CC13 2 (Book/static) : Risk Assessment Procedures

CC13-1 (book/static)
What are the five types of tests auditors use to determine whether financial statements are
fairly stated? Identify which tests are performed to reduce control risk and which tests are
performed to reduce planned detection risk.
What are the five types of tests auditors use to determine whether financial statements are
fairly stated?
Types of tests
1. Substantive analytical procedures
2. Substantive tests of transactions
3. Tests of controls
4. Tests of details of balances
5. Risk assessment procedures
Identify which tests are performed to reduce control risk and which tests are performed to reduce
planned detection risk.
While
risk assessment procedures
help the financial statement auditor obtain information to make an initial assessment of control
risk,
tests of controls
must be performed to support an assessment of control risk that is below maximum. Because
substantive tests of transactions
provide evidence about whether transactions have been correctly recorded, these tests also
provide evidence about the effectiveness of controls. Substantive evidence is obtained to
reduce
detection risk. Substantive evidence includes evidence from

substantive tests of transactions, substantive analytical procedures, and tests of details of
balances.
CC132 Question
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(book/static)
Explain the difference among
C3, C2, and C1. Explain the circumstances under which it would be a good decision to obtain audit
assurance from substantive tests at point C1. Do the same for points C2and C3.
The audit assurance from substantive tests and tests of controls at different levels of internal control
effectiveness shows the relationship between substantive tests and control risk assessment. Explain the
difference among C3, C2, and C1.
C represents the auditor's assessment of the effectiveness of

internal control.
C3
represents the idea that it is not cost-effective to test internal controls and all assurance must come from
substantive testing. Tests of controls at the
C1
level would support a minimum level of control risk. This would require more testing of the controls than
would be required at either
C2 or C3.
Testing controls at the

C1
level allows the auditor to obtain assurance from the controls, thereby allowing for a reduction in the
amount of substantive testing which must be performed to meet the level of acceptable audit assurance.
Explain the circumstances under which it will be a good decision to obtain audit assurance from
substantive tests at point C1. Do the same for points C2 and C3.
It would be a good decision to obtain assurance from

test of controls
at point
C1
especially if the cost of substantive testing is considerably greater than tests of controls. At point
C2
,
the auditor performs some tests of controls and is able to reduce control risk below maximum. Point
C2
would be appropriate if it is cost beneficial for the auditor to obtain a proper level of assurance.
Question
CC13-3
Help
(book/static)
State the four-step approach to designing tests of controls and substantive tests of transactions.
The four-step approach to designing tests of controls and substantive tests of transactions is
as follows: (Select the steps from the list in the proper order.)
LOADING...
(Click
on the icon to view steps.)
1. f.
2. b.
3. h.
4. d.
CC13-4 Question
(book/static) Help
Explain the relationship of performance materiality, inherent risk, and control risk to planned
tests of details of balances.
If performance materiality is low, and inherent risk and control risk are high, planned tests of
details of balances which the auditor must perform will be
high.
An increase in performance materiality or a reduction of either inherent risk or control risk will
lead to a reduction
in the planned tests of details of balances.
RQ131 Question
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(book/static)
What is the purpose of risk assessment procedures and how do they differ from the four other types of
audit tests? (Select all answers that apply.)
A.
Risk assessment procedures are performed to assess the risk of material misstatement in the financial
statements. Risk assessment procedures include procedures performed to obtain an understanding of the
entity and its environment, including internal controls.
Your answer is correct.
B.
Risk assessment procedures are performed to assess the risk of material misstatement in the financial
statements. Auditors use the results of the risk assessment procedures to design and perform further
audit procedures. Further audit procedures (not risk assessment procedures) provide the auditor sufficient
appropriate evidence.
RQ13-2 (book/static) Question Help

What is the purpose of tests of controls? Identify specific accounts on the financial statements
that are affected by performing tests of controls for the acquisition and payment cycle.
What is the purpose of tests of controls?
Audit procedures to test the operating effectiveness of control policies and procedures in
support of a reduced assessed control risk, and provide the primary basis for the auditor's
report on internal controls over financial reporting.
Identify ten specific accounts on the financial statements that are affected by performing tests of
controls for the acquisition and payment cycle. (Select all that apply.)
Cash
Prepaid insurance
Accounts payable
Purchases
Purchase returns and allowances
Purchase discounts
Manufacturing expenses
Selling expenses
Leasehold improvements
Various admin expenses

Distinguish between a test of control and a substantive test of transactions. Give two examples of
each.
Select the definition of tests of controls?
Audit procedures to test the operating effectiveness of control policies and procedures in
support of a reduced assessed control risk.
Select two examples of tests of controls.

.
Examination of employee time cards for approval of overtime hours worked.
The examination of vendor invoices for indication that they have been clerically tested,
compare to a receiving report and purchase order, and approved for payment.
Select the definition of a substantive test of transactions.
Audit procedures testing for monetary misstatements to determine the six transactions-
related objectives have been satisfied for each class of transactions.
Select two examples of a substantive test of transactions.
Examination of vendor invoices in support of amounts recorded in the acquisitions journal

for purchases of inventories.
Tracing of selected customer cash receipts to the accounts receivable master file, agreeing
customer names and amounts.
RQ134 Question
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(book/static)
State a test of control audit procedure to test the effectiveness of the following control: Approved wage
rates are used in calculating employees' earnings. State a substantive test of transactions audit
procedure to determine whether approved wage rates are actually used in calculating employees'
earnings.
A test of control audit procedure to test that approved wage rates are used to calculate employees'
earnings would be to
examine rate authorization forms to determine the existence of authorized signatures.
A substantive test of transactions audit procedure would be to
compare a sample of rates actually paid, as indicated in the earnings record, to authorized pay
rate on rate authorization forms.
RQ137 Question
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(book/static)
Explain how the calculation and comparison to previous years of the gross margin percentage and the
ratio of accounts receivable to
sales are related to the confirmation of accounts receivable and other tests of the accuracy of accounts
receivable.
When the results of analytical procedures are different from the auditor's expectations and thereby
indicate that
there may be a misstatement
in the balance in accounts receivable or sales,

the auditor should extend the tests to determine why the ratios are different from expectations.
Confirmation of accounts receivable and cutoff tests for sales

are two procedures that can be used to do this.
If the ratios are approximately what the auditor expects,

expansion in planned tests is not required.
This means that the auditor can satisfy the evidence requirements in different ways and that
analytical procedures and confirmation are complementary
when the results of the tests are both good.
RQ138 Question
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(book/static)
Evaluate the following statement: "Tests of sales and cash receipts transactions are such an essential
part of every audit that I like to perform them as near the end of the audit as possible. By that time I have
a fairly good understanding of the client's business and its internal controls because confirmations,
cutoff tests, and other procedures have already been completed." (Select all answers that apply.)
A.
The auditor should attempt to understand the entity and its environment, including
internal controls, as early as practical through the analysis of the accounting system, tests
of controls, and substantive tests of transactions.
B.
The primary purpose of testing sales and cash receipts transactions is to evaluate the internal
controls so that the scope of the substantive tests of the account balances may be set. If the
auditor performs the tests of details of balances prior to testing internal controls, no benefit will
be derived from the tests of controls.
RQ1316 Question
Help
(book/static)
List the eight balance-related audit objectives in the verification of the ending balance in inventory and
provide one useful audit procedure for each of the objectives.
LOADING...
(Click
on the icon to view a list of audit procedures.)
Inventory Balance-Related Audit
Audit Objectives Procedure
1. Detail tie-in g.
2. Completeness f.
3. Existence d.
4. Accuracy e.
5. Classification a.
6. Cutoff j.
7. Realizable value c.
8. Rights and obligations i.

Why do auditors often consider it desirable to perform audit tests throughout the year rather than
wait until year-end? List several examples of evidence that can be accumulated before year-end.
Why do auditors often consider it desirable to perform audit tests throughout the year rather than
wait until year-end?
Auditors frequently consider it desirable to perform audit tests throughout the year rather than
waiting until year-end because
of the CPA firm's difficulty of scheduling personnel and the client's need for timely
financial statements.
Additionally, public company auditors must begin their testing of controls earlier in the year to
ensure they are able to test a sufficient sample of controls for operating effectiveness.
Select eight examples of evidence that can be accumulated before year-end. (Select all that
apply.)
Review minutes of board of directors' meetings.
Examine new loan agreements and other legal records.
If the client has effective internal control, confirmation of accounts receivable balances may
be performed with minor review and updating at year-end.
If the client has effective internal control, confirmation and reconciliation of accounts
payable balances may be performed with minor review and updating at year-end.
If the client has effective internal control, observation of physical inventories may be
performed with minor review and updating at year-end.
Analyze changes in the client's accounting systems.
Update fixed asset schedules.
Vouch certain transactions.
MC13-20 (similar to) Question Help

The following questions concern types of audit tests. Choose the best response.
a. An auditor's decision either to apply analytical procedures as substantive tests or to perform

substantive tests of transactions and account balances usually is determined by the
relative effectiveness and efficiency of the tests.
b. The auditor faces a risk that the audit will not detect material misstatements that occur in the
accounting process. To minimize this risk, the auditor relies primarily on
substantive tests.
c. A conceptually logical approach to the auditor's evaluation of internal control consists of the
following four steps:
I.
Determining the internal controls that should prevent or detect errors and fraud.
II.
Identifying control deficiencies to determine their effect on the nature, timing, or extent of
auditing procedures to be applied and suggestions to be made to the client.
III.
Determining whether the necessary internal control procedures are prescribed and are being
followed satisfactorily.
IV.
Considering the types of errors and fraud that can occur.
What should be the order in which these four steps are performed?
IV, I, III, and II
P1326 Question
Help
(book/static)
The following are independent internal controls commonly found in the acquisition and payment cycle.
Each control is to be considered independently.
.
Complete all answers boxes for each audit procedure in the table below.
Requirement a. Requirement b. Requirement c.

1. Classification d. i.
Occurrence
Accuracy
2. Completeness c. m.
3. Completeness h. b.
Occurrence
Accuracy
4. Occurrence a. e.
Accuracy
Classification
5. Occurrence f. l.
RQ135 Question
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(book/static)
A considerable portion of the tests of controls and substantive tests of transactions are performed
simultaneously as a matter of audit convenience. But the substantive tests of transactions procedures and
sample size, in part, depend on the results of the tests of controls. How can the auditor resolve this
apparentinconsistency? (Select all answers that apply.)
The auditor assumes an effective system of internal control with few or no exceptions planned. If
the results of the tests of controls are as good as or better than the assumptions that were
originally made, the auditor can be satisfied with the planned extent of substantive tests
of transactions, unless the substantive tests of transactions themselves indicate the existence of
misstatements. If the tests of controls results were not as good as the auditor assumed in
designing the original tests, expanded substantive tests must be performed.
The auditor resolves the problem by making assumptions about the results of the tests of
controls and performing both the tests of controls and substantive tests of transactions on the
basis of these assumptions.

Distinguish between substantive tests of transactions and tests of details of balances. Give one
example of each for the acquisition and payment cycle.
Match the terms with the correct definition.

1) Test of details of balance
Tests performed to verify the ending balance in an individual account on the financial
statements.
2) Substantive test of transactions
Tests performed to verify the accuracy of a client's accounting system. This is

accomplished by determining whether individual transactions are correctly recorded
and summarized in the journals, master files, and general ledger.
Select an example of a substantive test of transaction.
Tracing amounts from a file of vouchers to the acquisitions journal.
Select an example of a test of details of balances.
Physically examine a sample of the client's fixed assets.
RQ139 Question
Help
(book/static)
The auditor of Ferguson's Inc. identified two internal controls in the sales and collection cycle for testing.
In the first control, the computer verifies that a planned sale on account will not exceed the customer's
credit limit entered in the accounts receivable master file. In the second control, the accounts receivable
clerk matches bills of lading, sales invoices, and customer orders before recording in the sales journal.
Describe how the presence of general controls over software programs and master file changes affects
the extent of audit testing of each of these two internal controls.
Control #1 -- Computer verification of the customer's credit limit.
The presence of effective general controls over software programs and master file changes
can significantly reduce
the auditor's testing of automated controls such as control #1. Once it is determined that control #1 is
functioning properly, the auditor can
focus subsequent tests on assessing whether any changes have occurred that would limit the
effectiveness of the control.
Such tests might include

determining whether any changes have occurred to the program
and whether
these changes were properly authorized and tested prior to implementation.
Control #2 - The accounts receivable clerk matches bills of lading, sales invoices, and customer orders
before recording in the sales journal.
This control is
a manual
control. General controls over software programs and master file changes would have
little effect
on the auditor's testing of control #2. If the auditor identifies control #2 as a key control in the sales and
collection cycle, he or she would
examine a sample of the underlying documents for the accounts receivable clerk's initials and
reperform the comparisons.
RQ1318 Question
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(book/static)
Indicate the four phases of the audit process. In which phase does the auditor perform tests of controls?
Phase I Plan and design an audit approach
Phase II Perform tests of controls and substantive tests of transactions
Phase III Perform substantive analytical procedures and tests of details of balances
Phase IV Complete the audit and issue an audit report
CC151 Question
Help
(book/static)
State what is meant by a representative sample and explain its importance in sampling audit populations.
A representative sample is one in which the characteristics of interest for the sample are
approximately the same as for the population. With a representativesample, sampled items are
similar to the items not sampled.
CC152 Question
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(book/static)
Explain the major difference between statistical and nonstatistical sampling. Are both methods acceptable
according to auditing standards?
The major difference between statistical and nonstatistical sampling is that the auditor
quantifies sampling risk when statistical sampling is used but not when nonstatistical sampling is
used.
Are both methods acceptable according to auditing standards?
Auditing standards permit auditors to use either statistical or nonstatistical sampling methods.
CC153 Question
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(book/static)
Explain what is meant by analysis of exceptions and discuss its importance.
Analysis of exceptions is the investigation of individual exceptions to determine the cause of the
breakdown in internal control. Such analysis is important because by discovering the nature and
causes of individual exceptions, the auditor can more effectively evaluate the effectiveness of
internal control. The analysis attempts to tell the "why" and "how" of the exceptions after the
auditor already knows how many and what types of exceptions have
occurred.
CC154 Question
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(book/static)
What are the steps of the audit sampling process that differ across statistical and nonstatistical
sampling approaches? In what ways do they differ?
Choose the steps of the audit sampling process that differ across statistical and nonstatistical sampling
approaches and then choose the ways in which they differ?
Ways they Differ
Steps of the Audit Sampling Process Nonstatistical Statistical
Specify acceptable risk of overreliance B 3
Determine initial sample size C 4, 5
Select the sample 1
Generalize from the sample to the
A 2
population
RQ154 Question
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(book/static)
Explain what is meant by block sample selection and describe how an auditor can obtain five blocks of 20
sales invoices from a sales journal.
Explain what is meant by block sample selection.
A block sample is the selection of several items in sequence. Once the first item in the block
is selected, the remainder of the block is chosen automatically.
Describe how an auditor can obtain five blocks of 20 sales invoices from a sales journal.
To select 5 blocks of 20 sales invoices, the auditor would select one invoice and the block would
be that invoice plus the next 19 entries. This procedure would be repeated 4 other times.
RQ155 Question
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(book/static)
Explain the difference between replacement sampling and nonreplacement sampling. Which method do
auditors usually follow? Why?
Choose the statements that are true. (Select all that apply.)
In replacement sampling, an element in the population can be included in the sample more than
once if the random number corresponding to that element is selected more than once.
In nonreplacement sampling, an element can be included only once. If the random number
corresponding to an element is selected more than once, it is simply treated as a discard the
second time.
Which method do auditors usually follow? Why?
Although both selection approaches are consistent with sound statistical theory, auditors rarely use
replacement
sampling; it seems more intuitively satisfying to auditors to include an item

only once.
RQ156 Question
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(book/static)
What are the two types of simple random sample selection methods? Which of the two methods is used
most often by auditors and why?
What are the two types of simple random sample selection methods?
Two methods of simple random selection are use of a random number table and use of the
computer to generate random numbers.
Which of the two methods is used most often by auditors and why?
Auditors most often use the computer to generate random numbers because it saves time,
reduces the likelihood of error, and provides automatic documentation of the sample selected.
RQ157 Question
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(book/static)
Describe systematic sample selection and explain how an auditor will select
40 numbers from a population of 2,800 items using this approach. What are the advantages and
disadvantages of systematic sample selection?
In systematic sampling, the auditor calculates an interval and then methodically selects the items
for the sample based on the size of the interval. The interval is set by dividing the population size
by the number of sample items desired. To select 40 numbers from a population of 2,800, the
auditor divides 40 into 2,800 and gets an interval of 70. He or she then selects a random number
between 0 and 69.
What are the advantages of systematic sample selection? (Select all that apply.)
In most populations a systematic sample can be drawn quickly.
This approach automatically puts the numbers in sequential order, and documentation is easy.
Systematic sampling is easy to use.
What are the disadvantages of systematic sample selection? (Select all that apply.)
Systematic sampling has the possibility of bias.
Auditors must consider possible patterns in the population data that can cause sample bias.
RQ158 Question
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(book/static)
Distinguish between probabilistic selection and statistical measurement. State the circumstances under
which one can be used without the other.
Distinguish between probabilistic selection and statistical measurement.
Random (probabilistic) selection

is a part of statistical sampling, but it is not, by itself,
statistical measurement. To have statistical measurement, it is necessary to

mathematically generalize from the sample to the population
.
State the circumstances under which one can be used without the other.
Probabilistic selection must be used if the sample is to be evaluated statistically, although it is

also acceptable to use probabilistic selection with a nonstatistical evaluation. If nonprobabilistic
selection is used, nonstatistical evaluation must be used.
RQ159 Question
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(book/static)
What is the purpose of using nonstatistical sampling for tests of controls and substantive tests
of transactions?
The purpose of using nonstatistical sampling for tests of controls and substantive tests of
transactions is to estimate the proportion of items in a population containing a characteristic or
attribute of interest.
RQ1512 Question
Help
(book/static)
Define each of the following terms:
a. Acceptable risk of overreliance (ARO)
b. Computed upper exception rate (CUER)
c. Estimated population exception rate (EPER)
d. Sample exception rate (SER)
e. Tolerable exception rate (TER)
For each definition, select the acronym of the term that matches the definition.
Definition Term
The actual rate of exception discovered in the sample. It is calculated by dividing the actual SER
number of exceptions in the sample by the sample size.
The highest estimated exception rate in the population at a given ARO. CUER
The risk the auditor is willing to take of accepting a control as effective or a rate of monetary ARO
misstatements as tolerable, when the true population exception rate is greater than the
tolerable exception rate.
The exception rate the auditor will permit in the population and still be willing to use the TER
assessed control riskand/or the amount of monetary misstatements in the transactions
established during planning.
The exception rate the auditor expects to find in the population before testing begins. It is EPER
necessary to plan the appropriate sample size.
RQ1516 Question
Help
(book/static)
Identify the factors an auditor uses to decide the appropriate ARO. Compare the sample size
for an ARO of 10% with that of 5%, all other factors being equal.
Identify the factors an auditor uses to decide the appropriate acceptable rist of
overreliance (ARO). (Leave unused cells blank.)
ARO is affected by the degree the auditor wishes to reduce assessed control risk below the maximum.
ARO is the result of an auditor's judgment.
Compare the sample size for an ARO of 10% with that of 5%, all other factors being equal.
The auditor will choose
a smaller
sample size for an ARO of 10% than would be used if the risk were 5%, all other factors being
equal.
Question
RQ1517 (book/static) Help
State the relationship between the following:

a. ARO and sample size
b. Population size and sample size
c. TER and sample size
d. EPER and sample size
Select your answers for each of the following statements:
a. As the ARO increases, the required sample size decreases

.
b. As the population size increases, the required sample size normally
is unchanged, or may increase slightly.
c. As the TER increases, the sample size decreases

.
d. As the EPER increases, the required sample size increases
.
RQ1518 Question
Help
(book/static)
When the
CUER
exceeds the
TER,
what courses of action are available to the auditor? Under what circumstances should each of these
be followed?
(Leave unused cells blank.)
Circumstances Under Which
Course of Action the Course of Action Should be Followed
Revise the TER or the Only when the auditor has concluded the original specifications
ARO. were too conservative.
When the auditor is willing to accept the risk associated with the
higher specifications.
When the auditor expects the additional benefits to exceed the
Expand the sample size.
additional costs.
Revise assessed control If revising the TER or the ARO and expanding the sample size are
risk upward. not practical.
May be done if additional substantive procedures are possible.
Write a letter to
Should be done in conjunction with all other alternatives.
management.
MC1524 (similar Question
Help
to)
The following questions concern sampling for attributes. Choose the best response.
a. An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an
auditor
measure the sufficiency of the audit evidence by quantifying sampling risk.
b. Which of the following best illustrates the concept of sampling risk?
A randomly chosen sample may not be representative of the population as a whole for the
characteristic of interest.
c. For which of the following tests would an auditor most likely use attribute sampling?
Inspecting employee time cards for proper approval by supervisors.
MC1525 Question
Help
(similar to)
The following questions concern audit sampling. Choose the best response.
a. As compared to a nonstatistical sampling plan, a statistical sampling plan
makes greater use of mathematical methods in determining an appropriate sample size.

b. The diagram below depicts an auditor's computed upper exception rate (CUER) compared with the
tolerable exception rate (TER), and also depicts the true population exception rate compared with the
TER.
True state of population
Auditor’s estimate based True exception rate is True exception rate
on sample results less than TER exceeds TER
CUER is less than TER I III
CUER exceeds TER II IV
As a result of tests of controls, the auditor assesses control risk too low and thereby decreases
substantive testing. This is illustrated by which situation?
III
c. In assessing sampling risk, the risk of underreliance (i.e. the risk of assessing control risk too high)
relates to the
efficiency of the audit.
P1534 Question
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(book/static)
For the audit of the financial statements of Mercury Fifo Company, Stella Mason CPA, has decided to
apply nonstatistical audit sampling in the tests of controls and substantive tests of transactions for sales
transactions. Based on her knowledge of Mercury's operations in the area of sales, she decides that the
EPER is likely to be 3 % And that she is willing to accept a 5 % risk that the true population exception rate
is not greater than 6 % Given this information, Mason selects a random sample of 150 sales invoices from
the 5 comma 0005,000 generated during the year and examines them for exceptions. She notes the
following exceptions in her audit schedules. There is no other documentation.
.
Requirement a. Which of the comments should be defined as an exception?
For each invoice listed, indicate whether the comment associated with the invoice represents an
exception by selecting "Yes" or "No". (Complete all answerboxes.)
Invoice
No. Exception
5028 No
6791 No
6810 Yes
7364 No
7625 Yes
8431 Yes
8528 Yes
8566 Yes
8780 Yes
9169 Yes
9974 Yes
Type of exception (Yes)/
Reason why the comment is not an exception (No)
Error was detected and corrected by client.
Sales invoice was voided.
Proof of shipment not presented.
Credit collection problem; should be noted for review of allowance for doubtful accounts.
Duplicate sales invoice not properly filed.
Invoices not recorded by proper date; represents potential cutoff problem.
Customer orders not included in invoice package to verify compliance with the order.
Error in pricing. No internal verification.
Duplicate sales invoice not properly filed.
Credit not authorized.
Internal verification of price extensions and postings of sales invoices was not included.
Requirement b. Explain why it is inappropriate to set a single acceptable TER and EPER for the
combined exceptions.
Each attribute has a different significance to the auditor and should be considered separately in
analyzing the results of the test.
Requirement c & d. Calculate SER for each attribute tested in the population. (You must decide which
attributes should be combined, which should be keptseparate, and which exceptions are actual
exceptions before you can calculate SER.) Then, in the next step, calculate TERminus−SER for each
attribute and evaluate whether the calculated allowance for sampling risk is sufficiently large given the 5
% ARO. Assume TER is 6 % for each attribute. (If a comment is not considered an exception leave all
boxes related to that comment empty; do not select a label or enter a zero. Round all applicable
percentages to the nearest hundreth percentX.XX%.)
Requirement c.
Number of
Comment exceptions SER
Sales invoice footed incorrectly then corrected %
Voided sales invoice %
Shipping document not located 1 0.67 %
Sales invoice for $2,875 not been collected %
Duplicate sales invoice/customer order not
3 2.00 %
located
Invoice date improper 1 0.67 %
Price extensions and postings incorrect 1 0.67 %
Price extensions and postings not internally
2 1.33 %
verified
Credit not authorized 1 0.67 %
Requirement d.
Sampling Error
TER - SER Sufficient
%
%
5.33 % Yes
%
4.00 % Probably
5.33 % Yes
5.33 % Yes
4.67 % Probably
5.33 % Yes
Requirement e. State the appropriate analysis of exceptions for each of the exceptions in the sample,
including additional procedures to be performed. (If a box is not used in the table leave the box empty; do
not select a response.)
Invoice
No. Exception analysis
5028
6791
6810 Confirm the account balances to the customers.

Examine the reduction in the perpetual inventory records.
7364
7625 Trace the amount to the sales journal and accounts receivable master file.
Examine the shipping document and recompute the sale amount.
8431
Check invoices prepared by this employee to determine if the problem consistently occurs.
8528 Examine the accounts receivable master file for subsequent cash receipt.
Examine sales invoice for other invoice to the same customer to determine if customer orders were
attached.
8566 Check the price on other invoices to the same customer.
Check the price on other invoices that have the same product.
8780 Trace the amount to the sales journal and accounts receivable master file.
Examine the shipping document and recompute the sale amount.
9169 Check credit history of customer and evaluate collectibility of the customer's account.
9974 Recheck actual price, extensions and postings.
Determine who the clerk was and check several other invoices for proper indication of performance.
P1535 Question
Help
(book/static)
The sampling data sheet below is missing selected information for six attributes involving tests of
transactions for the sales and collection cycle.
.
Requirement a. Use the tables below to complete the missing information for each attribute. (Complete
all answer boxes.)
Planned Audit Actual results

Initial
Sample Sample Number of
Attributes EPER TER ARO Size Size Exceptions CUER
Attribute 1 0 % 6% 5% 49 50 1 9.2 %
Attribute 2 0.5 % 5% 10 % 77 80 0 2.9 %
Attribute 3 1 % 7% 10 % 55 55 1 6.9 %
Attribute 4 1 % 6% 5% 78 80 1 5.8 %
Attribute 5 0 % 4% 5% 74 80 0 3.7 %
Attribute 6 0.5 % 6 % 10 % 64 70 2 7.5 %
Requirement b. For which attributes are the sample results unacceptable?
The sample results are unacceptable for

attributes 1 and 6
.
Requirement c. Compare attributes 1 and 3. Why does attribute 1 have the smaller sample size?
The sample size for attribute 1 is smaller than the sample size for attribute 3 because the
EPER
is
smaller
for attribute 1 than it is for attribute 3.
Requirement d. Compare attributes 2 and 5. Why is CUER higher for attribute 5?

CUER is higher for attribute 5 for the following reason:
ARO is higher in attribute 2 relative to attribute 5
CC171 Question
Help
(book/static)
What are the major differences in the 14 steps used in nonstatistical sampling for tests of details of
balances versus the steps for tests of controls and substantive tests of transactions?
The steps in nonstatistical sampling for tests of details of balances and for tests of controls are almost
identical. The major differences are that
sampling for tests of controls
deals with exceptions and

sampling for tests of details of balances
concerns dollar amounts. This results in differences

in the application of the two methods, but not the steps.
Because of these differences, tests of controls and substantive tests of transactions are designed to
measure the
occurrence rate of an attribute.
In contrast, tests of details of balances are designed to measure the

amount of monetary misstatements in the population being sampled.
CC172 Question
Help
(book/static)
What alternative courses of action are appropriate when a population is rejected using nonstatistical
sampling for tests of details of balances? When should each option be followed? (Select all that apply.)
C.
Request the client to correct the population. In some cases the client's records are so inadequate
that a correction of the entire population is required before the audit can be completed.
D.
Increase the sample size. When the auditor increases the sample size, sampling risk is reduced if
the rate of misstatements in the expanded sample, their dollar amount, and their direction are
similar to those in the original sample. Increasing the sample size, therefore, may allow the
auditor to conclude that the population is acceptable.
E.
Refuse to give an unmodified opinion. If the auditor believes the recorded amount in accounts
receivable or any other account is not fairly stated, it is necessary to follow at least one of the
above alternatives or to qualify the audit opinion in an appropriate manner.
F.
Perform expanded audit tests in specific areas. If an analysis of the misstatements indicates that
most of the misstatements are of a specific type, it may be desirable to restrict the additional audit
effort to the problem area.
G.
Adjust the account balance. When the auditor concludes that an account balance is
materially misstated, the client may be willing to adjust the book value.
CC173 Question
Help
(book/static)
Define the sampling interval when using MUS sampling. How is it calculated?
.
The sampling interval is the book value of the population being sampled divided by the sample
size. An individual dollar that is selected for sampling represents the entire sampling interval.
CC175 Question
Help
(book/static)
Distinguish among difference estimation, ratio estimation, mean-per-unit estimation, and stratified mean-
per-unit estimation. Give one example in which each can be used.
Begin by selecting the definition for each term.
LOADING...
(Click
on the icon to view the definitions.)
Terms Definition
1. Difference estimation c.
2. Ratio estimation a.
3. Mean-per-unit estimation f.
Stratified mean-per-unit
4. e.
estimation
Select an example in which each can be used.
LOADING...
(Click
on the icon to view the examples.)
Terms Example
1. Difference estimation b.
2. Ratio estimation c.
3. Mean-per-unit estimation a.
Stratified mean-per-unit
4. f.
estimation
RQ171 Question
Help
(book/static)
What major difference between (a) tests of controls and substantive tests of transactions and (b) tests of
details of balances makes attributes sampling inappropriate for tests of details of balances?
Begin by identifying the major difference between (a) tests of controls and substantive tests of
transactions and (b) tests of details of balances.
The most important difference between (a) tests of controls and substantive tests of transactions and (b)
tests of details of balances is
in what the auditor wants to measure. In tests of controls and substantive tests of transactions,
the primary concern is testing the effectiveness of internal controls and the rate of monetary
misstatements. In tests of details of balances, the concern is determining whether the monetary
amount of an account balance is materially misstated.
This major difference (noted above) makes attributes sampling inappropriate for tests of details of
balances because attributes sampling measures
the frequency of occurrence,
where details of balances are concerned with

whether the dollar amounts of account balances are materially misstated.
RQ172 Question
Help
(book/static)
Define stratified sampling and explain its importance in auditing. How can an auditor obtain a stratified
sample of 30 items from each of three strata in the confirmation of accounts receivable?
Begin by defining stratified sampling and explain its importance in auditing.
Stratified sampling is a method of sampling in which all the elements in the total population are
divided into two or more subpopulations. Each subpopulation is then independently sampled,
tested and the results projected to the population. After the results of the individual parts have
beencomputed, they are combined into one overall population measurement. Stratified sampling
is important when the auditor wants to emphasize testing of certain population items.
How can an auditor obtain a stratified sample of 30 items from each of three strata in the confirmation of
accounts receivable?
In order for an auditor to obtain a stratified sample of 30 items from each of three strata in the
confirmation of accounts receivable, he or she must first divide the population into three mutually
exclusive strata. A random sample of 30 items is then selected independently for each stratum.
RQ177 Question
Help
(book/static)
Define what is meant by sampling risk. Does sampling risk apply to nonstatistical sampling, MUS,
attributes sampling, and variables sampling? Explain.
Sampling risk is
the risk that the characteristics in the sample are not representative of those in the population.
Does sampling risk apply to nonstatistical sampling, MUS, attributes sampling, and variables sampling?
Explain.
The two types of sampling risk faced by the auditor testing an account balance are: (a)
The risk of incorrect acceptance (ARIA)
—this
is the risk that the sample supports the conclusion that the recorded account balance is not materially
misstated when it is materially misstated, and (b)
The risk of incorrect rejection (ARIR)
—this
is the risk that the sample supports the conclusion that the recorded account balance is materially
misstated when it is not materially misstated.
Sampling risk occurs
whenever a sample is taken from a population
and therefore
applies to all sampling methods.
While
ARIA
applies to all sampling methods,

ARIR
is only used in variables sampling and difference estimation.
RQ1712 Question
Help
(book/static)
Explain what is meant by basic precision. How is it determined?
Begin by defining basic precision.
Basic precision is the upper limit when no misstatements are found in the sample, and represents
the minimum allowance for sampling risk inherent in the sample.
How is it determined?
It is calculated by multiplying the sampling interval by the confidence factor for zero
misstatements at the specified level of ARIA.
RQ1715 Question
Help
(book/static)
Define what is meant by the population standard deviation and explain its importance in variables
sampling. What is the relationship between the population standard deviation and the required
sample size?
The population standard deviation is

a measure of the difference between the individual values and the mean of the population.
It is calculated for
all variables sampling methods but not for monetary unit sampling.
For the auditor, it is usually estimated

before
determining the required sample size, based on the previous year's results or on a preliminary sample.
The required sample size is
directly proportional to the square of the population standard deviation
RQ1716 Question
Help
(book/static)
In using difference estimation, an auditor took a random sample of 100 inventory items from a large
population to test for proper pricing. Several of the inventory items were misstated, but the combined net
amount of the sample misstatement was not material. In addition, a review of the individual misstatements
indicated that no misstatement was by itself material. As a result, the auditor did not investigate the
misstatements or make a statistical evaluation. Explain why this practice is improper.
All of the above.
RQ1717 Question
Help
(book/static)
Explain why difference estimation is commonly used by auditors.
Difference estimation can be very effective and very efficient where

(1) an audited value and a book value is available for each population item
,
(2) a relatively high frequency of misstatements is expected
,
and
(3) a result in the form of a confidence interval is desired.
In thosecircumstances, difference estimation

far outperforms
both MUS and mean-per-unit estimation. It

may or may not
outperform ratio estimation, depending on the relationship of misstatement amounts to recorded amounts.
If focus on
large dollar value items is required
,
difference estimation can be used with stratification.
MC1719 Question
Help
(similar to)
The following questions relate to determining sample size in tests of details of balances. For each one,
select the best response.
a. Mr. Murray decides to use stratified sampling. The reason for using stratified sampling rather than
unrestricted random sampling is to
allow the auditor to emphasize larger items from the population.
b. Which of the following sample planning factors will influence the sample size for a test of details of
balances for a specific account?
Expected Amount Measure of
of Misstatements Tolerable Misstatement
3.
Yes
Yes
c. How would increases in tolerable misstatement and assessed level of control risk affect the sample
size in substantive tests of details?
Increase in Increase in
Tolerable Misstatement Assessed Level of Control Risk
3. Decrease sample size Increase sample size
MC1720 Question
Help
(similar to)
The following apply to evaluating results of audit sampling for tests of details of balances. For each one,
select the best response.
a. While performing a substantive test of details during an audit, the 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 of
incorrect rejection.
b. In an MUS sample with a sampling interval of $5,000, an auditor discovered that a selected accounts
receivable with a recorded amount of $10,000 had an audit value of $8,000. If this is the only error
discovered by the auditor, the projected error of the sample would be
$2,000.
c. The accounting department reports the accounts receivable balance as $175,000. You are willing to
accept that balance if it is within $15,000 of the actual balance. Using a variables sampling plan, you
compute a 95% confidence interval of $173,000 to $187,000. You would therefore
accept the $175,000 balance because the confidence interval is within the materiality limits.
MC1722 Question
Help
(book/static)
The following questions relate to nonstatistical and monetary unit sampling. Choose the best response.
a. A number of factors influence 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?
Smaller measure of tolerable misstatement
b. The risk of incorrect acceptance relates to
substantive tests and affects audit effectiveness.
c. In a probability-proportional-to-size sample with a sampling interval of $3,000, which of the following

is true?
I. An overstatement error of $200 in an item recorded at $300 will result in a projected error of $2,000.
II. An overstatement error of $700 in an item recorded at $3,500 will result in a projected error of $600.
Both I and II
CC19-1
The emphasis in auditing property, plant, and equipment is on the current period acquisitions and
disposals rather than on the balances in the account carried forward from the preceding year
because
there is an expectation that permanent assets will be kept and maintained on the records
for several years. The assets carried over from the preceding years can be assumed to have been
verified
in the prior years' audits. If tests of controls and substantive tests of transactions do not show
that all disposals have been recorded, additional testing of the prior balance could be required.
CC19-3
Distinguish between the evaluation of the adequacy of insurance coverage and the verification of
prepaid insurance. Explain which is more important in a typical audit.
The evaluation of the adequacy of insurance is a test of reasonable protection against the
loss of existing assets; however, the verification of the prepaid insurance is performed to
determine whether the balances represent proper charges against future operations. The
evaluation of adequacy of insurance coverage is more important because of the potential
loss due to under-insurance.
CC19-4
In verifying accounts payable, it is common to restrict the audit sample to a small portion of the
population items, whereas in auditing accrued property taxes, it is common to verify all
transactions for the year. Explain the reason for the difference.
Property tax accruals take little audit time because there are few transactions to test and
they are typically material in amount. Accounts payable takes a significant amount of audit
time because there are usually a large number of transactions to test and they are typically
varied in amount.
CC19-5
What is meant by the analysis of expense accounts? List four expense accounts that are
commonly analyzed in audits.
The analysis of expense accounts is a procedure by which selected expense accounts are
verified by examining underlying supporting vendors' invoices or other documentation to
determine if the transactions making up the total are correctly stated.
The emphasis in most expense account analysis is on the occurrence of recorded amounts,
accuracy and classification
List four expense accounts that are commonly analyzed in audits
Legal expense, travel and entertainment expense, repair and maintenance expense, tax
expense
RQ19-1
Identify three asset accounts, three expense accounts, and three liability accounts typically
associated with acquisition and payment cycle transactions.
Begin by identifying three asset accounts typically associated with acquisition and payment cycle
transactions.
(1) Cash, (2) Inventory and (3) Prepaid insurance
Now identify three expense accounts typically associated with acquisition and payment cycle
transactions.
(1) Cost of goods sold, (2) Property taxes and (3) Professional fees
Finally, identify three liability accounts typically associated with acquisition and payment cycle
transactions.
(1) Accounts payable, (2) Income taxes payable and (3) Accrued professional fees
RQ19-2
Explain the relationship between substantive tests of transactions for the acquisition and payment
cycle and tests of details of balances for the verification of property, plant, and equipment.
Which aspects of property, plant, and equipment are directly affected by the tests of controls and
substantive tests of transactions and which are not?
Begin by explaining the relationship between substantive tests of transactions for the acquisition
and payment cycle and tests of details of balances for the verification of property, plant, and
equipment. Complete the statement below.
Because the source of the debits in the asset account is the acquisitions journal (or
similar record), the current period acquisitions of property, plant and equipment have already
been partially verified as part of the acquisition and payment cycle.
Next, select which aspects of property, plant, and equipment are directly affected by the tests of
controls and substantive tests of transactions and which are not?
The occurrence, completeness, accuracy, cutoff, and classification of acquisitions of property,

plant, and equipment Would have been examined. The disposal ofassets, depreciation and
accumulated depreciation are not tested as a part of the acquisition and payment cycle.
RQ19-3
What is the relationship between the audit of property, plant, and equipment accounts and the
audit of repair and maintenance accounts? Explain how the auditor organizes the audit to take
this relationship into consideration.
Many clients accidentally or intentionally record purchases of assets in the repair and
maintenance accounts instead of property, plant, and equipment account. The auditor can
vouch the larger amounts debited to the expense accounts at the same time that property
accounts are being audited to uncover unrecorded property purchases.
RQ19-6
Explain the relationship between substantive tests of transactions for the acquisition and payment
cycle and tests of details of balances for the verification of prepaid insurance.
Since the source of the debits to prepaid insurance is the acquisitions journal or
similar record, the current period premiums have already been partially verified as a part
of the acquisition and payment cycle. The allocation of premium payments is not tested.
RQ19-9
Explain the relationship between accrued rent and substantive tests of transactions for the
acquisition and payment cycle. Which aspects of accrued rent are not verified as part of the
substantive tests of transactions?
Debits to accrued rent arise from the cash disbursements journal, which is verified as a
part of tests of controls and substantive tests of transactions for cash disbursements. Tests
of controls and substantive tests of transactions do not include verification of the inclusion
of accruals on all existing property.
RQ19-10
Which documents will be used to verify accrued property taxes and the related
expense accounts? (Select all that apply.)
Invoices from the taxing authority

Cancelled checks
Property tax returns
Deeds to properties
RQ19-11
List three expense accounts that are tested as part of the acquisition and payment cycle or the
payroll and personnel cycle. List three expense accounts that are not directly verified as part of
the cycle.
List three expense accounts that are tested as part of the acquisition and payment cycle or the
payroll and personnel cycle.
Property tax expense
Payroll expense
Rent expense
List three expense accounts that are not directly verified as part of the cycle.
Year-end bonuses to officers
Depreciation expense
Amortization expense, patents
RQ19-12
Explain how expense account analysis relates to the tests of controls and substantive tests of
transactions that the auditor has already completed for the acquisition and payment cycle. (Select
all answers that apply.)
The differences are that tests of controls and substantive tests of transactions are selected
from all of the acquisitions and cash disbursements journals for the entire period whereas
transactions examined for expense analysis are limited to the account being analyzed.
Potentially the same objectives are accomplished in tests of controls and substantive tests of
transactions as for expense account analysis.
RQ19-13
How will the approach for verifying repair expense differ from that used to audit
depreciation expense? Why will the approach be different?
How will the approach for verifying repair expense differ from that used to audit
depreciation expense?
The emphasis for verifying repair expense should be on vouching transactions that may be
capital items; however, the approach for verifying depreciation expense should emphasize
the consistency of the method of depreciaiton used and the related computations.
Why will the approach be different?
The approach is different because in repairs and maintenance the primary objective is to
locate improperly classified fixed assets, whereas in depreciation the emphasis is on
consistency from period to period and accurate depreciation calculations.
RQ19-14
List the factors that should affect the auditor's decision whether to analyze an account balance.
(Select all that apply.)
The account is likely to contain misstatements because it is difficult for the client to properly
classify or value the transactions.
The test of controls and substantive tests of transactions indicate there is a high likelihood
of misstatement in an account.
The analytical procedures indicate there is a high likelihood of misstatement in an account.
The analysis of the account might disclose a contingency.

Tax returns and the SEC require the disclosure of certain information, which the account is
likely to provide.
The account is likely to contain misstatements because it is difficult for the client to
properly classify or value the transactions.
RQ19-15
The following questions concern internal controls in the acquisition and payment cycle. Choose
the best response.
a. Which of the following controls will most likely justify a reduced assessed level of control
risk for the existence assertion for equipment?
Internal auditors periodically select equipment items in the fixed assets master file and
locate the related equipment on company premises.
b. Equipment acquisitions that are misclassified as maintenance expense most likely would be
detected by an internal control that provides for
investigations of variances within a formal budgeting system.
c. Which of the following questions is an auditor least likely to include on an internal control
questionnaire concerning the initiation and execution of equipmenttransactions?
Are procedures in place to monitor and properly restrict access to equipment?
MC19-16
The following questions concern the audit of asset accounts in the acquisition and payment
cycle. Choose the best response.
a. In testing for unrecorded disposals of equipment, an auditor most likely will
select items of equipment from the accounting records and then locate them during the
plant tour.
b. Which of the following analytical procedure results might suggest that certain repairs and
maintenance expenses have been inappropriately capitalized?
The balance in the repairs and maintenance expense account is noticeably lower than
amounts recorded in the past several years.
c. In connection with the audit of the prepaid insurance account, which of the following
procedures is usually not performed by the auditor?
Confirm premium rates with an independent insurance broker.

MC19-17
The following questions concern the audit of income and expense accounts. Choose the best
response.
a. The auditor may note that annual depreciation expense is too low for a class of assets by
noting
excessive recurring losses on assets retired.

b. An auditor's principal objective in analyzing repairs and maintenance expense accounts is to
discover expenditures that were expensed but should have been capitalized.
c. Which of the following comparisons will be most useful to an auditor in auditing an entity's
income and expense accounts?
Current year revenue to budgeted current year revenue
MC19-18
The following questions concern internal controls and tests for property, plant, and equipment.
Choose the best response.
a. An audit firm performs a preliminary review of the client's internal controls over its property,
plant, and equipment cycle. Which of the following would represent a weakness in
internal control?
The purchasing department generates a special requisition form upon oral or written
approval by senior management.
b. In searching for unrecorded retirements, an auditor selects older fixed assets from the
subsidiary ledger and then tries to locate those assets. This procedure primarily relates
to management's assertion of
existence
c. When auditing a client's property, plant, and equipment transactions, which of the following
tests of details can be used to support the existence and occurrenceassertion?
Vouch a sample of purchases to the vendor invoice and receiving report.
P19-19
For each of the following misstatements in property, plant, and equipment accounts, state an
internal control that the client can implement to prevent the misstatement from occurring and a
substantive audit procedure that the auditor can use to discover the misstatement:
(Enter each internal control only once.)

Item Internal Control
Have office manager periodically report whether or not there have been abandonments or
1.
replacements.
2. Internally verify charges for depreciation expenses.
3. Use of government study depreciation tables.
Establish a policy for deciding which items require capitalization and establish an internal verification
4.
procedure.
5. Require internal verification in the recording of property acquisitions.
6. Require the deposit of all cash directly into the bank account.
7. Assign tools to individual foreman and periodically count the tools.
(Enter each substantive audit procedure only once.)
Item Substantive audit procedures
1. Trace from equipment recorded on the accounting records to the equipment.
2. Compare depreciation expense for administration and manufacturing to previous years.
3. Compare to government study depreciation table.
4. Test all expense charges to these accounts that exceed a certain amount.
5. Compare supporting documentation on property acquisitions to the recorded value.
6. Confirm loans with the bank and perform other tests for unrecorded loans.
Examine plant asset additions and agree to recorded amounts and date.
7. Check the client's physical count of the tools.
P19-20
The following types of internal controls are commonly used by organizations for property, plant,
and equipment:
LOADING...
(Click
on the icon to view the types of internal control.)
Requirements
a. State the purpose of each of the internal controls just listed. Your answer should be in the form of the type of m
reduced because of the control.
b. For each internal control, list one test of control the auditor can use to test for its existence.
c. List one substantive procedure for testing whether the control is actually preventing misstatements in property
Requirement a. State the purpose of each of the internal controls just listed. Your answer should
be in the form of the type of misstatement that is likely to be reduced because of the control.
LOADING...
(Click
on the link to view the type of misstatements that are likely to be reduced because of the control.)
Internal Control Purpose
Written policies exist and are known by accounting personnel to differentiate between
1. 2.
capitalizable additions,
freight, installation costs, replacements, and maintenance expenditures.
2. A fixed asset master file is maintained with a separate record for each fixed asset. 3.
3. Acquisitions of fixed assets in excess of $50,000 are approved by the board of directors. 5.
4. When practical, equipment is labeled with metal tags and is inventoried on a systematic basis. 4.
Depreciation charges for individual assets are calculated for each asset; recorded in a fixed asset
5. 1.
master file
that includes cost, depreciation, and accumulated depreciation for each asset; and verified
periodically by an
independent clerk.
Requirement b. For each internal control, list one test of control the auditor can use to test for
its existence.
Internal Control Test

1. 10.
3. Acquisitions of fixed assets in excess of $50,000 are approved by the board of directors. 6.
4. When practical, equipment is labeled with metal tags and is inventoried on a systematic basis. 8.
Depreciation charges for individual assets are calculated for each asset; recorded in a fixed asset
5. 7.
master file
that includes cost, depreciation, and accumulated depreciation for each asset; and verified
periodically by an
independent clerk.
Requirement c. List one substantive procedure for testing whether the control is actually
preventing misstatements in property, plant, and equipment.
Internal Control Procedures

1. 12.
3. 11
4. 15
5. 14
P19-21
The following audit procedures were planned by Linda King, CPA, in the audit of the acquisition
and payment cycle for Cooley Products, Inc.:
Complete all answers boxes for each audit procedure in the table below.
Requirement
Type of procedure
Type of evidence used (a.) Objectives (c., d.)
(b.)
1. Analytical procedure SAP Occurrence + Accuracy + Classification
2. Observation TOC Occurrence
Inspection of external
3. TDB Completeness + Accuracy + Cutoff
documentation
Inspection of external Occurrence + Accuracy + Timing +
4. TOC + STOT
documentation Classification
5. Recalculation STOT Posting and summarization
Existence + Completeness + Accuracy +
6. Confirmation TDB
Cutoff
Inspection of internal
7. TOC Completeness
documentation
8. Physical examination TDB Existence + Realizable value
9. Analytical procedure SAP Existence + Completeness + Accuracy
10. Inquiry of client TDB Completeness + Accuracy
Inspection of external
11. STOT Completeness + Accuracy + Timing
documentation
12. Recalculation TDB Accuracy
P19-22
Your client, Edgartown Corporation, prepared the following schedule of land, buildings and
equipment for the audit of financial statements for the year ended December31, 2016:
.
Requirement a. What type of evidence would you examine to support the beginning balances in
the accounts?
The amount can be verified by examining the ending audited balances in the prior year
audit files.
Requirement b. What types of evidence would you use to support the additions to each account?
How might the sources of evidence differ for additions to the building account and the
equipment accounts?
To obtain evidence about the items in the additions column, the auditor obtains detailed
information of
individual additions
for each account category. The equipment accounts are examined for accuracy by
matching the amounts against invoices, purchase contracts, and receiving reports.
For the building account, the auditor may examine

property deeds and contracts for purchases.
For large purchases, the auditor may want to examine

approvals noted in board of directors minutes.
Requirement c. What types of evidence would you examine to support equipment disposals?
To obtain evidence about the items in the disposal column, the auditor would obtain detailed
information of
individual disposals
for each account category. The disposal schedule is examined for accuracy,
matching it against the shipping documents and cash receipts.
Requirement d. What procedures would you perform related to the ending balances in
the accounts?
The ending balances on the schedule should be tied to the general ledger balances and
traced to the line item in the balance sheet. It must also be recalculated for mathematical
accuracy.
Requirement e. In the audit of property, plant, and equipment accounts, auditors should consider
whether there are any implications to other accounts in the audit. 1. What other accounts might
be impacted by the additions of buildings and equipment? 2. What other accounts might be
impacted by disposals of equipment?
What other accounts might be impacted by the additions of buildings and equipment? (Select all
that apply.)
Long-term debt
Depreciation expense accounts
Long-term capital leases
Short-term debt
Lease expense
The following accounts may be affected by the disposal of equipment. (Select all that apply.)
Accumulated depreciation, equipment

Other income
Cash
Gain or loss on disposal
P19-23
The following program has been prepared for the audit of accrued real estate taxes of a client that
pays taxes on 25 different pieces of property, some of which have been acquired in the
current year:
1. Obtain a schedule of accrued taxes from the client and tie the total to the general ledger.
2. Compare the charges for annual tax payments with property tax assessment bills.
3. Recompute accrued/prepaid amounts for all bills on the basis of the portion of the year
expired.
Requirements
a. State the purpose of each procedure.
b. Evaluate the adequacy of the audit program.
Requirement a. Select the appropriate purpose of each procedure.
Purpose of each procedure
1. To assure that the clients' detailed schedule equals the total in the general ledger. (Detail tie-in)
To assure that taxes on property included on the schedule of accrued taxes are not over- or underpaid.
2.
(Accuracy)
3. To assure that the accrued/prepaid account is correctly stated. (Accuracy)
Requirement b. Evaluate the adequacy of the audit program.
Adequacy of Audit Program
1. This procedure is necessary as a starting point to perform detailed tests.
2. This procedure is adequate for its purpose.
3. This procedure is adequate for its purpose.
P19-24
As part of the audit of different audit areas, auditors should be alert for the possibility of
unrecorded liabilities. For each of the following audit areas or accounts, describe a liability that
can be uncovered and the audit procedures that can uncover it:
a. Minutes of the board of directors meetings
b. Land and buildings
c. Rent expense
d. Interest expense
e. Cash surrender value of life insurance
f. Cash in the bank
g. Officers' travel and entertainment expenses
(Each liability can be selected more than once.)
Accounts Liability that could be uncovered
Minutes of the board of directors
a. Contingent liability related to a lawsuit.
meetings
Building used as collateral for a loan or mortgage tied to the buildin
purchase.
c. Rent expense Unrecorded lease.
d. Interest expense Note payable.
e. Cash surrender value of life insurance Loan by borrowing against an insurance policy.
f. Cash in the bank Note payable.
Officers' travel and entertainment
g. Income taxes payable for nondeductible expenses.
expenses
(Each audit procedure can be selected more than once.)
Accounts Audit procedure to uncover liability
a. Minutes of the board of directors Review minutes of the Board of Directors' meetings.
meetings
Examine documents of ownership to determine if the loan is
collateralized.
Send confirmations to major banks.
c. Rent expense Examine lease agreements.
d. Interest expense Examine underlying records for loans related to the interest expense
Send confirmations to major banks.
e. Cash surrender value of life insurance Obtain a confirmation from the life insurance company.
f. Cash in the bank Obtain confirmation from bank for loans.
Officers' travel and entertainment Examine a sample of travel and expense reports to ensure IRS
g.
expenses compliance
P19-25
You are auditing the financial statements of Austin Software Company, which is a fast-growing
software development company. As part of the company's strategy, management has been
aggressively pursuing acquisitions of other companies. Some of the prior acquisitions resulted in
the recording of goodwill. During your review of income and expense accounts, you noted a
material goodwill impairment charge associated with the company's acquisition of
Longhorn Software, Inc.
.
a. What are the underlying accounting standards requirements that are relevant to your
evaluation of the company's charge for the impairment of goodwill?
U.S. GAAP and IFRS standards
generally contain similar requirements
for assessing the impairment of assets, including goodwill. Both standards require the testing of
goodwill for impairment
at least annually or more frequently
if there are indications that impairment exists. When there is impairment, both standards require
thewrite-down of impaired assets and recognition of an impairment loss. Impairment occurs
when the recorded value of goodwill exceeds its fair value
.
b. What types of evidence would be relevant to your evaluation of whether management's
impairment charge is fairly stated?
The auditor would need to examine evidence and assumptions management used to
determine its estimate of the fair value of goodwill, which is used to determine the
impairment amount.
c . How might the use of a business valuation specialist be helpful in this year's audit? (Select all
that apply.)
Valuation of fair value requires consideration of a number of factors, such as

macroeconomic conditions, industry and market conditions, anticipated changes in costs
of business, other relevant company-specific events, among a number of other matters.
Financial statement auditors may not have the expertise required for business valuations.
Business valuation specialists have unique skills and expertise often necessary to determine
if management's estimates of the fair (or recoverable) values are reasonable and
appropriate.
CC211 Question
Help
(book/static)
Give the reasons why inventory is often the most difficult and time consuming part of many audits. (Select
the 5 choices that apply.)
Inventory is generally a major item on the balance sheet and often the largest item making up the
accounts included in working capital.
Inventory takes many different forms that are difficult for the auditor to fully understand.
The need for organizations to have the inventory in diverse locations makes the physical control
and counting of the inventory difficult.
The consistent application of different valuation methods can be fairly complicated.
The valuation of inventory is difficult due to such factors as the large number of different
items involved, the need to allocate the manufacturing costs toinventory, and obsolescence.
CC212 Question
Help
(book/static)
State what is meant by cost accounting records and explain their importance in the conduct of an audit.
Cost accounting records are those which are concerned with the
processing and storage of raw materials, work in process, and finished goods,
insofar as these activities constitute internal transfers within the

inventory and warehousing cycle.
These records generally include electronics files, ledgers, worksheets and reports which
accumulate material, labor, and overhead costs by job or process as the costs are incurred.
Cost accounting records are important in conducting an audit because (Select all that apply.)
they indicate the relative profitability of the various products for management planning and
control.
they typically include information about the units of inventory acquired, sold, and on hand which
is important to the valuation of inventories for financial statement purposes.
CC213 Question
Help
(book/static)
Explain why a proper cutoff of purchases and sales is heavily dependent on the physical inventory
observation. What information should be obtained during the physical count to make sure that cutoff
is accurate?
A proper cutoff of purchases and sales is heavily dependent on the physical inventory observation
because a proper cutoff of sales requires that
finished goods inventory included in the physical count be excluded from sales
and
all inventory received be included in purchases.
To make sure the cutoff for sales is accurate, the following information should be obtained during the
taking of the physical inventory: (Select the 4 choices that apply.)
The last shipping document number should be recorded in the working papers for
subsequent follow-up to sales records.
A review should be made of shipping to test for the possibility of shipments set aside for shipping
and not counted or other potential cutoff problems.
When prenumbered shipping documents are not used, a careful review of the client's method of
getting a proper sales cutoff is the first step in testing the cutoff.
A list of the most recent shipments should be included in the working papers for
subsequent follow-up to sales records.
For the purchase cutoff, the following information should be noted: (Select the 2 choices that apply.)
The last receiving report number should be noted in the working papers for subsequent follow-up
to purchase records.
A review should be made of the receiving department to make sure all inventory has been
properly included in the physical inventory.
CC215 Question
Help
(book/static)
A client applies manufacturing overhead to inventory on the basis of $3.47 per direct labor hour. Explain
how the auditor will evaluate the reasonableness of total direct labor hours and manufacturing overhead
in the ending inventory of finished goods.
The direct labor hours for an individual inventory item would be verified by
examining engineering specifications or similar information to determine whether the number of

hours to complete a unit of finished goods was correctly computed.
The manufacturing overhead rate is calculated by
dividing the total annual number of labor hours into total manufacturing overhead.
These two totals are verified as a part of the

payroll and personnel and acquisition and payment cycles.
Once these two numbers are verified, it is not difficult to verify the overhead cost in inventory.
RQ211 Question
Help
(book/static)
Explain the relationship between the acquisition and payment cycle and the inventory and warehousing
cycle in the audit of a manufacturing company. List several audit procedures in the acquisition and
payment cycle that support your explanation.
Explain the relationship between the acquisition and payment cycle and the inventory and warehousing
cycle in the audit of a manufacturing company. (Select all thatapply.)
In a standard cost inventory system, the acquisition and payment cycle computes any inventory
purchase variances, which then enter the inventory system.
The acquisition and payment cycle includes the system for purchasing all goods and services,
including raw materials and purchased parts for producing finished goods.
Purchase requisitions are used to notify the purchasing department to place orders for inventory
items. When inventory reaches a predetermined level or automatic reorder point, requisitions may
be initiated by stockroom personnel or by computer. In other systems, orders may be placed for
the materials required to produce a customer order, or orders may be initiated upon periodic
evaluation of the situation in light of the prior experience of inventory activity.
After receiving the materials ordered, as part of the acquisition and payment cycle, the materials
are inspected with a copy of the receiving document used to book perpetual inventory.
The following audit procedures in the acquisition and payment cycle illustrate the relationship between
that cycle and the inventory and warehousing cycle (Select all that apply.)
Test the purchase cutoff at the physical inventory date and year-end to determine whether or not
the physical inventory and year-end inventory cutoffs are proper from a purchase standpoint.
Compare the inventory cost entered into the inventory system to the supporting invoice to
determine that it was properly recorded and the purchase variance(standard cost system), if any,
was properly reflected.
RQ212 Question
Help
(book/static)
Many auditors assert that certain audit tests can be significantly reduced for clients with adequate
perpetual records that include both unit and cost data. What are the most important tests of the perpetual
records that the auditor must make before reducing assessed control risk? Assuming the perpetuals are
determined to beaccurate, which tests can be reduced?
Begin by selecting the most important tests of the perpetual records that the auditor must make before
reducing assessed control risk. (Select all that apply.)
Tests of the cost accounting documents and records by verifying the reduction of the raw material
inventory for use in production and the increase in the quantity of finished goods inventory when
goods have been manufactured.
Tests of the reduction in the finished goods inventory through the sale of goods to customers.
Tests of the purchases of raw materials and pricing thereof.
Assuming the perpetual records are determined to be accurate, which tests can be reduced? (Select all
that apply.)
Tests of inventory cutoff may be reduced.
The physical inventory may be tested prior to the balance sheet date.
Physical inventory tests may be reduced.
RQ213 Question
Help
(book/static)
List the major analytical procedures for testing the overall reasonableness of inventory. For each test,
explain the type of misstatement that could be identified.
Begin by selecting which major analytical procedures are used for testing the overall reasonableness of
inventory. Then select the corresponding letter from the list that identifies what type of misstatement that
could occur for each procedure.
Analytical Procedure Type of Potential Misstatement
Compare gross margin percentage with previous years. d.
Compare inventory turnover with previous years. c.
Compare unit costs with previous years. e.
Compare extended inventory value with previous years. a.
Compare current year manufacturing costs with previous
b.
years.
Question
RQ214 Help
(book/static)
In the verification of the amount of the inventory, one of the auditor's concerns is that slow-moving and
obsolete items be identified. List the auditing procedures that can be used to determine whether slow-
moving or obsolete items have been included in inventory. (Select the eight choices that apply.)
Make observations during the physical inventory for rust, damaged inventory, inventory in
unusual locations, and unusual amounts of dust on the inventory.
Ask questions of production personnel during physical inventory observation about the extent of
the use or nonuse of inventory items.
Calculate inventory ratios, by type of inventory if possible, and compare them to previous years or
industry standards.
Be aware of inventory that is tagged obsolete, spoiled, or damaged, or is set aside because it is
obsolete or damaged.
Obtain a sufficient understanding of the client's business to aid in recognizing inventory that is no
longer useful in the client's business.
Discuss the quality of the inventory with management.
Examine obsolescence reports, scrap sales, and other records in subsequent periods that may
indicate the existence of inventory that should have been excluded from the physical inventory or
included at a reduced cost.
Review the perpetual records for slow-moving items.
RQ215 Question
Help
(book/static)
Before the physical examination, the auditor obtains a copy of the client's inventory instructions and
reviews them with the controller. In obtaining an understanding of inventory procedures for a small
manufacturing company, these deficiencies are identified: Shipping operations will not be completely
halted during the physicalexamination, and there will be no independent verification of the original
inventory count by a second counting team. Evaluate the importance of each of these deficiencies and
state its effect on the auditor's observation of inventory.
Evaluate the importance of the following deficiency and state its effect on the auditor's observation of
inventory. "Shipping operations will not be completely halted during the physical examination."
The continuation of shipping operations during the physical inventory will require the auditor to
perform additional procedures to insure that a proper cutoff is achieved. The auditor must
conclude that merchandise shipped is either included in the physical count or recorded as a sale,
but not both.
Evaluate the importance of the following deficiency and state its effect on the auditor's observation of
inventory. "There will be no independent verification of the original inventory count by a second
counting team."
Since no second count is taken, the auditor must increase the number of test counts to determine
that the counts recorded are accurate.
RQ216 Question
Help
(book/static)
During the taking of physical inventory, the controller intentionally withheld several inventory tags from the
employees responsible for the physical count. After the auditor left the client's premises at the completion
of the inventory observation, the controller recorded nonexistent inventory on the tags and thereby
significantly overstated earnings. How could the auditor have uncovered the misstatement, assuming that
there are no perpetual records? (Select the 6 choices that apply.)
The auditor should have selected certain tags (especially larger items) and had the client show
him or her where the goods were stored.
The tag numbers used and unused should have been recorded in the auditor's working papers for
subsequent follow-up.
Adequate controls over the use of inventory tags could have uncovered the misstatement.
A comparison of ratios such as gross margin percentage and inventory turnover could have
indicated that a problem was present.
The auditor should have assured himself or herself that the client had accounted for all used and
unused tag numbers by examining all tags, if necessary.
As part of substantive procedures, the auditor could have performed analytical tests on the
inventory and cost of sales.
Question
RQ219 Help
(book/static)
Assuming that the auditor properly documents receiving report numbers as a part of the physical
inventory observation procedures, explain how the proper cutoff ofpurchases, including tests for the
possibility of raw materials in transit, should be verified later in the audit.
Assuming the auditor properly documents receiving report numbers as a part of the physical inventory
observation procedures, the auditor should
verify the proper cutoff of purchases as a part of subsequent tests by examining each invoice to
see if a receiving report is attached. If the receiving report is dated on or before the inventory date
and the last recorded number, the received inventory must have been included in the
physical inventory; therefore the invoice should be included in accounts payable. Those invoices
that are received after the balance sheet date but shipped F.O.B. shipping point on or before the
close of the year would indicate merchandise in transit.
RQ2110 Question
Help
(book/static)
Define what is meant by compilation tests. List several examples of audit procedures to verify compilation.
Define compilation tests.
Compilation tests are the tests of the summarization of physical counts, the extension of price
times quantity, footing the inventory summary, and tracing the totals to the general ledger.
Several examples of audit procedures to verify compilation are: (Select the 4 choices that apply.)
Trace the test counts recorded in the working papers to the final inventory summary to make sure
they are correctly included.
Test the extensions and footings of the physical inventory summary.
Trace inventory items on the final inventory list to the tags as a test of the existence of recorded
inventory.
Trace the tag numbers used to the final inventory summary to make sure they were properly
included and the numbers not used to the final inventory summary to make sure no tag numbers
have been added.
RQ2111 Question
Help
(similar to)
Included in the December 31, 2016 inventory of the Cat's Meow Supply Company are 2,600 deluxe ring
binders in the amount of $7,111. An examination of the most recent acquisitions of binders showed the
following costs: January 26, 2017 2,000 at $2.78 each; December 6, 2016 1,700 at $2.69 each;
November 26, 2016 2,100 at $2.57 each. What is the misstatement in valuation of the December 31,
2016 inventory for deluxe ring binders, assuming FIFO inventory valuation? What would your answer be if
the January 26, 2017 acquisition was for 2,000 binders at $2.58 each?
What is the misstatement in valuation of the December 31, 2016, inventory for deluxe ring binders,
assuming FIFO inventory valuation?
Assuming FIFO inventory valuation, the December 31, 2016 inventory balance for
$6,886 .
deluxe ring binders should be
As such, the ending at December 31,
$7,111 overstated by $225 .
inventory balance of 2016 is
What would your answer be if the January 26, 2017 acquisition was for 2,000 binders at $2.58 each?
If the January 26, 2017, acquisition was for 2,000 binders at $2.58 each, the current ending
inventory balance for deluxe ring
binders should As such, the ending inventory balance of $7,111
$6,699 . overstated
be at December 31, 2016 would be
by $412 .
RQ2112 Question
Help
(book/static)
Each employee for the Gedding Manufacturing Co., a firm using a job-cost inventory costing method,
must reconcile his or her total hours worked with the hours worked on individual jobs using a job time
sheet at the time weekly payroll time cards are prepared. The job time sheet is then stapled to the time
card. Explain how you could test the direct labor dollars included in inventory as a part of the payroll and
personnel tests.
With a job cost system, labor charged to a specific job is accumulated on a job cost sheet. The
direct labor dollars included on the job cost sheet can be traced to the employee "job time sheet"
to make sure the hours are correctly included on the job cost sheet. The labor rate can be verified
by comparing it to the amount on the employee's earnings record.
MC2113 Question
Help
(similar to)
The following questions concern internal controls, and the testing of internal controls, in the inventory and
warehousing cycle. Choose the best response.
a. For control purposes, the quantities of materials ordered may be omitted from the copy of the purchase
order that is
forwarded to the receiving department.
b. Which of the following internal control procedures most likely would be used to maintain accurate
inventory records?
Periodic inventory counts are used to adjust the perpetual inventory records.
c. Which of the following sets of duties related to inventory and warehousing causes the greatest concern
about inadequate segregation of duties?
Purchasing agents who arrange for shipment of raw materials from vendors are responsible for
verifying actual receipt of the inventory items at the receiving dock.
MC2114 Question
Help
(book/static)
The following questions deal with tests of details of balances and substantive analytical procedures for
inventory. Choose the best response.
a. An auditor selected items for test counts while observing a client's physical inventory. The auditor
traced the test counts to the client's inventory listing. This procedure likely obtained evidence about
which balance-related audit objective for inventory?
Completeness
b. Which of the following procedures is the auditor least likely to perform on the actual date the physical
inventory count is observed?
Examine documentation supporting the acquisition of highly material inventory items on hand at
the count date.
c. An inventory turnover analysis is useful to the auditor because it may detect
the existence of obsolete merchandise.
MC2115 Question
Help
(book/static)
The following questions deal with internal controls in the inventory and warehousing cycle and tests of
details of balances for inventory. Choose the best response.
a. As part of the current audit, the auditor begins performing substantive tests on a client's inventory. To
test the valuation, allocation, and accuracy assertion, the auditor should perform all of the following
procedures except for
vouching a sample of items from the client's inventory report sheet to the corresponding
prenumbered inventory tags.
.
b. In auditing a manufacturing entity, which of the following procedures would an auditor most likely
perform to determine whether slow-moving, defective, and obsolete items included in inventory are
properly identified?
Tour the manufacturing plant or production facility

c. Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate controls
over the invoicing function allow goods to be shipped that are not invoiced. The inadequate controls could
cause an
understatement of revenues and receivables, and an overstatement of inventory.
P2116 Question
Help
(book/static)
Items 1 through 8 are selected questions typically found in questionnaires used by auditors to obtain an
understanding of internal control in the inventory and warehousing cycle. In using the questionnaire for
a client, a "yes" response to a question indicates a possible internal control, whereas a "no" indicates a
potential deficiency.
Requirements
a. For each of the preceding questions, state the purpose of the internal control.
b. For each internal control, list a test of control to test its effectiveness.
c. For each of the preceding questions, identify the nature of the potential financial misstatement(s) if the control is not in e
d. For each of the potential misstatements in part c., list a substantive audit procedure to determine whether a material mis
Requirement a. For each of the questions listed, state the purpose of the internal control.
Purpose of
internal
Question
control
1. D.
2. B.
3. F.
4. A.
5. G.
6. E.
7. C.
8. H.
Requirement b. For each internal control, list a test of control to test its effectiveness.
Test of control
1. Account for a numerical sequence of shipping orders.
2. Review procedures for determining standard costs.
3. Read policy and discuss procedures with client.
4. Examine receiving and requisition documents, trace to perpetual records.
5. Observe counting personnel and discuss with client.
6. Observe who compiles the inventory and discuss with client.
Account for a numerical sequence of receiving reports and observe matching invoices received from
7.
vendors.
8. Discuss with client and observe whether personnel prepare shipping documents.
Requirement c. For each of the preceding questions, identify the nature of the potential
financial misstatement(s) if the control is not in effect.
Potential financial misstatement
1. Understatement of sales.
2. Misstatement of inventory.
Understatement of inventory or payment for goods not
7.
received.
8. Overstatement of inventory.
Requirement d. For each of the potential misstatements in part c., list a substantive audit procedure to
determine whether a material misstatement exists. (Each selection may be used more than once.)
Substantive audit procedure
1. Trace quantity and description on bills of lading to recorded sales.
2. Trace costs from supporting documents to development of standards.
3. Substantive analytical procedures for inventory.
4. Compare physical count to perpetual inventory record.
6. Reperform clerical tests of inventory compilation.
7. Trace quantity and description on vendor's invoice to receiving report.
P2117 Question
Help
(book/static)
The Frist Corporation has the following internal controls related to inventory:
Requirements
For each of the internal controls:
a. Identify the related transaction-related audit objective(s) affected by the control.
b. Describe risks the control is designed to mitigate.
c. Design a test of control to determine if the control is operating effectively.
Requirement a. For each of the internal controls, identify the related transaction-related audit objective(s)
affected by the control.
Internal Transaction-related
Control audit objectives
1. E.
2. A.
3. J.
4. D.
5. C.
6. G.
7. H.
8. B.
9. F.
10. I.
Requirement b. For each of the internal controls, describe risks the control is designed to mitigate.
Internal Related
Control risks
1. G.
2. A.
3. B.
4. H.
5. C.
6. D.
7. J.
8. E.
9. I.
10. F.
Requirement c. For each of the internal controls, design a test of control to determine if the control is
operating effectively.
Internal Tests of
Control control
1. C.
2. B.
3. G.
4. I.
5. D.
6. A.
7. E.
8. E.
9. H.
10. F.
P2118 Question
Help
(book/static)
The cost accounting records are often an essential area to audit in a manufacturing or construction
company.
Requirements
a. Why should the auditor review the cost accounting records and test their accuracy?
b. For the audit of standard cost accounting records in which 35 parts are manufactured, explain how you would determine
reasonable for part no. 21:
(1) Standard direct labor hours (4) Standard units of raw materials
(2) Standard direct labor rate (5) Standard cost of a unit of raw materials
(3) Standard overhead rate (6) Total standard cost
Requirement a. Why should the auditor review the cost accounting records and test their accuracy?
(Select all that apply.)
In many companies, there are many types of inventory items with complex cost structures. The
potential for misstatement is great in determining costs. The auditor would need to go to an
extreme effort to verify such costs without being able to rely on the cost accounting records
which provides the costs.
The cost accounting records also deal with transferring inventories through the production cycle
and then from finished goods for sales. These transfers must be handled accurately for inventory
to be properly stated.
The cost accounting records determine unit costs that are applied to derive inventory values.
Since inventory is usually material, unit costs must be verified.
Requirement b. For the audit of standard cost accounting records in which 35 parts are manufactured,
explain how you would determine whether each of the following were reasonable for part no. 21:
Item Tests to determine reasonableness

(1) Standard direct labor
A.
hours
(2) Standard direct labor
D.
rate
(3) Standard overhead rate B.
(4) Standard units of raw
C.
materials
(5) Standard cost of a unit
F.
of raw materials
(6) Total standard cost E.
P2119 Question
Help
(book/static)
Following are audit procedures commonly performed in the inventory and warehousing cycle for a
manufacturing company:
Requirements
a. Identify whether each of the procedures is primarily a test of control or a substantive test.
b. State the purpose(s) of each of the procedures.
Requirement a. Identify whether each of the procedures is primarily a test of control or a substantive test.
Test of control or
Substantive test?
1. Test of control
2. Substantive test
3. Substantive test
4. Substantive test
5. Substantive test
6. Substantive test
7. Test of control
8. Both a test of control and substantive test
Requirement b. State the purpose(s) of each of the procedures.
Purpose of each procedure
To make sure that proper controls exist and are being followed in the
1.
taking of the physical inventory.
To identify slow-moving inventory that may need to be written
2.
down.
To ensure that all inventory represented by an inventory tag actually
3.
exists.
4. To test the accuracy of the client's perpetual inventory records.
5. To test client's final inventory compilation.
6. To test that the final inventory was valued at its proper cost.
7. To ensure that no raw material was issued without proper approval.
To ensure that additions recorded on finished goods perpetual
8.
records were recorded on books as completed production.
Question
Help
P2124
(book/static)
Answer the following questions regarding the situations you encountered during the December 31, 2016,
physical inventory of Latner Shoe Distributor Company.
.
Requirement a. Latner maintains a large portion of the shoe merchandise in 10 warehouses throughout
the eastern United States. This ensures swift delivery service for its chain of stores. You are assigned
alone to the Boston warehouse to observe the physical inventory process. During the inventory count,
several express trucks pulled in for loading. Although infrequent, express shipments must be attended to
immediately. As a result, the employees who were counting the inventory stopped to assist in loading the
express trucks. What should you do?
The auditor in this situation should observe the recording of the shipments on the day of
occurrence and record these details in the working papers so a determination can be made as to
whether the shipments affected the physical inventory count.
Requirement b (1). In one storeroom of 10,000 items, you have test-counted about 200 items of high
value and a few items of low value. You found no misstatements. You also note that the employees are
diligently following the inventory instructions. Do you think you have tested enough items? Explain.
There is no clear-cut answer to sample size for inventory counts. The answer to the question
depends on additional factors, such as the randomness of your test counts and whether the
values of the merchandise are relatively stratified. It also depends on inherent risk for inventory
physical counts and the materiality of inventory compared to total assets.
Requirement b (2). What would you do if you test-counted 150 items and found a substantial number of
counting errors?
Request a recount by the client or greatly expand your tests to determine whether a material
misstatement exists.
Requirement c. In observing an inventory of liquid shoe polish, you note that one lot is five years old.
From inspection of some bottles in an open box, you find that the liquid has solidified in most of the
bottles. What action should you take?
The auditor should determine how this inventory is valued and after discussion with the client it
may be well to classify it as obsolete. In all cases, the auditor must specifically identify the
merchandise in the working papers for subsequent evaluation. The auditor should also be aware
that this could be an indication of widespread obsolescence problems in other parts of the
inventory.
Requirement d. During your observation of the inventory count in the main warehouse, you found that
most of the prenumbered tags that had been incorrectly filled out are being destroyed and thrown away.
What is the significance of this procedure and what action should you take?
One of the important tasks the auditor undertakes during the observation is to determine that
inventory tags are physically controlled. This assures that the inventory is not understated
because tags are lost, or overstated because falsified tags are added. In this situation, the auditor
should recover the discarded tags and request that the practice be stopped, and that control of
tags be established under the auditor's direct observation.
P2127 Question
Help
(book/static)
In an annual audit at December 31, 2016 you find the following transactions near the closing date:
Requirements
a. State whether the merchandise should be included in the client's inventory.
b. Give your reason for your decision on each item. (AICPA adapted)
Requirement a. State whether the merchandise should be included in the client's inventory.
Include or Exclude
Transaction Merchandise?
1. Exclude
2. Include
3. Include
4. Exclude
5. Exclude
Requirement b. Give your reason for your decision on each item. (AICPA adapted)
Transaction 1. Merchandise costing $625 was received on December 28,

2016 and the invoice was not recorded. You located it in the hands of the purchasingagent; it was
marked "on consignment."
Goods held "on consignment"

do not belong to the consignee, and should not be included in inventory.
2. A packing case containing products costing $816 was standing in the shipping room when the physical
inventory was taken. It was not included in the inventory because it was marked "Hold for
shipping instructions." Your investigation revealed that the customer's order was dated December 18,
2016 but that the case was shipped and the customer billed on January 10, 2017. The product was a
stock item of your client.
Normally title to a stock item

does not pass to the customer until shipment, even though it has been set aside. Therefore it
should be included in inventory.
3. Merchandise received on January 3, 2017, costing $720 was entered in the acquisitions journal on
January 4, 2017. The invoice showed shipment was made FOB supplier's warehouse on December 31,
2016. Because it was not on hand December 31, it was not included in inventory.
Title to goods shipped F.O.B. shipping point normally passes to the buyer
on delivery to the transportation agency, therefore, the goods belong to your client at December
31, 2016.
4. Merchandise costing $1,822 was received on January 3, 2017 and the related acquisition invoice
recorded January 5. The invoice showed the shipment was made on December 29, 2016 FOB
destination.
This merchandise should be

excluded because title does not pass to the buyer on an F.O.B. destination shipment until delivery
to the buyer, January 3.
5. A special machine, fabricated to order for a customer, was finished and in the shipping room on
December 31, 2016. The customer was billed on that date and the machine excluded from inventory,
although it was shipped on January 4, 2017
Title to custom made-merchandise

passes to the buyer as materials and labor are appropriated to the job.
The machine
should be excluded from inventory since the job was completed and ready for shipment on
December 31, 2016.
P2128 Question
Help
(book/static)
As a part of your clerical tests of inventory for Martin Manufacturing, you have tested about 20% of the
dollar items and have found the following exceptions:
Requirements
a. State the amount of the actual misstatement in each of the four tests. For any item for which the amount of the misstatem
information given, state the considerations that will affect your estimate of the misstatement.
b. As a result of your findings, what will you do about clerical accuracy tests of the inventory in the current year?
c. What changes, if any, would you suggest in internal controls and procedures for
MartinMartin
Manufacturing during the compilation of next year's inventory to prevent each type of misstatement?
Requirement a. State the amount of the actual misstatement in each of the four tests. For any item for
which the amount of the misstatement cannot be determined from the information given, state the
considerations that will affect your estimate of the misstatement.
Exception 1. Begin by calculating the extension errors.
Extension Over
as Actual (Under)
Description Recorded Extension Statement
Wood $11.04 $110.40 $(99.36)
Metal-cutting tools 1,740.00 1,470.00 270.00
Cutting fluid 240.00 1,040.00 (800.00)
Sandpaper 579.00 5.70 573.30
Total Misstatement $(56.06)
Exception 2. Next, let's discuss the differences located in comparing last year's costs with the
current year's costs on the client's inventory lists.
The differences in the previous year's and this year's costs

indicate a problem.
The auditor
should attempt to obtain support for the current year's costs if the effect of the differences noted
seems significant
(considering that the test only covered20% of the dollar items).

A review for reasonableness of the differences in the current and prior year costs indicate the following:
(Select the 3 choices that apply.)
Precision cutting torches are expensive. Maybe $800.00 each is a reasonable price. Examine
a vendor's invoice or a price list.
Aluminum scrap values may fluctuate significantly. The two prices may be reasonable. Look at
sales invoices for the two years.
Lubricating oil cost appears unreasonable for this year and for the previous year. The auditor
should examine invoices for both years. If the previous year's costs were incorrect, determination
of the effect of the misstatements on the prior year's and this year's financial statements must be
completed to determine the need for disclosure of the misstatements.
Exception 3. Select which action an auditor should take in the event that test counts are not found when
tracing from the test counts to the final inventory compilation.
Investigate the reasons for the omission of these tags from final inventory compilation. If it is
determined that the omission of two tags is significant based on the number of tags used
and tested, the auditor should account for all tags to determine the total extent of omissions.
Exception 4. Page total, footing errors are as follows: (Enter all amounts to the nearest cent, $X.XX. Use
a minus sign or parentheses for any understatements.)
Over(Under)
Page No. Client Total Correct Total Statement
14 $2,375.36 $2,375.30 $0.06
82 6,721.18 6,421.18 300.00
Total Misstatement $300.06
Requirement b. As a result of your findings, what will you do about clerical accuracy tests of the
inventory in the current year? (Enter the net misstatement as a positive number.)
The net effect of the misstatements for which we were able to compute the actual misstatement was an
overstatement
of inventory by
244.00
(from requirement a, items 1 and 4).
The exceptions resulted from various causes including incorrect decimal placement, mathematical errors,
and unit of measure errors. What action should the auditor take as a result?
The auditor should determine that the net effect of the misstatements is not significant;
in addition, to insure against other individual misstatements that might be significant, the auditor
should review the extensions and other computations for reasonableness and obvious
misstatements.
For the items for which the amount of the misstatement could not be determined, the auditor should:
Follow up by investigating the differences and having discussions with the client. From the
results of thefollow-up, the effect of the misstatements noted should be assessed and
determination made as to the need for expansion of scope for the tests considered.
Requirement c. What changes, if any, would you suggest in internal controls and procedures for
Martin Manufacturing during the compilation of next year's inventory to prevent each type
of misstatement?
Prior to compiling the inventory next year, Martin Manufacturing should implement the following
internal controls: (Select the 3 choices that apply.)
Review formulas in schedule for inventory compilation. Accuracy of spreadsheet should be

independently reviewed.
All inventory tags should be accounted for prior to posting to the compilation schedules and a
control total compared to the total on the compilation sheets after the compilation is complete.
Someone familiar with the inventory should review the compilation schedules for reasonableness
of quantities, prices, and extensions.
P2129 Question
Help
(book/static)
You have been engaged for the audit of the Upper A Company for the year ended December 31, 2016.
The Upper A Company is in the wholesale chemical business and makes all sales at 25% over cost.
Following are portions of the client's sales and purchases accounts for the calendar year 2016. You
observed the physical inventory of goods in the warehouse on December 31, 2016, and were satisfied
that it was properly taken. When performing a sales and purchases cutoff test,you found that at
December 31, 2016, the last receiving report that had been used was no. 1063 and that no shipments
have been made on any sales invoices with numbers larger than no. 968. You also obtained the following
additional information:
Requirement a. Compute the adjustments that should be made to the client's physical inventory at
December 31, 2016.
Select descriptions for any items that will require the client's physical inventory to be adjusted at
December 31, 2016, then enter the amount of the adjustment and calculate the total adjustments.
Adjustment
Description of Adjustment Amount
RR#1063 8,420
SI#966 15,800
Chemicals exposed to rain during transit and deemed (1,075)
unsalable.
Total adjustments $23,145
Requirement b. Prepare a worksheet of adjusting entries that are required as of December 31,
2016. (AICPA adapted)
1. Included in the warehouse physical inventory at December 31, 2016, were chemicals that had been
acquired and received on receiving report no. 1060 but for which an invoice was not received until the
year 2017. Cost was $2,098.
Journal Entry
Date Accounts Debit Credit
Dec 31 Purchases 2,098
Accounts payable 2,098
2. In the warehouse at December 31, 2016, were goods that had been sold and paid for by the customer
but which were not shipped out until the year 2017. They were all sold on sales invoice no. 965 and were
not inventoried.
Journal Entry
Dec 31 No entry required
3 (a). On the evening of December 31, 2016, there were two cars on the Upper A company siding: Car
AR38162 was unloaded on January 2, 2017, and received on receiving report no. 1063. The freight was
paid by the vendor.
Journal Entry
3 (b). Car BAE74123 was loaded and sealed on December 31, 2016, and was switched off the company's
siding on January 2, 2017. The sales price was $16,400 and the freight was paid by the customer. This
order was sold on sales invoice no. 968.
Journal Entry
Dec 31 Accounts receivable 16,400
Sales 16,400
4. Temporarily stranded at December 31, 2016 on a railroad siding were two cars of chemicals en route to
the Z Pulp and Paper Co. They were sold on sales invoice no. 966, and the terms were FOB destination.
Journal Entry
Dec 31 Sales 19,750
Accounts receivable 19,750
5. En route to the Upper A Company on December 31, 2016, was a truckload of material that was
received on receiving report no. 1064. The material was shipped FOBdestination, and freight of $25 was
paid by the Upper A Company. However, the freight was deducted from the purchase price of $1,750.
Journal Entry
6. Included in the physical inventory were chemicals exposed to rain during transit and deemed
unsalable. Their invoice cost was $1,075, and freight charges of $300 had been paid on the chemicals.
Journal Entry
Dec 31 Claims receivable 1,375
Purchases 1,075
Freight in 300
Record any entry required to adjust the accounts for changes in physical inventory quantities.
Journal Entry
Dec 31 Inventory 23,145
Cost of goods sold 23,145
Record any entry required to adjust the sales records for merchandise that was in the warehouse at time
of physical count.
Journal Entry
Dec 31 Sales 19,551
Accounts receivable 19,551
CC231 Question
Help
(book/static)
Explain the relationships among the initial assessed control risk, test of controls and substantive tests of
transactions for cash disbursements, and the tests of details of cash balances. Give one example in
which the conclusions reached about internal controls in cash disbursements will affect the tests of cash
balances.
Explain the relationships among the initial assessed control risk, test of controls and substantive tests of
transactions for cash disbursements, and the tests of details of cash balances.
The appropriate tests for the ending balance in the cash accounts
depend heavily on
the initial assessment of control risk, tests of controls, and substantive tests of transactions for cash
disbursements. The company's controls over cash disbursements assist the auditor in determining that
cash disbursed is for approved company purposes, that cash disbursements are promptly recorded in the
proper amount, and that
cash cutoff
at year-end is proper. If the results of the evaluation of internal control, the tests of controls, and the
substantive tests of transactions are adequate,
it is appropriate to reduce
the tests of details of balances for cash, especially for the detailed tests of bank reconciliations. On the
other hand, if the tests indicate that the client's controls are inadequate,
extensive year-end testing may be necessary.
Give one example in which the conclusions reached about internal controls in cash disbursements will
affect the tests of cash balances.
If controls over the issuance of blank checks, the review of payees, amounts, and
supporting documentation, the signing of checks, and the reconciliation of bank statements and
vendors' statements
are adequate, the auditor's review of outstanding checks on the year-end bank reconciliation may be
greatly reduced.
Theyear-end outstanding checks can be verified by testing a sample of checks returned with the
cutoff
bank statement rather than tracing all paid outstanding checks and the final monthly checks in the cash
disbursements journal to the last month's cleared checks and the bank reconciliation.
CC232 (book/static)
Why is the monthly reconciliation of bank accounts by an independent person an important internal
control over cash balances? Which individuals will generally not be considered independent for
this responsibility?
Why is the monthly reconciliation of bank accounts by an independent person an important internal
control over cash balances?
It provides an opportunity for an internal verification of the cash receipts and cash
disbursements transactions, investigation of reconciling items on the bankreconciliation, and the
verification of the ending cash balance.
Which individuals will generally not be considered independent for this responsibility?
Anyone responsible for the following duties would not be considered independent for the purposes of
preparing monthly bank reconciliations:
All of the above
CC233 Question
Help
(book/static)
Explain why an auditor compares the "date of deposit according to the books" to the "date of
disbursement according to the books" on an interbank transfer schedule to detect kiting.
Begin by selecting the choice that describes how kiting could be carried out.
A client may write a check on December 31 from the general checking account to a payroll
account. If the client records the deposit into the payroll account on December 31, but does not
record the disbursement out of the general checking account until January 1, the cash will be
counted in both accounts at December 31. This is typically carried out by first crediting another
account such as revenue for the first journal entry to record the cash deposit, and then debiting
an account such as an expense (or reversing the first entry) for the second journal entry to record
the cash disbursement.
Explain why an auditor compares the "date of deposit according to the books" to the "date of
disbursement according to the books" on an interbank transfer schedule to detect kiting.
When comparing the dates of deposit and disbursement, the auditor is looking to ensure both were
recorded
in the same fiscal period.
The auditor will also
verify
the dates of deposit and disbursement according to the

bank
when testing the interbank transfer schedule.
CC234 Question
Help
(book/static)
Briefly explain why accounting standards related to fair value estimates make the audit of financial
instruments more complex.
Accounting standards related to fair value estimates make the audit of these estimates difficult due to
the significant amount of management judgment involved. Management first applies judgment to
determine whether the fair value estimate will be a level 1, 2 or 3 estimate. If the fair value estimate
is level 2 or level 3, there is significant judgment involved in estimating the fair value. Level 3 fair
value estimates may have several unobservable inputs used to determine fair value.
RQ231 Question
Help
(book/static)
Explain the relationships among the initial assessed control risk, tests of controls and substantive tests of
transactions for cash receipts, and the tests of details of cash balances.
The appropriate tests for the ending balance in the cash accounts
depend heavily on
the initial assessment of control risk, tests of controls, and substantive tests of transactions for cash
receipts. If the results of the evaluation of internal control, the tests of controls, and the substantive tests
of transactions are adequate,
it is appropriate to reduce
the tests of details of balances for cash, especially for the detailed tests of bank reconciliations. If the
tests indicate that the client's controls are deficient,
extensive year-end testing may be necessary.
RQ232 Question
Help
(book/static)
What is meant by an imprest bank account for a branch operation? Explain the purpose of using this type
of bank account.
What is meant by an imprest bank account for a branch operation?
An imprest bank account for a branch operation is one in which a fixed balance is maintained.
After authorized branch personnel use the funds for properdisbursements, they make an
accounting to the home office. After the expenditures have been approved by the home office, a
reimbursement is made to the branch account from the home office's general account for the total
of the cash disbursements.
Explain the purpose of using this type of bank account.
The purpose of using this type of account is to provide controls over

cash receipts
and
cash disbursements
by preventing the
branch operators
from disbursing their cash receipts directly, and by providing

review and approval
of cash disbursements before more cash is made available.
RQ233 Question
Help
(book/static)
Evaluate the effectiveness and state the shortcomings of the preparation of a bank reconciliation by the
controller in the manner described in the following statement:
"When I reconcile the bank account, the first thing I do is review the sorted list of returned checks and find
which numbers are missing. Next I determine the amount of the uncleared checks by referring to the cash
disbursements journal. If the bank account reconciles at that point, I am all finished with the reconciliation.
If it does not, I search for deposits in transit, checks from the beginning outstanding check list that still
have not cleared, other reconciling items, and bank errors until it reconciles. In mostinstances, I can do
the reconciliation in 20 minutes."
The controller's approach is to reconcile until the balance agrees. The shortcoming of this approach is
that it
does not include a review of the items that flow through the account and it opens the door for the
processing of improper items.
Such items as checks payable to improper parties, reissuance of outstanding checks to improper parties,
and
kiting of funds would not
be discovered with the controller's approach.
The controller's procedures should include the following:
Examination of all checks clearing with the statement (including those on the previous month's
outstanding check list) and comparison of payee and amount to the cash disbursements journal.
Follow-up on old outstanding checks to determine why they are still outstanding.
Test of cash receipts to determine that they are deposited within a reasonable amount of time.
RQ234 Question
Help
(book/static)
How do bank confirmations differ from positive confirmations of accounts receivable? Distinguish between
them in terms of the nature of the information confirmed, the sample size, and the appropriate action
when the confirmation is not returned after the second request. Explain the rationale for the differences
between these two types of confirmations.
Begin by selecting which type of confirmation each item below describes —Bank confirmations or Positive
confirmation of accounts receivable.
Requests the balances in all bank accounts. Bank confirmation
If this type of confirmation is not returned, they must be pursued until
the
auditor is satisfied as to what the requested information is. Bank confirmation
Information regarding liabilities to the bank for notes, mortgages, or
Bank confirmation
other debt.
The interest rate on interest-bearing accounts. Bank confirmation
Confirmation of an account balance stated on the confirmation form or
Positive confirmation of Accounts
designate a different amount with an explanation
receivable
This type of confirmation is normally requested only for a sample of Positive confirmation of Accounts
accounts. receivable
Information regarding restrictions on withdrawals. Bank confirmation
If this type of confirmation is not returned, second and maybe third
requests
Positive confirmation of Accounts
may be made, but thereafter, follow-ups are not likely to be pursued.
receivable
Explain the rationale for the differences between these two types of confirmations.
The reason why more importance is placed on

bank confirmations than accounts receivable confirmations
is that cash, being the most liquid of assets,

must be more closely controlled than accounts receivable.
In addition, other information-such as liabilities to the bank must be known for purposes of the
Finally, there are usually

only a few
bank accounts and most bank accounts have a

large volume of transactions
during the year.
RQ235 Question
Help
(book/static)
Evaluate the necessity of following the practice described by an auditor: "In confirming bank accounts, I
insist upon a response from every bank the client has done business with in the past 2 years, even
though the account may be closed at the balance sheet date."
This is a good auditing procedure that attempts to discover if any accounts that should have been
closed are still being used, such as by a company employee to deposit customer remittances. The
procedure may also discover unrecorded and contingent liabilities.
RQ237 Question
Help
(book/static)
Why are auditors usually less concerned about the client's cash receipts cutoff than the cutoff for sales?
Explain the procedure involved in testing for the cutoff for cash receipts.
Why are auditors usually less concerned about the client's cash receipts cutoff than the cutoff for sales?
The cutoff of cash receipts affects only cash and

accounts receivable
and not the

income statement
,
whereas a misstatement in the cutoff of sales affects
accounts receivable
and the
income statement.
Explain the procedure involved in testing for the cutoff for cash receipts.
For the purpose of detecting a cash receipt cutoff misstatement, there are two useful audit procedures.
The first is to trace the

deposits in transit
to the
cutoff
bank statement to determine the date they were deposited in the bank account. Because the recorded
cash will have to be included as
deposits in transit
on the bankreconciliation, the auditor can test for the number of days it took for the
in transit items to be deposited.
If there is more than a two or three day delay between the balance sheet date and the subsequent
deposit of all
deposits in transit
,
there is an indication of a cutoff misstatement.
The second audit procedure requires being on the premises at the
balance sheet
date and counting all cash and checks on hand and recording the amount in the
audit files.
When the bank reconciliation is tested, the auditor can then check whether the
deposits in transit
equal the amount recorded.
RQ239 Question
Help
(book/static)
How will a company's bank reconciliation reflect an electronic deposit of cash received by the bank from
credit card agencies making payments on behalf of customers purchasing products from the company's
online Web site, but not recorded in the company's records?
The company does not have the electronic deposit

recorded in the general ledger.
The company's
bank reconciliation
should include an adjustment for thistransaction, which would increase the book balance of
cash
and decrease
accounts receivable from credit card agencies
RQ2310 Question
Help
(book/static)
Explain the purpose of a four-column proof of cash. List two types of misstatements it is meant to
uncover.
Explain the purpose of a four-column proof of cash.
The purpose of the four-column proof of cash is to verify: (Select all that apply.)
Whether all amounts that were paid by the bank were recorded as cash disbursements in the
accounting records.
Whether all recorded cash disbursements were paid by the bank.
Whether all recorded cash receipts were deposited.
Whether all deposits in the bank were recorded in the accounting records.
List two types of misstatements it is meant to uncover.
Cash received that was not recorded in the cash receipts journal and checks that cleared the bank
but have not been recorded in the cash disbursements journal.
RQ2311 Question
Help
(book/static)
Distinguish between lapping and kiting. Describe audit procedures that can be used to uncover each.
Distinguish between lapping and kiting. (Match a description with each term.)
a. Lapping
e. Kiting
Describe audit procedures that can be used to uncover lapping. (Select all that apply.)
Make a surprise count of the cash and customers checks on hand. The deposit of these funds
should be made under the auditor's control, and the details of the deposit should later be
compared with the cash receipts book and the accounts receivable records.
Confirm accounts receivable and give close attention to exceptions made by customers about
payment dates. The confirmation procedure is better applied as a surprise at an interim date so
that if a person is engaged in this, he or she will not have been able to bring the affected accounts
up to date.
Compare the check vouchers received with the customers' checks with stamped duplicate
deposit slips, the entries in the cash book, and postings to the accounts receivable records. If the
client stamps the voucher with the date it was received, the auditor should make careful
comparisons of the stamped dates to the dates recorded in the cash receipts journal.
Compare the details of remittance lists (if prepared), stamped duplicate deposit slips, and entries
in the cash receipts book. Because deposit slips are easily altered, some auditors prepare
duplicate deposit slips made a few days before and after the audit date and have these slips
authenticated by the bank. These authenticated duplicate deposit slips are compared to
remittance lists and to entries in the cash book.
Describe audit procedures that can be used to uncover kiting. (Select all that apply.)
Obtain cutoff bank statements directly from the bank covering the seven to ten day period after
the balance sheet date. Examine the checks returned with the cutoff statements and pay attention
to dates of the transactions stamped by the banks on the backs of the checks. These stamped
dates should not be earlier than the dates of the checks or the dates of cash disbursements
recorded on the books. Protested (N.S.F.) checks should be investigated to determine they are not
fictitious checks deposited temporarily to cover a shortage.
As a surprise count of cash and customers' checks on hand is made as a test for one type
of embezzlement, determine that checks representing transfers of funds are properly recorded on
the books.
Prepare a schedule of the interbank transfers made for a few days before and after the audit date.
The schedule should show, for each check, the date that the cash disbursement was recorded on
the books, and the dates of withdrawal and deposit shown on the bank statements.
RQ2312 Question
Help
(book/static)
Why is there a greater emphasis on the detection of fraud in tests of details of cash balances than for
other balance sheet accounts? Give two specific examples that demonstrate how this emphasis affects
the auditor's evidence accumulation in auditing year-end cash.
Why is there a greater emphasis on the detection of fraud in tests of details of cash balances than for
other balance sheet accounts?
The amount of cash flowing into and out of the cash account is frequently larger than for any
other account in the financial statements. Furthermore, the susceptibility of cash to
misappropriation is greater than other types of assets.
Give two specific examples that demonstrate how this emphasis affects the auditor's evidence
accumulation in auditing year-end cash.
(1) Verifying whether cash transactions are properly recorded and (2) obtaining bank
confirmations
RQ2313 Question
Help
(book/static)
How would an auditor test the realizable value audit objective for a financial instrument classified as a
level 3 fair value estimate?
All of the above
MC2314 Question
Help
(similar to)
The following questions deal with auditing year-end cash and financial instruments. Choose the best
response.
a. A CPA obtains a January 10 cutoff bank statement for a client directly from the bank. Very few of the
outstanding checks listed on the client's December 31 bank reconciliation cleared during the cutoff period.
A probable cause for this is that the client
transmitted the checks to the payees after year-end.
b. In establishing the existence and ownership of an investment held by a corporation in the form of
publicly traded stock, an auditor should inspect the securities or
confirm the number of shares owned that are held by an independent custodian.
c. The auditor should ordinarily send confirmation requests to all banks with which the client has
conducted any business during the year, regardless of the year-end balance, because
the confirmation form also seeks information about indebtedness to the bank.
MC2315 Question
Help
(similar to)
The following questions deal with discovering fraud in auditing year-end cash. Choose the best response.
a. The auditor should control and verify all liquid assets simultaneously to prevent
conversion of assets to conceal a shortage.
b. Which of the following is one of the better auditing techniques to detect kiting?
Prepare a schedule of bank transfers from the client's books.

c. Which of the following cash transfers results in a misstatement of cash at December 31, 2016?
BANK TRANSFER SCHEDULE
Disbursements Receipt
Recorded in
Transfer Recorded in books Paid by bank Received by bank
books
4.
1/4/17
1/5/17
12/31/16
1/4/17
MC2316 Question
Help
(book/static)
The following questions concern auditing year-end cash and financial instruments. Choose the best
response.
a. Which of the following controls would most likely detect a kiting scheme?
Preparing a bank transfer schedule
b. All of the following are effective ways to prevent and/or detect lapping, except for
preparing a bank transfer schedule.
c. Which of the following discovered by the auditor would be a weakness in the client's internal control
over its investments?
Investments not held by an independent third-party custodian are kept in the Treasurer's office.
P2317 Question
Help
(book/static)
The following are misstatements that might be found in the client's year-end cash balance (assume that
the balance sheet date is June 30):
.
a. Assuming that each of these misstatements was intentional (fraud), state the most likely motivation of
the person responsible.
Requirement a
Misstatement Motivation
1. D.
2. A.
3. A.
4. E.
5. A.
6. B.
7. C.
b. What control can be instituted for each fraud to reduce the likelihood of occurrence?
Requirement b
Misstatement Internal Control
1. H.
2. I.
3. G.
4. F.
5. I.
6. F.
7. F.
c. List an audit procedure that can be used to discover each fraud.
Requirement c
Misstatement Audit Procedure
1. M.
2. P.
3. L.
4. J.
5. N.
6. K.
7. O.
P2318 Question
Help
(book/static)
The following audit procedures are concerned with tests of details of general cash and financial
instruments balances:
Requirement
Explain the objective of each audit procedure.
Match each audit procedure with the corresponding letter (from the list below) that best explains its
objective. Use each letter only once. Begin with audit procedures 1 through 5, then complete 6 through 9.
Audit procedure Objective

1. Obtain a standard bank confirmation from each bank with which the client does business. a.
Compare the balance on the bank reconciliation obtained from the client with the bank
2. c.
confirmation.
3. List the check number, payee, and amount of all material checks not returned with the cutoff
bank statement. d.
Review minutes of the board of directors meetings, loan agreements, and bank confirmation
4.
for interest-
bearing deposits, restrictions on the withdrawal of cash, and compensating balance
b.
agreements.
5. Prepare a four-column proof of cash. g.
Compare the bank cancellation date with the date on the cancelled check for checks dated on
6.
or shortly
before the balance sheet date. e.
Trace deposits in transit on the bank reconciliation to the cutoff bank statement and the
7.
current year cash
receipts journal. f.
8. Compare the price per share on an equity investment at year-end according to the schedule of
investment activity to the quoted market price according to an outside pricing source. i.
Confirm the balance of financial instruments at year-end with the broker-dealer service
9.
organization
used by the client to manage their investment portfolio. h.
P2319 Question
Help
(book/static)
You are auditing general cash for the
PittsburghPittsburgh
Supply Company for the fiscal year ended
JulyJuly
31,
20162016.
The client has not prepared the
JulyJuly
31 bank reconciliation. After a brief discussion with the owner, you agree to prepare the reconciliation,
with assistance from one of
PittsburghPittsburgh
Supply's clerks. You obtain the following information:
LOADING...
(Click
the icon to view info for
JulyJuly.)
LOADING...
(Click
the icon to view the
JuneJune
3030
bank rec.)
Additional information obtained is as follows:
LOADING...
(Click
the icon to view the additional information.)
Read the
requirements
LOADING...
.
Requirement a. Prepare a bank reconciliation that shows both the unadjusted and adjusted balance per
books. (If a box is not used in the table, leave the box empty; do not select a label or enter a zero.)
Bank Reconciliation, July 31, 2016
Balance per bank $1,522
Add:
Deposits in transit 2,000

Check erroneously charged to Pittsburgh Supply 646 2,646
Deduct:
Outstanding checks (2,218) (2,218)

Balance per bank, adjusted $1,950
Balance per books before adjustments $10,103
Add:
Deduct:
Unrecorded bank service charge (107)
Note payment (6,400)
NSF check (516)
Unrecorded check (1,130) (8,153)
Balance per books, adjusted $1,950
Requirement b. Prepare all adjusting entries. (Prepare a single compound entry. Record debits first, then
credits. Exclude explanations from any journal entries.)
Journal Entry
Jul 31 Miscellaneous expense 107
Interest expense 400
Note payable 6,000
Allowance for doubtful accounts 516
Purchases 1,130
Cash in bank 8,153
Requirement c. What audit procedures would you use to verify each item in the bank reconciliation?
Reconciling Item Audit Procedure
Trace to duplicate deposit slip and entry on cutoff bank
1. Deposits in transit
statement.
2. Erroneous check Examine correction notice received from bank in August.
Obtain cutoff bank statement. Trace enclosed checks to
3. Outstanding checks
outstanding
check list. Trace uncleared items to supporting documentation.
4. Bank service charge Examine advice returned with July bank statement.
Examine cancelled note. Recompute interest. Check for absence
5. Note payment
of
note on 7/31 bank confirmation.
Examine advice returned with July bank statement. Examine
6. NSF check
other
related evidence from credit manager to determine if account is
uncollectible.
Examine check returned with July bank statement. Trace
7. Unrecorded check
number
to absence in July cash disbursements journal and recording in
August. Examine supporting documentation. Investigate why
unrecorded.
Requirement d. What is the cash balance that should appear on the July 31, 2016 financial statements?
The cash balance that should appear on the July 31, 2016 financial statements is
1,950 .
$
P2320 Question
Help
(book/static)
In the audit of the Regional Transport Company, a large branch that maintains its own bank account, cash
is periodically transferred to the central account in Cedar Rapids. On the branch account's records, bank
transfers are recorded as a debit to the home office clearing account and a credit to the branch bank
account.Similarly, the home office account is recorded as a debit to the central bank account and a credit
to the branch office clearing account. Gordon Light is the head bookkeeper for both the home office and
the branch bank accounts. Because he also reconciles the bank account, the senior auditor, Cindy
Marintette, is concerned about the internal control deficiency. As a part of the year-end audit of
bank transfers, Marintette asks you to schedule the transfers for the last few days in 2016 and the first
few days of 2017. You prepare the following list:
.
Requirement a. In verifying each bank transfer, state the appropriate audit procedures you should
perform.
In addition to creating a list of interbank transfers made a few days before and after the balance sheet
date, which has already been done, the auditor should:
Trace interbank transfers to the appropriate accounting records, bank reconciliations, and bank
records to verify proper recording.
Requirement b. Prepare any adjusting entries required in the home office records.
Begin by preparing any adjusting entry required in the home office records for the $17,000 transfer.
Journal Entry
Prepare any adjusting entry required in the home office records for the $28,000 transfer.
Journal Entry
Journal Entry
Dec 31 Cash in bank 16,000
Branch bank clearing account 16,000
Journal Entry
Journal Entry
Journal Entry
Journal Entry
Requirement c. Prepare any adjusting entries required in the branch bank records.
Begin by preparing any adjusting entry required in the branch bank records for the $17,000 transfer.
Journal Entry
Prepare any adjusting entry required in the branch bank records for the
$ 28 comma 000$28,000
transfer.
Journal Entry
Dec 31 Home office clearing account 28,000
Cash in bank 28,000
$ 16 comma 000$16,000
transfer.
Journal Entry
$ 10 comma 000$10,000
transfer.
Journal Entry
$ 21 comma 000$21,000
transfer.
Journal Entry
Cash in bank 21,000
$ 22 comma 000$22,000
transfer.
Journal Entry
Cash in bank 22,000
$ 39 comma 000$39,000
transfer.
Journal Entry
Requirement d. State how each bank transfer should be included in the December 31,
20162016,
bank reconciliation for the home office account after your adjustments in part b. (Complete all
answer boxes.)
Date Recorded
Date Recorded in Date Deposited Date Cleared Included in the
in
Amount the Home Office the Branch Office in the Home the Branch Home Office
of Cash Receipts Cash Disbursements Office Bank Bank December 31
transfer Journal Journal Account Account Bank Reconciliation?
$17,000 12-27-16 12-29-16 12-26-16 12-27-16 Not included
28,000 12-28-16 01-02-17 12-28-16 12-29-16 Not included
16,000 01-02-17 12-30-16 12-28-16 12-29-16 Not included
10,000 12-26-16 12-26-16 12-28-16 01-03-17 Not included
21,000 01-02-17 01-02-17 12-28-16 12-31-16 Not included
22,000 01-07-17 01-05-17 12-28-16 01-03-17 Not included
39,000 01-04-17 01-06-17 01-03-17 01-05-17 Not included
Requirement e. State how each bank transfer should be included in the December 31,
20162016,
bank reconciliation of the branch bank account after your adjustments in part c. (Complete all
answer boxes.)
Date Recorded
Date Recorded in Date Deposited Date Cleared Included in the
in
Amount the Home Office the Branch Office in the Home the Branch Branch Bank
of Cash Receipts Cash Disbursements Office Bank Bank December 31
transfer Journal Journal Account Account Bank Reconciliation?
$17,000 12-27-16 12-29-16 12-26-16 12-27-16 Not included
28,000 12-28-16 01-02-17 12-28-16 12-29-16 Not included
16,000 01-02-17 12-30-16 12-28-16 12-29-16 Not included
Included as an outstanding
10,000 12-26-16 12-26-16 12-28-16 01-03-17
check
21,000 01-02-17 01-02-17 12-28-16 12-31-16 Not included
Included as an outstanding
22,000 01-07-17 01-05-17 12-28-16 01-03-17
check
39,000 01-04-17 01-06-17 01-03-17 01-05-17 Not included
partial credit,P2321 Question

Help
(book/static)
The following are various potential misstatements due to errors or fraud (1 through 7), and a list of
auditing procedures (a. through h.) the auditor would consider performing to gather evidence to determine
whether the error or fraud is present.
For each possible misstatement, identify one audit procedure that would be most effective in providing
evidence regarding the potential misstatement. Listed auditing procedures may be used once, more
than once, or not at all.
Possible Audit
Misstatement Procedure
1. The auditor suspects
that a lapping scheme
a.
exists because an
accounting department
employee who has access
to cash receipts also
maintains the accounts
receivable ledger and
refuses to take any
vacation or sick days.
2. The auditor suspects
that the entity is
h.
inappropriately increasing
the cash reported on
its balance sheet by
drawing a check on one
account and not recording
it as an outstanding
check on that account and
simultaneously recording
it as a deposit in a second
account.
3. The entity's cash
receipts of the first few
days of the subsequent a.
year were properly
deposited
in its general operating
account after the year-end.
However, the auditor
suspects that the entity
recorded the cash receipts
in its books during the last
week of the year under
audit.
4. The auditor noticed a
significant increase in the
e.
number of times that petty
cash was
reimbursed during the year
and suspects that the
custodian is stealing from
the petty cash fund.
5. The auditor suspects that
a kiting scheme exists
d.
because an accounting
department employee
who can issue and record
checks seems to be leading
an unusually luxurious
lifestyle.
6. During tests of the
reconciliation of the
c.
payroll bank account, the
auditor notices that a check
to an employee is
significantly larger than
other payroll checks.
7. The auditor suspects that
the controller wrote several
d.
checks and recorded the
cash
disbursements just before
year-end but did not mail
the checks until after the
first week of the
subsequent year.
P2322 Question
Help
(book/static)
You are doing the first-year audit of Sherman School District and have been assigned responsibility for
doing a four-column proof of cash for the month of October 2016. You obtain the following information:
.
Requirement a. Prepare a four-column proof of cash for the month ended October 31. It should show
both adjusted and unadjusted cash. (If a box is not used in thetable, leave the box empty; do not enter
a zero.)
Cash
9/30/16
Balance per bank $6,915
Deposits in transit
9/30/16 5,621
10/31/16
Outstanding checks
9/30/16 (1,811)
10/31/16
Bank error - check charged to wrong
account
NSF checks
Balance per bank - adjusted $10,725
Balance per books - unadjusted $10,725

Adjustments to be made
Interest charged
Note proceeds
Balance per books - adjusted $10,725
Receipts
$28,792
(5,621)
996
(600)
$23,567
$20,271
3,296
$23,567
Disbursements
$27,431
(1,811)
2,615
(1,144)
(1,335)
$25,756
$25,160
596
$25,756
Cash
10/31/16
$8,276
996
(2,615)
1,144
735
$8,536
$5,836
(596)
3,296
$8,536
Requirement b. Prepare all adjusting entries.
Prepare the entry for the $596 interest charged by the bank, but not recorded. (Record debits first, then
credits. Exclude explanations from any journal entries.)
Journal Entry
Oct 31 Interest expense 596
Cash in bank 596
Prepare the entry for the $3296 note proceeds that was collected by the bank, but not recorded. (Record
debits first, then credits. Exclude explanations from any journalentries.)
Journal Entry
Oct 31 Cash in bank 3,296
Notes receivable 2,900
Interest income 396
P2324 Question
Help
(book/static)
McNeil Company, a medium-sized manufacturer of microwave ovens, has been an audit client for the
past five years. McNeil Co. has been steadily growing and recently hired a new CEO who has decided to
increase the level of investments in financial instruments as a way of generating a profit from excess cash
from operations. The new CEO has invested primarily in actively-traded equity securities, but has also
invested a portion of the cash in speculative derivative financial instruments. McNeil Co. is using a
brokerage firm to execute trades, but the CEO is making the decision as to which securities and
derivatives to purchase and sell.
In planning for the current year's audit engagement, you note the following related to the investments in
financial instruments:
.
Requirement a. Identify the inherent and control risks related to the financial instruments accounts for
McNeil Co.
Begin by identifying which statements below are correct in regards to the inherent risks related to the
financial instruments accounts for McNeil Co. (Select all thatapply.)
Inherent risk is increased by the fact that the CEO does not have prior experience investing in
such complex financial instruments.
Exposure to risk is significant because the financial instruments account represents

approximately 15% of total assets which is a material amount, and many of the equity investments
are considered high risk stocks.
Inherent risk is increased by the fact that the CEO has been given an incentive bonus based on
return on assets.
Inherent risk is increased by the investment in speculative derivative financial instruments due to
the potential complexity of the derivative contracts, the complexity of the relevant
accounting standards, and the potential volatility of the fair value.
Next, identify which statements below are correct in regards to the control risks related to the financial
instruments accounts for McNeil Co. (Select all that apply.)
Control risk is increased by the fact that the CEO is making investment decisions without any
monitoring. He is discussing his strategy with the board of directors and using a brokerage firm to
execute trades, but the board does not approve the investments in advance.
Control risk is increased because no limits are placed on the CEO's ability to enter into
investment transactions.
The use of a brokerage firm to execute trades lowers the control risk assuming internal controls at
the brokerage firm have been tested and are considered effective.
Requirement b. Identify at least two audit procedures the auditor would perform to test the
existence balance-related audit objective for the trading andavailable-for-sale securities.
The auditor would test the existence balance-related audit objective by

confirming with the broker any equity investments held at year end.
For the derivative financialinstruments, the auditor would

review the underlying agreements.
Requirement c. How would the auditor test the completeness balance-related audit objective for the
speculative derivative financial instruments? (Select all that apply.)
To search for unrecorded derivative contracts, the auditor could request information from all
counterparties the company has transacted with during the year even if the records do not
indicate any agreements outstanding at the end of the fiscal year.
The auditor would search following year-end for settlement of any contracts that should have
been recorded at year end.
The auditor would read other financial instruments contracts to search for embedded derivatives
and would read board of director meeting minutes for discussion of derivative contracts that are
not recorded.
Requirement d. Identify at least two audit procedures the auditor would perform to test the realizable
value balance-related audit objective for the financial instruments accounts. Assume the investments in
stock are all actively-traded in a liquid market, but the derivative financial instruments require a level 3 fair
value estimate. (Select all that apply.)
The auditor must gain an understanding of the method used by management to develop the fair
value estimate.
The auditor will verify the ending market value as listed on the client's schedule of equity
investment activity by referring to quoted market prices from a source such as a financial
publication or the stock exchange.
The auditor should obtain evidence by performing procedures such as assessing the
appropriateness of the model used and the reasonableness of estimates.
Requirement e. In your opinion, would the audit of financial instruments require the use of a
valuation specialist? Why or why not?
It is highly likely the auditor

would
use a valuation specialist for the audit of financial instruments when level 3 fair value estimates are
involved. It is
unlikely
the auditor will have the valuation expertise necessary to develop an independent estimate. If
management uses a specialist to develop their fair value estimate, the auditor must ensure the specialist
is
objective and qualified and the auditor must understand the methods used by the specialist to
develop the estimate.
The auditor may choose to use their own valuation specialist to develop an estimate in order to
corroborate the estimates developed by management or their specialists.
CC251 Question
Help
(book/static)
Distinguish among engagements to prepare, compile, and review of financial statements. What is the
level of assurance for each?
Select the answer that defines a preparation of financial statements.
Preparation is defined in SSARS as a service where the CPA is engaged by the client to prepare or
assist in preparing financial statements, but the CPA does not provide any assurance on the
financial statements or issue a report, even if the financial statements are expected to be used by,
or provided to, a third party.
Select the answer that defines a compilation of financial statements
A compilation is defined as a service, the objective of which is to assist management in

presenting financial information in the form of financial statements without undertaking to obtain
or provide any assurance that there are no material modifications that should be made to the
financial statements in order for the statements to be in conformity with the applicable financial
reporting framework.
Select the answer that defines a review of financial statements.

A review is defined as a service, the objective of which is to obtain limited assurance that there
are no material modifications that should be made to the financial statements in order for the
statements to be in conformity with the applicable financial reporting framework. In a
review engagement, the accountant should accumulate review evidence to obtain a limited level of
assurance.
What is the level of assurance for a preparation, a compilation or a review?
There is no level of assurance provided by a preparation or compilation. Reviews provide

limited assurance, but considerably less than a typical audit.
CC252 Question
Help
(book/static)
What procedures should the auditor use to obtain the information necessary to give the level of assurance
required of reviews of financial statements? (Select all that apply.)
Read the financial statements. The accountant should read the financial statements to determine
whether they conform with the financial reporting framework.
Perform analytical procedures. The analytical procedures are meant to identify relationships and
individual items that appear to be unusual.
Obtain a letter of representation. The accountant is required to obtain a letter of representation

from members of management who are knowledgeable about financial matters.
Obtain knowledge of the client. The information should be about the nature of the client's
business transactions, its accounting records and employees, and thebasis, form, and content of
the financial statements. The level of knowledge should be higher than that for compilation.
Obtain agreement on engagement terms with management or those charged with governance.
This is generally in the form of an engagement letter or other suitable form of written agreement.
Make inquiries of management. The objective of these inquiries is to determine whether the
financial statements are fairly presented, assuming that management does not intend to deceive
the accountant.
Obtain knowledge of the accounting principles and practices of the client's industry. The level of
knowledge for reviews should be somewhat higher than that for compilation.
Reconcile the financial statements to the underlying accounting records. The accountant should
obtain evidence that the financial statements agree or reconcile with the accounting records.
Prepare documentation. The accountant should prepare documentation of procedures performed,

sources of evidence obtained, and conclusions reached.
CC253 Question
Help
(book/static)
Define what is meant by attestation standards. Distinguish between attestation standards and auditing
standards.
Select the best definition for attestation standards.
Attestation standards provide a general framework for and set reasonable boundaries around the
attestation function. They provide guidance to AICPAstandard-setting bodies for establishing
detailed standards and interpretations of standards for specific types of services. They also
provide practitioners useful guidance in performing new and evolving attestation services where
no specific guidance exists.
Distinguish between attestation standards and auditing standards.
The attestation standards provide a conceptual framework for

various types of services.
Auditing standards provide a conceptual framework for

the ordinary audit of financial statements
prepared in accordance with accounting standards.
CC254 Question
Help
(book/static)
Distinguish the three types of service organization reports.
Select the three types of service organization reports, then select the description of each report from the
following list:
Report Description
SOC 1 c.
SOC 2 a.
SOC 3 e.
RQ251 Question
Help
(book/static)
What is meant by the term level of assurance? How does the level of assurance differ for an audit of
historical financial statements, a review, a compilation, and a preparation engagement?
What is meant by the term level of assurance?
Levels of assurance represent the degree of certainty the practitioner has attained, and wishes
to convey, that the conclusions stated in his or her report are correct.
Select the level of assurance for an audit of historical financial statements, a review, a compilation, and a
preparation engagement.
Level of assurance
Audit e.
Review a.
Compilation g.
Preparation d.
RQ252 Question
Help
(book/static)
What is negative assurance? Why is it used in a review engagement report?
What is negative assurance?
A negative assurance states, along with factual statements, that nothing came to the accountant's
attention that would lead the accountant to believe that the financial statements were not prepared
in accordance with accounting standards.
Why is it used in a review engagement report?
The reason for including such a statement in a review report is to provide financial statement users
with some level of assurance that the financial statements are fairly stated.
RQ253 Question
Help
(book/static)
Distinguish the three forms of compilation reports that a CPA can provide to clients. (Select all that apply.)
Compilation With Full Disclosure Compilation of this type requires disclosures in accordance with
accounting standards, the same as for audited statements.
Compilation That Omits Substantially All Disclosures This type of compilation is acceptable if the
report indicates the lack of disclosures and the absence of disclosures is not, to the CPA's
knowledge, undertaken with the intent to mislead users.
Compilation Without Independence A CPA firm can issue a compilation report even if it is not
independent with respect to the client, as defined by the Code of Professional Conduct. However,
the CPA firm must state its lack of independence in the report.
RQ254 Question
Help
(book/static)
List five things that are required of an auditor by SSARS for a compilation.
The preparer of the statements must: (Select five that apply.)

Establish an understanding with the client in a written engagement letter about the objectives of
the nature of the engagement.
Disclose in the report any omissions or departures from accounting standards of which the
accountant is aware. This requirement does not apply to a compilation that omits substantially all
disclosures.
Possess knowledge of the accounting principles and practices of the client's industry.
Know the client, the nature of its business transactions, accounting records and employees, and
the basis, form, and content of the financial statements.
Read the compiled financial statements and be alert for any obvious omissions or errors in
arithmetic and generally accepted accounting principles
RQ258 Question
Help
(book/static)
What are the differences between the review reports for a private company under SSARS and for the
interim financial statements of a public company?
Compilations and reviews under SSARS can only be issued for

nonpublic companies for which an audit has not been performed.
They may be for

monthly, quarterly, or annual statements.
Reviews are issued on
quarterly
information of publicly held companies as a part of the client's reporting requirements to the SEC and are
subject to PCAOB standards. The wording on a review report for a nonpublic company and a public
company review report are
substantively the same.
RQ259 Question
Help
(book/static)
Explain why a review of interim financial statements for a public company may provide a greater level of
assurance than an SSARS review.
The review procedures are

essentially the same for public company and SSARS reviews.
Some additional procedures are required for public company reviews that are beyond the scope of
SSARS as follows: (Select all that apply.)
Under SSARS, the auditor makes inquiries about actions of directors and stockholder meetings;
for public companies the auditor reads the minutes of those meetings.
The level of knowledge the accountant has about the client's internal control is likely to be higher
for public company reviews. Because an annual audit is done for public companies that have an
interim review, the accountant must also obtain sufficient information about the client's internal
control for both annual and interim financial information.
The auditor's knowledge of the results of the audit procedures performed during the annual audit
will affect the scope of the procedures performed during the review of interim financial
information.
For public companies, the accountant must also obtain evidence that the interim financial
information agrees or reconciles with the accounting records.
The accountant will also have a good idea whether the quarterly statements were accurate after
the annual audit is complete. This information will be useful in determining the review procedures
in subsequent years.
RQ2510 Question
Help
(book/static)
You have been asked to provide assurance on information contained in New Dominion's Corporate
Sustainability Report. What standards would you use to perform thisengagement?
In response to a request to provide assurance on information contained in New Dominion's Corporate

Sustainability Report, the accountant would conduct the engagement in accordance with
Statements on Standards for Attestation Engagements (SSAEs).
The accountant would most likely be engaged to conduct

an examination
level attestation engagement whereby the accountant would issue an opinion on the presentation of
management's assertions about compliance with specific sustainability criteria.
RQ2511 Question
Help
(book/static)
Describe the five Trust Service Principles.
Select the five Trust Services principles.
Confidentiality - Confidentiality practices, ensuring that information designated as confidential is

protected as committed or agreed.
Availability - Availability practices, ensuring that the system is available for operation and use as
committed or agreed.
Security - Security practices ensuring that the system is protected against authorized
access (both physical and logical).
Online Privacy - Online privacy practices, ensuring that personal information obtained as a result
of e-commerce is collected, used, disclosed, and retained as committed or agreed.
Processing Integrity - Processing integrity, ensuring that system processing is complete,

accurate, timely, and authorized.
RQ2512 Question
Help
(book/static)
Describe the key difference between a type 1 and type 2 SOC 1 report.
In a Type 1 SOC 1 report, the accountant provides an opinion about the fairness of the description
of the service organization's system and opinion about the suitability of the design of the controls
in that system. In a Type 2 report, the accountant provides the opinions contained in a Type
1 report, plus an opinion on the operating effectiveness of controls at the service organization.
RQ2514 Question
Help
(book/static)
An audit client has engaged a third party service organization to host its payroll software package on
servers located at the service organization. What options do you have to obtain assurance about the
controls embedded in the payroll application? (Select all that apply.)
The service organization can engage its auditor to provide a Type 1 report that provides an
opinion about the fairness of the description of the serviceorganization's system and opinion
about the suitability of the design of the controls in that system.
You can visit the service organization to obtain evidence about the design and operating
effectiveness of internal controls at the service organization.
The service organization may engage its auditor to provide a Type 2 report that provides the
opinions contained in a Type 1 report, plus an opinion on the operating effectiveness of controls
at the service organization.
RQ2515 Question
Help
(book/static)
Explain what is meant by prospective financial statements and distinguish between forecasts and
projections. What four things are involved in an examination of prospective financial statements?
A prospective financial statement
is a predicted or expected financial statement in some future period or at some future date.
A forecast is a prospective financial statement that
presents an entity's expected financial position, results of operations, and cash flows for
future periods, to the best of the responsible party's knowledge and belief.
A projection is a prospective financial statement that
presents an entity's financial position, results of operations, and cash flows, to the best of the
responsible party's knowledge and belief, given one or more hypothetical assumptions.
What four things are involved in an examination of prospective financial statements?
Evaluating the preparation of the prospective financial statements.
Evaluating the presentation of the prospective financial statements for conformity with AICPA
presentation guidelines.
Issuing an examination report.
Evaluating the support underlying assumptions.

RQ2516 Question
Help
(book/static)
The Absco Corporation has requested that Herb Germany, CPA, provide a report to the Northern State
Bank as to the existence or nonexistence of certain loan conditions. The conditions to be reported on are
the working capital ratio, dividends paid on preferred stock, aging of accounts receivable, and
competence of management. This isHerb's first experience with Absco. Should Herb accept
this engagement? Substantiate your answer.
It would be appropriate for Germany to provide a report to Northern State Bank on

all the conditions except the competency of management.
Reporting
on the competence of management is highly subjective
and should not ordinarily be in a debt compliance letter. All the other conditions
are factual matters within a normal auditor's competence.
MC2517 Question
Help
(book/static)
The following are miscellaneous questions about compilation and review services. Choose the best
response.
a. A CPA is performing review services for a small, closely held manufacturing company. As a part of
the follow-up of a significant decrease in the gross margin for the current year, the CPA discovers that
there are no supporting documents for $40,000 of disbursements. The chief financial officer assures her
that the disbursements are proper. What should the CPA do?
Modify the review opinion or withdraw from the engagement unless the unsupported
disbursements are satisfactorily explained.
b. Which of the following best describes the responsibility of the CPA in performing compilation services
for a company?
The CPA must understand the client's business and accounting methods and read the financial
statements for reasonableness.
c. The standard compilation report includes which statement or phrase?
Management is responsible for the financial statements.
MC2518 Question
Help
(book/static)
The following questions concern attestation engagements. Choose the best response.
a. A Type 1 service auditor's report on internal controls at a service organization
includes an opinion about the suitability of the design of controls at the service organization.
b. Which of the following professional services would be considered an attestation engagement?

Preparing the income statement and balance sheet for one year in the future based on client
expectations and predictions.
MC2519 Question
Help
(book/static)
The following questions concern reports issued by auditors, other than those on historical financial
statements. Choose the best response.
a. An auditor is reporting on cash basis financial statements. These statements are best referred to in the
opinion of the auditor by which of the following descriptions?
Cash receipts and disbursements and the assets and liabilities arising from cash transactions
b. When asked to perform an audit to express an opinion on one or more specified elements, accounts, or
items of a financial statement, the auditor
may not describe auditing procedures applied.

MC2520 Question
Help
(book/static)
The following questions concern engagements other than the audit of financial statements performed by
accountants. Choose the best response.
a. Which of the following procedures would most likely be performed during an engagement to compile
the financial statements of a nonissuer?
Read the financial statements and consider whether they are appropriate in form and free from
obvious material errors
b. Which of the following procedures would most likely be performed during the engagement to review the
annual financial statements of a nonissuer?
Comparison of the current financial statements with prior period financial statements
c. Which of the following is a prospective financial statement for general use upon which an accountant
may appropriately report?
Financial forecast
P2522 Question
Help
(book/static)
You are doing a review services and related tax work engagement for Murphy Construction Company.
You have made extensive inquiries of management about their financial statements and have concluded
that management has an excellent understanding of its business and is honest, but lacking in knowledge
of technical accounting issues. In doing the review you determine the following:
.
Requirement a. Beyond inquiries and analytical procedures, what are the accountant's responsibilities in
performing review service engagements?
Perform additional procedures if the accountant becomes concerned that information is incorrect,
incomplete or otherwise unsatisfactory.
Obtain a letter of representation.
Issue the review report.
Obtain knowledge of the client's business
Read the financial statements.
Obtain knowledge of the accounting principles and practices of the client's industry.
Prepare documentation of procedures performed, evidence examined, and conclusions reached.
Requirement b. Describe what you should do in each of the preceding situations, assuming each one is
material.
Situation Description of Procedure

1. f.
2. a.
3. c.
4. h.
5. d.
P2525 Question
Help
(book/static)
Jennifer Branson is a new staff auditor on the audit engagement of Greenville Light & Sound, which is a
publicly traded company with a calendar year-end. The engagement team has completed its review of
the third-quarter financial statements, and the firm has been asked to issue a review report on those
statements. As the senior auditor on the engagement, you asked Jennifer to draft the firm's report for her
review. Here's what she provided you:
Requirement
1. What changes are needed to the report draft provided by Jennifer?
Should this report contain a title? If so, what should it be?
Yes. Report of Independent Registered Public Accounting Firm.
The first paragraph changes are: (Select four that apply.)
The financial statements reviewed would include reference to the financials prepared for
the three-month period and nine-month period ending at the end of the third quarter. This
reference should be included in the first sentence to the report.
The word "examined" in the first sentence should be replaced with "reviewed" since this is a
review level engagement.
The second and third sentences should be deleted and moved to the next paragraph, and the
phrase "testing internal controls over financial reporting" should be deleted.
The first sentence needs to include a reference to the Statement of Retained Earnings and
Statement of Cash Flows.
The second paragraph changes are: (Select four that apply.)
A final sentence must also be added stating that the accountant is not expressing an opinion on
the financial statements.
The review would be conducted in accordance with PCAOB standards, not the SSARS standards
issued by the AICPA. Therefore, the opening sentence should be modified.
The second sentence needs to be deleted from the report.
A sentence needs to be added to describe that a review consists primarily of applying analytical
procedures and inquiries and a second sentence saying a review is substantially less in scope
than an audit in accordance with PCAOB standards.
The final paragraph changes are: (Select two that apply.)
The phrase "it is our opinion" should be deleted and replaced with "we are not aware of any
material modifications that should be made to the accompanying interim financial statements."
The financial reporting framework used by management to present the financial statements is
GAAP in the U.S., and the reference to the SEC should be removed.
What item(s) are included in the closing of the review report?
The closing should include the audit firm's signature and be dated as of the end of fieldwork for
review.
P2527 Question
Help
(book/static)
With the rapid growth of cloud computing, many organizations are contracting with third-party service
providers to process and store all kinds of data off site. In doing so, entities are now dependent on the
effectiveness of controls provided by external software providers and data centers that are used to
generate and store a huge volume of important information for making critical business decisions.
.
Requirement a. How might the use of an external service provider to process financial statement
transactions affect the audit of the entity's financial statements?
When clients outsource some or all of their IT needs to an independent computer service
organization rather than maintain an internal IT function or data center, their auditors may face
difficulty when obtaining an understanding of the client's internal control over financial reporting
because many of the controls reside at the service organization, and the auditor cannot assume
that the controls are adequate since they are provided by an independent IT provider. It has
become increasingly common for the service center to engage a CPA firm to obtain an
understanding and test internal controls of the service organization and issue a report for use by
all customers and their independent auditors.
Requirement b. What options are available to the auditor of the user entity's financial statements to
obtain information about the design of internal controls over financial reporting at the
service organization?
Their auditors could examine a Type 1 SOC 1 report on management's description of a

service organization's system and the suitability of the design of controls to obtain information
about the design of controls at the service organization. In a Type 1 report, the service auditor
expresses an opinion about the fairness of the description of the service organization's system
and an opinion about the suitability of the design of controls in that system.
Requirement c. What kind of report could the auditor of the user entity obtain from the
service organization, if the user auditor needed information about the operating effectiveness of controls
at the service organization?
When clients outsource some or all of their IT needs to an independent computer

service organization, their auditors could examine a Type 2 SOC 1 report onmanagement's
description of a service organization's system and the suitability of the design and operating
effectiveness of controls. In a Type 2 engagement, the service auditor performs tests of the
operating effectiveness of the controls at the service organization, in addition to procedures
performed in the Type 1 engagement. The service auditor's Type 2 report contains the two
opinions about the description and suitability of the design of controls that are provided in a Type
1 report, plus an additional opinion about the operating effectiveness of controls throughout the
period.
Requirement d. What type of report might the service organization provide to management of an entity
that uses the service center to process quality control reports related to the user entity's
manufacturing processes?
SOC 1 reports address internal controls over financial reporting. But, in this situation,
management of a service organization that processes quality control reports related to the
user entity's manufacturing processes could engage their auditor to provide an SOC 2 report,
Report on Controls at a Service Organization Relevant to Security, Availability,
Processing Integrity, Confidentiality, or
Privacy. A SOC 2 report is intended to meet the needs of a broad range of users who need
information and assurance about controls at a service organization that affect the security,
availability, and processing integrity of the systems the service organization uses to
process users' data and the confidentiality and privacy of the information processed by these
systems.
P2528 Question
Help
(book/static)
Carl Monson, the owner of Major Products Manufacturing Company, a small, successful, long-time audit
client of your firm, has requested you to work with his company in preparing 3-year forecasted information
for the year ending December 31, 2017, and two subsequent years. Monson informs you that he intends
to use the forecasts, together with the audited financial statements, to seek additional financing to expand
the business. Monson has had little experience in formal forecast preparation and counts on you to assist
him in any way possible. He wants the most supportive opinion possible from your firm to add to the
credibility of the forecast. He informs you that he is willing to do anything necessary to help you prepare
the forecast.
Requirement a. Explain circumstances under which it is and is not acceptable to undertake the
engagement.
It would be acceptable to undertake the engagement only if all of the following conditions exist. (Select all
that apply.)
The accountant has sufficient competence to properly complete an examination of the forecasted
The client is willing to take responsibility for preparation (with the accountant's assistance) of the
forecast in accordance with guidelines, established by the AICPA in Statements on Standards
for Accountant's Services on Prospective Financial
Statements.
The accountant believes a reasonably accurate forecast is practicable in the circumstances.
The client understands and agrees to the examination procedures and reporting requirements the
accountant must comply with.
Requirement b. Why is it important that Monson understand the nature of your reporting requirements
before the engagement proceeds?
If Monson believes the accountant can issue an opinion about the achievability of the forecast, but later
finds that
such an opinion cannot be given,
Monson is likely to be unhappy.

The result would be a loss of fee, loss of a client for other services, and perhaps even a lawsuit
.Similarly, Monson must understand his responsibilities concerning the forecast of the assumptions and
other aspects of the report, again to avoid a misunderstanding later.
Requirement c. What information will Monson have to provide to you before you can complete the
forecasted statements? Be as specific as possible.
The primary information the CPA firm will need to help in completing the forecast are the following: (Select
all that apply.)
Information about the economic conditions of the industry. The CPA firm will likely need
knowledge beyond that required for performing the audits.
Information about the offer he has made for the new business and the offer he has received for
the existing assets. Because the financial statements will be aforecast, and not a projection, it is
necessary to determine that there is a reasonable likelihood of the transaction being completed
and the forecasted result, assuming both transactions are finalized.
Audited financial statements for the past several years.
Requirement d. Discuss, in as specific terms as possible, the nature of the report you will issue with
the forecasts, assuming that you are able to properly complete them.
The report will be a report on a forecast and will include the following components: (Select all that apply.)
A statement that the examination of the prospective financial statements was made in accordance
with AICPA standards and a brief description of the nature of such examination.
A caveat that the prospective results may not be achieved.
An identification of the prospective financial statements presented.
A statement that the accountant assumes no responsibility to update the report for events and
circumstances occurring after the date of the report.
The accountant's opinion that the prospective financial statements are presented in conformity
with AICPA presentation guidelines and that the underlying assumptions provide a reasonable
basis for the forecast.
P2529 Question
Help
(book/static)
Bengston, CPA, is conducting the audit of Pollution Control Devices, Inc. In addition, a supplemental
negative assurance report is required for a major mortgage holder. The supplemental report concerns
indenture agreements to keep the client from defaulting on the mortgage. Total assets are $14 million and
the mortgage is for $4 million. The major provisions of the indentures are as follows:
Requirement a. Write the appropriate supplemental report if all three indenture agreement provisions
have been satisfied.
We have
audited
,
in accordance with
generally accepted auditing standards
in the United States of America, the financial statements of Pollution Control Devices, Inc., which
comprise the balance as of (date inserted here) and the related statements of income, retained earnings,
and cash flows for the year then ended, and have issued our report thereon dated.
In connection with our
audit
,
nothing came to our attention that caused us to believe that the Company failed
to comply with any of the provisions of the indenture dated (date inserted here) with (lender) insofar as
they relate to accounting matters. However, our
audit
was not directed primarily toward obtaining knowledge of such noncompliance. Accordingly, had we
performed
additional procedures
,
other matters may have come to our attention regarding the Company's noncompliance with the above-
referenced provisions of the indenture insofar as they relate to accounting matters.
This report is intended solely for the information and use of the
boards of directors and management
of Pollution Control Devices, Inc., and (lender) and is not intended to be and should not be used by
anyone other than these specified parties.
Requirement b. How would the supplemental report change if net earnings after taxes were $1,010,000
and dividends paid were $60,000?
The supplemental report would have to state that the company was not in compliance with the
provisions of the indenture because net earnings did not exceed dividends by at least $1,000,000.
Requirement c. Assume the same situation as in part b. and also assume that the client refuses to
modify the financial statements or disclose the violation of the indenture agreement provisions on the
grounds that the amount is immaterial. What is the nature of the appropriate auditor?s report?
The supplemental report

would be
the same as discussed in b. Assuming that a default in the provisions of the indenture results in the loan
becoming dueimmediately, the auditor's report
would have to include either an adverse or qualified opinion depending upon the materiality of the
misstatement
.
Because the mortgage is for $4 million, which is
material
to the client, violation of the indenture and potential default

cannot
be dismissed as being immaterial.
Requirement d. What is the nature of the appropriate supplemental report if all the indenture agreement
provisions have been satisfied but there is a lawsuit against the company that has resulted in disclosure
of the lawsuit in a footnote to the financial statements?
Contingencies due to a lawsuit
may
affect the liabilities of the client that affect the indenture provisions. The auditor will be
unable
to express an opinion in the debt compliance letter. This

should be
disclosed in the supplemental report.

CC13 2 (Book/static) : Risk Assessment Procedures

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CC13 2 (Book/static) : Risk Assessment Procedures

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CC13-1 (book/static)

detection risk. Substantive evidence includes evidence from

C represents the auditor's assessment of the effectiveness of

Testing controls at the

It would be a good decision to obtain assurance from

in the planned tests of details of balances.

RQ13-2 (book/static) Question Help

What is the purpose of tests of controls?

RQ13-3 (book/static) Question Help

Select the definition of tests of controls?

Select two examples of tests of controls.

Select the definition of a substantive test of transactions.

Select two examples of a substantive test of transactions.

Examination of vendor invoices in support of amounts recorded in the acquisitions journal

in the balance in accounts receivable or sales,

Confirmation of accounts receivable and cutoff tests for sales

If the ratios are approximately what the auditor expects,

when the results of the tests are both good.

RQ13-19 (book/static) Question Help

Review minutes of board of directors' meetings.

Examine new loan agreements and other legal records.

Analyze changes in the client's accounting systems.

Update fixed asset schedules.

Vouch certain transactions.

MC13-20 (similar to) Question Help

a. An auditor's decision either to apply analytical procedures as substantive tests or to perform

relative effectiveness and efficiency of the tests.

IV, I, III, and II

Requirement a. Requirement b. Requirement c.

RQ13-6 (book/static) Question Help

Match the terms with the correct definition.

2) Substantive test of transactions

Tests performed to verify the accuracy of a client's accounting system. This is

Select an example of a substantive test of transaction.

Tracing amounts from a file of vouchers to the acquisitions journal.

Select an example of a test of details of balances.

Physically examine a sample of the client's fixed assets.

Control #1 -- Computer verification of the customer's credit limit.

Such tests might include

Are both methods acceptable according to auditing standards?

Explain what is meant by block sample selection.

Which method do auditors usually follow? Why?

sampling; it seems more intuitively satisfying to auditors to include an item

In most populations a systematic sample can be drawn quickly.

Systematic sampling is easy to use.

Distinguish between probabilistic selection and statistical measurement.

Random (probabilistic) selection

statistical measurement. To have statistical measurement, it is necessary to

Probabilistic selection must be used if the sample is to be evaluated statistically, although it is

State the relationship between the following:

Select your answers for each of the following statements:

a. As the ARO increases, the required sample size decreases

c. As the TER increases, the sample size decreases

measure the sufficiency of the audit evidence by quantifying sampling risk.

b. Which of the following best illustrates the concept of sampling risk?

Inspecting employee time cards for proper approval by supervisors.

a. As compared to a nonstatistical sampling plan, a statistical sampling plan

makes greater use of mathematical methods in determining an appropriate sample size.

efficiency of the audit.

6810 Confirm the account balances to the customers.

Planned Audit Actual results

Requirement b. For which attributes are the sample results unacceptable?

The sample results are unacceptable for