MGAD10H3 Chapter Notes - Chapter 6: Inverse Relation, Audit Risk, Internal Control

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6 Apr 2013

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Audit sampling the application of audit procedures to less than 100 percent of items within a population. When there are numerous transactions or items within an account balance available for testing, an auditor must decide how best to select a sample that is representative of the entire population. We can leverage audit sampling when there are 100 items or more and when vouching. Sampling risk risk that the sample chosen by the auditor is not representative of the population of transactions or items within an account balance available for testing and, as a consequence, the auditor arrives at an inappropriate conclusion. Procedures are correct but samples may be inappropriate. Two consequences: risk that the audit will be ineffective and the risk that the audit will be inefficient. 6-4-1 sampling risk and tests of controls. This risk can happen when the items selected for testing the effectiveness of internal controls are not representative of all items available for testing.

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1 - The most appropriate procedure an auditor can use toensure integrity of the sales and collection cycle isto:

a) Confirm accounts receivables balances.

b)Ensure the bank reconciliations are preparedby one who also handles sales returns so missing items can beaccounted for timely.

c)Recalculate the sales list price of allproducts in the computer files that are accessed by salepersonnel.

2 - When performing audit procedures, which of thefollow must be set prior to testing a sample?

a)Achieved upper precision limit

b) Computed error rate

c) Tolerable error rate

3 - When auditing the inventory cycle the auditor shoulddo all of the following EXCEPT:

a)Adjust the balance in the inventory accountto reflect the perpetual inventory counts

b)Assess the value of obsolete or damagedinventory

c)Review the procedures for the count ofphysical inventory.

4 - Tests of controls for the acquisition and paymentcycle are usually done by:

a)Inquires and documentation of management'srepresentation.

b)Recalculating sales tax amounts

c)Sending out confirmations for amounts under$10,000

5 - Cash is the most desirable asset for people tomisappropriate, when determining risk as part of the audit process,cash would have a higher:

a) Control risk

b)Detection risk

c) Inherent risk

6 - When an auditor looks at a report with over 500purchases and decides to review all of the purchase over $1,000,000this is an example of what type of sampling:

a)Judgmental sampling

b)Statistical sampling

c)This is not sampling

7 - Upon review of your audit findings your discovercash receipts from sales on account have been misappropriate. Whichof the following internal controls may have preventedthis:

a)Ensuring the same person that receives thepayments from customers does not enter transactions into thejournal and post to the ledger

b) Do a background check on all accountspayable personnel before they are hired

c)Verify that the person who receives thepayments does not also write the checks

8 - Upon review of your audit findings you not weakinternal control system that allows a department supervisor to"clock in" for a fictitious employee and then approve theemployee's time card at the end of the pay period. This fraud wouldbe detected if other controls were in place, such as having anindependent party:

a)Compare the date of the recorded check in thepayroll journal with the date on the canceled checks and timecards

b)Distribute paychecks

c)Recompute hours worked from time cards

9 - Different professional standards apply to differenttypes of services offered by a CPA. Assurance services performed bya CPA would include:

a)Audits of financial statements

b)Bookkeeping and accounting system consultingservices

c)Tax service

10 - A CPA may perform all of the following services fordifferent clients EXCEPT:

a)Audits

b)Legal advice relating to accounting ethicsviolations

c)Tax preparation

11 - If an auditor discovers material misstatement afterthe audit report is issued the auditor's first step should benotify

a)The audit firm's legal council

b)The audit committee of the client

c) The client

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Which of the following statements is most correct regarding the independent auditor's reliance on the tests of controls performed by the internal auditors to reduce their substantive testing?

1-The independent auditor must obtain assurance of the independence of the internal auditors but need not test their work.

2-It is not acceptable for the independent auditor to rely upon the work of the internal auditors.

3-There are no restrictions in relying upon the work of internal auditors.

4-The independent auditor must evaluate the competency and objectivity of the internal auditors and must test a sample of the work of the internal auditors in order to rely upon their work.

The term "materiality" as used in auditing is best described as the

1-substance of the auditing procedures.

2-amount of misstatement on the financial statements that would influence a decision maker.

3-underlying evidence upon which the audit opinion is based.

4-amount of material the auditor gathers as evidence to support the audit opinion.

Prior to accepting an audit client an auditor has a professional obligation to

1-contact the predecessor auditor.

2-perform preliminary analytical review procedures.

3-do all of the listed actions.

4-obtain approval for the audit engagement from the SEC.

Which of the following best represents financial statement fraud?

1-The transfer agent issues 40,000 shares of the company's stock to a friend without authorization by the board of directors.

2-The controller of the company decreases a contingent liability by $3 million so the company will meet analysts' expectations this quarter.

3-The in-house attorney receives payments from the French government for negotiating the development of a new plant in Paris.

4-The accounts receivable clerk covers up the theft of cash receipts by writing off older receivables without authorization.

Sampling risk is the risk that

1-errors are inherent and may be present in the population without regard to the internal controls.

2-the population will not contain characteristics representative of the sample such that inferences made about that sample will be incorrect.

3-internal controls are not adequate to prevent or detect material errors.

4-the sample will not contain characteristics representative of the population such that inferences made about that population will be incorrect.

Control risk that is assessed excessively high (i.e. the auditor believes control risk is high when in reality it is moderate or low) leads to:

1-audit inefficiency.

2-a less expensive audit.

3-reduced substantive testing.

4-errors that are more likely to occur than anticipated.

The purchasing process consists of each of the following phases except

1-receipts of goods and services.

2-approval of items for payment.

3-authorized request for goods and services.

4-cash receipts.

Ira Icandoit is a staff auditor in the internal audit functionof a small manufacturing company located in western Kansas. Irarecently completed a professional development course on astatistical sampling and is very excited about the new knowledge hehas gained. He decided to apply his newly gained knowledge duringthe audit to which he had just been assigned. He used attributesampling when he performed his tests of controls over the companyâsprocurement transactions.

Ira figured that a tolerable deviation rate of 10 percent and a5 percent risk of assessing control risk too low were appropriatefor the tests he planned to perform. He had no idea how manydeviations actually might exist in the population, so he set theexpected deviation rate at 2 percent to be conservative. Iraselected a sample of 100 items.

Because Ira believed larger items deserved more attention thansmaller items, he selected 75 items with values greater than orequal to $2,500 and 25 items with values less than$2,500. Hethought it would be the most appropriate to select transactionsnear the end of the fiscal year, so he randomly selected items fortesting from the last two months.

Ira was relieved when he found only six deviations fromprescribed controls. One deviation was a missing vendorâs invoice,so Ira called the vendor to make sure the transaction was in factvalid. Three deviations were missing signatures by an authorizedmanager. The manager explained that he had not approved theinvoices because he had been out of the office on the date theinvoices were prepared. H reviewed the invoices and told Ira therewere no problems with them. The other two deviations involveddollar errors. One was an error in the extension of an invoice, andthe other was a misclassification error between expenses, which didnot affect net income. Ira considered these two dollar errors to bethe only two actual control deviations. He determined that theachieved upper deviation limit was 7 percent at a 5 percent risk ofassessing control risk too low.

Based on these results, Ira concluded that procurementtransactions for the year were unlikely to contain more deviationsthan the allowable rate. Accordingly, he concluded that controlsover procurement transactions were effective and could be relied onmanagement.

Identify and explain any deficiencies you note in Iraâsattribute sampling application.

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MGAD10H3 Chapter Notes - Chapter 6: Inverse Relation, Audit Risk, Internal Control

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