analytical procedures to better understand RCT's business and to determine where
During an audit of the financial statements of Houston Wholesalers, Inc., for the year ended June 30, 1999, an auditor performs several cutoff tests.Required:1. What are cutoff tests and why are they
Following are errors, frauds, or other circumstances that an auditor might encounter as a result of applying substantive tests to cash balances as of December 31.a. The petty cash fund is short
During year end substantive procedures for cash balances as of June 30, 1999, an auditor obtains a July 10, 1999 bank statement directly from a bank.Required:Explain how the auditor will use the
The following client prepared bank reconciliation is presented to Kautz during an audit of the financial statements of Cynthia Company:Required: Indicate one or more audit procedures Kautz should
After determining that computer controls are valid, Hastings is reviewing the sales system of Rosco Corporation to determine how computer assisted audit techniques may be used to assist in performing
An entry level staff member in the Providence, RI office of DeMarinis & Harrison, LLP, has drafted the following receivable confirmation for the Newman Crosby Company, a December 31, 1998 year
Following is partial evidence from an audit working paper:Required: 1. What is the evidence attempting to detect?2. Did it? Why or why not? Disbursement Date Receipt Date Per Per Per Per Books Bank
Following is partial evidence from an audit working paper:Required:1. What is the evidence attempting to detect?2. Did it? Why or why not? FOB: Destination FOB: Shipping Point FOB: Destination FOB:
Following is an audit working paper that documents an auditor's tests of a client's bank reconciliation.Required: List the deficiencies in this working paper. Ansonia Wire & Cable Co., Inc. Bank
Burger Buddy Restaurants grants area franchises to operate up to two restaurants within a 100 square mile area. The Uniform Franchise Offering Circular reveals that, following payment of the lump sum
Earnings manipulation has been the subject of considerable attention both in the financial press and in academic research. For example. The Wall Street Journal, Forbes Magazine, and Business Week
Identify the major business functions and activities common to the expenditure/disbursement cycle.
Why should policies assure that goods and services be purchased oiJy from approved vendors?
How can management control against unauthorized or duplicate cash payments?
Proper recording within general ledger control accounts does not necessarily mean that transactions are posted accurately to individual vendor accounts. What controls can management institute to
Why should the receiving department be segregated from inventory control and, if possible, from shipping?

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