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MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question (2 points each). (50 points) ACCT 422 Auditing Theory and Practice Spring 2017 1. Which of the following statements is correct regarding the predictability of analytical procedures in a financial statement audit? a. Relationships involving income statement accounts tend to be more predictable than relationships involving only balance sheet accounts. b. Relationships involving transactions subject to management discretion tend to be more predictable than automated transactions. c. Relationships involving only balance sheet accounts tend to be more predictable than relationships involving income statement accounts. d. Relationships in a dynamic environment tend to be more predictable than relationships in a stable environment. 2. The diagram below depicts the auditor's estimated deviation rate compared with the tolerable rate, and also depicts the true population deviation rate compared with the tolerable rate. In which of the situations would the auditor have properly concluded that risk of material misstatement is at or below the planned assessed level? a. I. b. II. c. III. d. IV. 3. Which of the following items would be the least persuasive type of audit evidence? a. A letter of representation signed by the client's president and chief executive officer. b. A confirmation of bank balances as of year-end received by the auditor directly from the bank. c. A schedule comparing an estimate of interest expense, prepared by the auditor, to the amount reported on the client's trial balance. d. A copy of a bank statement provided to the auditor by the client. 4. Which of the following would be a consideration in planning a sample for a test of subsequent cash receipts? a. Preliminary judgments about materiality levels. b. The amount of bad debt write-offs in the prior year. c. The size of the intercompany receivable balance. d. The auditor's allowable risk of assessing control risk is too low. 5. 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 $3,000 had an audit amount of $2,700. If this were the only error discovered by the auditor, the projected error of this sample would be a. $300. b. $500. c. $800. d. $2,300. 6. A client maintains perpetual inventory records in both quantities and dollars. If the assessed level of control risk is high, an auditor would probably a. Insist that the client perform physical counts of inventory items several times during the year. b. Apply gross profit tests to ascertain the reasonableness of the physical counts. c. Request the client to schedule the physical inventory count at the end of the year. d. Increase the extent of tests of controls of the inventory cycle. 7. An auditor 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. The auditor plans to use the following PPS sampling table: Reliability Factors for Overstatements. Which sample size should the auditor use? a. 30b. 60c. 72 d. 120 8. The primary purpose of sending a standard confirmation request to financial institutions with which the client has done business during the year is to a. Provide the data necessary to prepare a proof of cash. b. Corroborate information regarding deposit and loan balances. c. Request information about contingent liabilities and secured transactions. d. Detect kiting activities that may otherwise not be discovered. 9. An auditor is selecting vouchers for testing an entity's internal control activities related to the proper approval of vouchers before checks are prepared. The auditor is matching random numbers with voucher numbers to determine which vouchers to inspect. If a random number matches a voided voucher, that voucher ordinarily would be replaced by another voucher in the random sample if the voided voucher a. Indicates a deviation from the prescribed activity. b. Cannot be located in the voucher file. c. Represents a dollar amount that is material. d. Has been properly voided. 10. The risk of incorrect acceptance and the likelihood of assessing risk of material misstatement too low relate to the a. Effectiveness of the audit. b. Preliminary estimates of materiality levels. c. Efficiency of the audit. d. Allowable risk of tolerable misstatement. 11. An auditor intends to use the work of an actuary who has a relationship with the client. Under these circumstances, the auditor a. Should communicate this matter to the audit committee as a significant deficiency. b. Should assess the risk that the actuary's objectivity might be impaired. c. Is required to disclose the contractual relationship in the auditor's report. d. Is not permitted to rely on the actuary because of a lack of independence. 13. When the auditor decides to select less than 100 percent of the population for testing, the auditor is said to use: a. audit sampling. b. representative sampling. c. poor judgment. d. estimation sampling. 14. Which of the following is the risk that audit tests will not uncover existing exceptions in a sample? a. Sampling risk b. Nonsampling risk c. Audit risk d. Detection risk 15. Auditors who prefer statistical to nonstatistical sampling believe that the principal advantage of statistical sampling flows from its ability to: a. quantify sampling risk. b. promote a more legally defensible procedural approach. c. define the precision required to provide audit satisfaction. d. establish conclusive audit evidence with decreased audit effort. 16. You are determining the significance of the following: you set a 5% risk of assessing control risk to low and your computation of the upper deviation risk is 7%. What could you conclude? a. There is a 95% chance the deviation rate is the population is less than 5%. b. There is a 5% chance the deviation rate in the population is less than 7%. c. There is a 95% chance the deviation rate in the population exceeds 95%. d. There is a 5% chance the deviation rate in the population exceeds 7%. 17. The exception rate the auditor will permit in the population and still be willing to reduce the assessed level of control risk is called the: a. tolerable exception rate. b. estimated population exception rate. c. acceptable risk of overreliance. d. sample exception rate. 19. Which of the following misstatements is most likely to be uncovered during an audit of a client's bank reconciliation? a. Duplicate payment of a vendor's invoiceb. Billing a customer at a lower price than indicated by company policyc. Failure to record a collection of a note receivable by the bank on the client's behalf d. Payment to an employee for more than the hours actually worked. 20. Monetary unit sampling is not particularly effective at detecting: a. overstatements. b. understatements. c. errors in current assets. d. errors in noncurrent assets. 22. Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle? 18. The overall attitude and awareness of an entity's board of directors concerning the importance of the internal control structure usually is reflected in its a. Control Activities b. System of segregation of duties. c. Safeguards over access to assets. d. Control environment. 21. Which of the following procedures would be most appropriate for testing the completeness assertion as it applies to inventory? a. Performing cutoff procedures for shipping and receiving. b. Tracing inventory items from the tag listing back to the physical inventory quantities. c. Examining paid vendor invoices. d. Scanning perpetual inventory, production, and purchasing records. a. The write-off of receivables by personnel who receive cash permits the misappropriation of cash. b. Fictitious transactions are recorded that cause an understatement of revenue and overstatement c. Obsolete items included in inventory balances are rarely reduced to the lower of cost or market v d. Merchandise received is not promptly reconciled to the outstanding purchase order file. 23. The overall attitude and awareness of an entity's board of directors concerning the importance of the internal control structure usually is reflected in its a. Control Activities b. System of segregation of duties. c. Safeguards over access to assets. d. Control environment. 24. An auditor's documentation serves mainly to a. Satisfy the auditor's responsibilities concerning the Code of Professional Conduct. b. Document the level of independence maintained by the auditor. c. Provide the principal support for the auditor's report. d. Monitor the effectiveness of the CPA firm's quality control procedures. 25. For effective internal control, the purchasing manager generally should a. Be responsible for negotiating terms with vendors. b. Establish the agreement of the vendor's invoice with the receiving report and purchase order. c. Defer to the accounts payable department for authorization of purchases. d. Stamp, perforate, or otherwise cancel supporting documentation after payment is mail