Evaluate the following statement made by an auditor: "On every aspect of the audit where it is possible, I calculate the point estimate of the misstatements and evaluate whether the amount is material. If it is, I investigate the cause and continue to test the population until I determine whether there is a serious problem. The use of statistical sampling in this manner is a valuable audit tool."
> The following questions concern the determination of the proper sample size in audit sampling using the following table: Required a. Assume that the initial sample size for column 1 using nonstatistical sampling is 90 items. For each of columns 2 through
> The following is a partial audit program for the audit of sales transactions. 1. Foot the sales journal for one month and trace the postings to the general ledger. 2. Vouch entries in sales journal to sales invoice and shipping document. 3. Review the sa
> Lenter Supply Company is a medium-sized distributor of wholesale hardware supplies in the central Ohio area. It has been a client of yours for several years and has instituted excellent internal controls for sales at your recommendation. In providing con
> a. In each of the following independent problems, design an unbiased random sampling plan, using an electronic spreadsheet or a random number generator program. The plan should include defining the sampling unit and establishing a numbering system for th
> 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 (1) Minimize the failure to detect errors and fraud. (2
> The following items concern determining exception rates using random sampling from large populations using attributes sampling. Select the best response. a. From a random sample of items listed from a client's inventory count, an auditor estimates with a
> The following items apply to determining sample sizes using random sampling from large populations for attributes sampling. Select the most appropriate response for each question. a. If all other factors specified in a sampling plan remain constant, chan
> What are the two types of simple random sample selection methods? Which of the two methods is used most often by auditors and why?
> List the major decisions that the auditor must make in using attributes sampling. State the most important considerations involved in making each decision.
> Distinguish between probabilistic selection and statistical measurement. State the circumstances under which one can be used without the other.
> When the CUER exceeds the TER, what courses of action are available to the auditor? Under what circumstances should each of these be followed?
> Explain what is meant by analysis of exceptions and discuss its importance.
> Assume that the auditor has selected 100 sales invoices from a population of 100,000 to test for an indication of internal verification of pricing and extensions. Determine the CUER at a 10% ARACR if four exceptions are found in the sample using attribut
> This problem requires the use of ACL software, which is included in the CD attached to the text. Information about installing and using ACL and solving this problem can be found in Appendix, pages 838-842. You should read all of the reference material, e
> You have just completed the accounts receivable confirmation process in the audit of Danforth Paper Company, a paper supplier to retail shops and commercial users. Following are the data related to this process: Accounts receivable recorded balance $
> You are doing the audit of Peckinpah Tire and Parts, a wholesale auto parts company. You have decided to use monetary unit sampling (MUS) for the audit of accounts receivable and inventory. The following are the recorded balances: Accounts receivable
> Marjorie Jorgenson, CPA, is verifying the accuracy of outstanding accounts payable for Marygold Hardware, a large, single-location retail hardware store. There are 650 vendors listed on the outstanding accounts payable list. She has eliminated from the p
> In auditing the valuation of inventory, the auditor, Claire Butler, decided to use difference estimation. She decided to select an unrestricted random sample of 80 inventory items from a population of 1,840 that had a book value of $175,820. Butler decid
> An audit partner is developing an office training program to familiarize her professional staff with audit sampling decision models applicable to the audit of dollar-value balances. She wishes to demonstrate the relationship of sample sizes to population
> You intend to use MUS as a part of the audit of several accounts for Roynpower Manufacturing Company. You have done the audit for the past several years, and there has rarely been an adjusting entry of any kind. Your audit tests of all tests of controls
> In the audit of Price Seed Company for the year ended September 30, the auditor set a tolerable misstatement of $50,000 at an ARIA of 10%. A PPS sample of 100 was selected from an accounts receivable population that had a recorded balance of $1,975,000.
> State the relationship between the following: a. ARACR and sample size b. Population size and sample size c. TER and sample size d. EPER and sample size
> The accounts receivable population for Jake's Bookbinding Company follows. This table is the same as Table 17-1, except that cumulative amounts are included to assist you in completing the problem. The population is smaller than is ordinarily the case fo
> You are evaluating the results of a nonstatistical sample of 85 accounts receivable confirmations for the Bohrer Company. Information on the sample and population are included below. An overstatement or understatement of more than $100,000 is considered
> You are planning to use nonstatistical sampling to evaluate the results of accounts receivable confirmation for the Meridian Company. You have already performed tests of controls for sales, sales returns and allowances, and cash receipts, and they are co
> The following relate to the use of statistical sampling for tests of details of balances. For each one, select the best response. a. When the auditor uses monetary unit statistical sampling to examine the total dollar value of invoices, each invoice (1)
> 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 suppor
> 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
> Give an example of the use of attributes sampling, MUS, and variables sampling in the form of an audit conclusion.
> Explain why difference estimation is commonly used by auditors.
> An essential step in difference estimation is the comparison of each computed confidence limit with tolerable misstatement. Why this step so important, and what should the auditor do if one of the confidence limits is larger than the?
> 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. When is MUS preferable to any of these?
> Identify the factors an auditor uses to decide the appropriate ARACR. Compare the sample size for an ARACR of 10% with that of 5%, all other factors being equal.
> 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 mater
> 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?
> 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?
> What is meant by a decision rule using difference estimation? State the decision rule.
> Why is it difficult to determine the appropriate sample size for MUS? How should the auditor determine the proper sample size?
> Assume that a sample of 100 units was obtained in sampling the inventory in Question 17-4. An auditor is determining the appropriate sample size for testing inventory valuation using MUS. The population has 2,620 inventory items valued at $12,625,000. Th
> What is meant by the "percent of misstatement assumption" for MUS in those population items that are misstated? Why is it common to use a 100% misstatement assumption when it is almost certain to be highly conservative?
> What is the relationship between ARIA and ARACR?
> Evaluate the following statement made by an auditor: "I took a random sample and derived a 90 percent confidence interval of $800,000 to $900,000. That means that the true population value will be between $800,000 and $900,000, 90 percent of the time."
> Explain what is meant by acceptable risk of incorrect acceptance. What are the major audit factors affecting ARIA?
> Identify the factors an auditor uses to decide the appropriate TER. Compare the sample size for a TER of 7% with that of 4%, all other factors being equal.
> Explain how the auditor determines tolerable misstatement for MUS.
> The 2,620 inventory items described in Question 17-14 are listed on 44 inventory pages with 60 lines per page. There is a total for each page. The client's data are not in machine-readable form. Describe how a monetary unit sample can be selected in this
> What major difference between (a) Tests of controls and substantive tests of transactions (b) Tests of details of balances makes attributes sampling inappropriate for tests of details of balances? SOLUTION The most important difference between (a) te
> Define what is meant by sampling risk. Does sampling risk apply to nonstatistical sampling, MUS, attributes sampling, and variables sampling? Explain.
> Define monetary unit sampling and explain its importance in auditing. How does it combine the features of attributes and variables sampling?
> Distinguish between the point estimate of the total misstatements and the true value of the misstatements in the population. How can each be determined?
> 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?
> Monetary unit sampling (MUS) is the most commonly used statistical method of sampling for tests of details because of its simplicity and its ability to provide statistical results in dollars. Read an article titled "Monetary-Unit Sampling Using Microsoft
> Explain the difference between replacement sampling and nonreplacement sampling. Which method do auditors usually follow? Why?
> Explain the difference between an attribute and an exception condition. State the exception condition for the audit procedure: The duplicate sales invoice has been initialed indicating the performance of internal verification.
> Explain the major difference between statistical and nonstatistical sampling. What are the three main parts of statistical and nonstatistical methods?
> Auditors have used samples to conduct audit tests for decades. Despite the frequent use of sampling, auditors often use nonstatistical sampling rather than statistical sampling. Visit the website for The CPA Journal (www.cpajournal.com) and use the searc
> Describe the nature of the following documents and records and explain their use in the sales and collection cycle: bill of lading, sales invoice, credit memo, remittance advice, monthly statement to customers.
> For this problem use the Metaphor-AR-2002 file in ACL-Demo. The suggested command or other source of information needed to solve the problem requirement is included at the end of each question. a. Determine the total number and amount of September 2002 t
> In Part III of this case study, you obtained an understanding of internal control and made an initial assessment of control risk for each transaction-related audit objective for acquisition and cash disbursement transactions. The purpose of Part V is to
> The Meyers Pharmaceutical Company, a drug manufacturer, has the following internal controls for billing and recording accounts receivable: 1. An incoming customer's purchase order is received in the order department by a clerk who prepares a prenumbered
> YourTeam.com is an online retailer of college and professional sports team memorabilia, such as hats, shirts, pennants and other sports logo products. Consumers select the college or professional team from a pull-down menu on the company's Web site. For
> Items 1 through 10 present various internal control strengths or internal control deficiencies. 1. Credit is granted by a credit department. 2. Once shipment occurs and is recorded in the sales journal, all shipping documents are marked "recorded" by the
> You have been asked by the board of trustees of a local church to review its accounting procedures. As part of this review you have prepared the following comments about the collections made at weekly services and record keeping for members' pledges and
> The following are a list of possible errors or fraud (1 through 5) involving cash receipts and controls (a through g) that may prevent or detect the errors or fraud: Possible Errors or Fraud 1. Customer checks are properly credited to customer accounts a
> What is meant by an attribute in sampling for tests of controls and substantive tests of transactions? What is the source of the attributes that the auditor selects?
> In recent years, several high-profile incidents of improper revenue recognition attracted the attention of the business media. The SEC has also expressed concerns about the number of instances of improper revenue recognition identified by SEC staff. One
> What major considerations should the auditor take into account in determining how extensive the review of subsequent events should be?
> In obtaining letters from attorneys, Bill Malano's aim is to receive the letters as early as possible after the balance sheet date. This provides him with a signed letter from every attorney in time to properly investigate any exceptions. It also elimina
> Distinguish between the two general types of subsequent events and explain how they differ. Give two examples of each type.
> Describe the action that an auditor should take if an attorney refuses to provide information that is within the attorney's jurisdiction and may directly affect the fair presentation of the financial statements.
> Distinguish between an asserted and an unasserted claim. Explain why a client's attorney may not reveal an unasserted claim.
> During the audit of the Merrill Manufacturing Company, Ralph Pyson, CPA, has become aware of four lawsuits against the client through discussions with the client, reading corporate minutes, and reviewing correspondence files. How should Pyson determine t
> Explain why the analysis of legal expense is an essential part of every audit.
> Explain why an auditor is interested in a client's future commitments to purchase raw materials at a fixed price.
> In the audit of the James Mobley Company, you are concerned about the possibility of contingent liabilities resulting from income tax disputes. Discuss the procedures you could use for an extensive investigation in this area.
> The following questions concern internal controls in the acquisition and payment cycle. Choose the best response. a. A client erroneously recorded a large purchase twice. Which of the following internal controls would be most likely to detect this error
> The cost accounting records are often an essential area to audit in a manufacturing or construction company. Required a. Why should the auditor review the cost accounting records and test their accuracy? b. For the audit of standard cost accounting reco
> Distinguish between a contingent liability and an actual liability and give three examples of each.
> Describe the purpose of a financial statement disclosure checklist and explain how it helps the auditor determine if there is sufficient appropriate evidence for each of the presentation and disclosure objectives.
> Identify and describe the four presentation and disclosure audit objectives.
> In your audit of Aviary Industries for calendar year 2011, you found a number of matters that you believe represent possible adjustments to the company's books. These matters are described below. Management's attitude is that "once the books are closed,
> Audit committees of public companies have many responsibilities in today's financial reporting environment. Visit the website of Microsoft Corporation (www.microsoft.com) and locate the Audit Committee's Charter under the "Investor Relations" link to ans
> The Check Clearing for the 21st Century Act (Check 21 Act) allows recipients of paper checks to create a digital image of the original check, eliminating the need for further handling of the actual check. The Federal Reserve Board has created a consumer
> In connection with an audit you are given the following work sheet: Checks Drawn but Not Paid by Bank No. Amount 573 ………………â
> 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. Possible
> 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 ho
> You are auditing general cash for the Pittsburgh Supply Company for the fiscal year ended July 31, 2011. The client has not prepared the July 31 bank reconciliation. After a brief discussion with the owner, you agree to prepare the reconciliation, with a
> The Frist Corporation has the following internal controls related to inventory: 1. The inventory purchasing system only allows purchases from pre-approved vendors. 2. The perpetual inventory system tracks the average number of days each inventory product
> Distinguish between FOB destination and FOB origin. What procedures should the auditor follow concerning acquisitions of inventory on an FOB origin basis near year-end?
> The following audit procedures are concerned with tests of details of general cash balances: 1. Obtain a standard bank confirmation from each bank with which the client does business. 2. Compare the balance on the bank reconciliation obtained from the cl
> 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): 1. The outstanding checks on the June 30 bank reconciliation were under footed by $2,000. 2. A loan from the bank o
> The following questions deal with discovering fraud in auditing year-end cash. Choose the best response. a. Which of the following is one of the better auditing techniques to detect kiting? (1) Review composition of authenticated deposit slips. (2) Revi
> 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
> Explain why, in verifying bank reconciliations, most auditors emphasize the possibility of a nonexistent deposit in transit being included in the reconciliation and an outstanding check being omitted rather than the omission of a deposit in transit and t
> 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 ye
> Distinguish between the verification of petty cash reimbursements and the verification of the balance in the fund. Explain how each is done. Which is more important?
> Assume that a client with excellent internal controls uses an imprest payroll bank account. Explain why the verification of the payroll bank reconciliation ordinarily takes less time than the tests of the general bank account, even if the number of disbu
> Distinguish between lapping and kiting. Describe audit procedures that can be used to uncover each.
> 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 ind
> When the auditor fails to obtain a cutoff bank statement, it is common to verify the entire statement for the month subsequent to the balance sheet date. How is this done and what is its purpose?
