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. Review the sales journal for any large or unusual transactions. 3. Examine sales order for evidence of credit approval prior to shipment. 4. Vouch entries in sales journal to sales invoice and shipping document. 5. Examine evidence on sales invoice that the prices were agreed to the approved price list. 6. Recompute extensions of price and quantities on the sales invoice. 7. Trace entries in sales journal to entry in accounts receivable master file. Required: a. Identify which audit procedures can be tested by using attributes sampling. b. What is the appropriate sampling unit for the tests in part a.? c. List the attributes for testing in part a. d. Assume an ARO of 10 percent and a TER of 5 percent for tests of controls and 6 percent for substantive tests of transactions. The EPER for tests of controls is 1.0 percent, and for substantive tests of transactions it is 0.5 percent. What is the initial sample size for each attribute?
> 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. Tolerable misstatement for accounts receivable confirmation sampling is
> 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 are common tests of details of balances or substantive analytical procedures for the audit of accounts receivable: 1. Select 20 customer accounts from the accounts receivable master file and trace to the aged accounts receivable listing to
> The Salah Company sells electronics equipment and has grown rapidly in the last year by adding new customers. The audit partner has asked you to evaluate the allowance for doubtful accounts at December 31, 2019. Comparative information on sales and accou
> Describe the purpose of obtaining a cutoff bank statement or obtaining online access to the client’s bank activity after year end.
> Describe how electronic confirmation of cash balances through third-party intermediaries can improve the cash confirmation process.
> How would an auditor test the realizable value audit objective for a financial instrument classified as a level 3 fair value estimate?
> State the most important factors affecting the sample size in confirmations of accounts receivable.
> 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.
> You have been asked to provide assurance on information contained in New Dominion’s Corporate Sustainability Report. What standards would you use to perform this engagement?
> Five months after issuing an unqualified audit opinion and an unqualified opinion on internal controls for the audit of the year ended December 31, 2019, for a large publicly traded client, the client and the auditor become aware of a material misstateme
> Identify three tests of controls or substantive tests of transactions in the payroll and personnel cycle that an auditor may perform using audit software.
> Identify and describe the transaction-related and balance-related presentation audit objectives. Explain how many of the procedures to test presentation objectives are integrated with tests performed in earlier stages of the audit.
> Explain how unacceptable results from tests of controls and substantive tests of transactions might impact the auditor’s planned reliance on tests of details of balances.
> Why do CPA firms sometimes use a combination of positive and negative confirmations on the same audit?
> Included in the December 31, 2019, inventory of the Wholeridge Supply Company are 2,600 deluxe ring binders in the amount of $5,902. An examination of the most recent acquisitions of binders showed the following costs: January 26, 2020, 2,300 at $2.42 ea
> Identify three asset accounts, three expense accounts, and three liability accounts typically associated with acquisition and payment cycle transactions.
> What is the importance of cash discounts to the client and how can the auditor verify whether they are being taken in accordance with company policy?
> Describe factors the auditor should consider in developing an expectation for depreciation while performing a substantive analytical procedure for depreciation expense.
> Explain why asset impairments are difficult to identify and audit. How might a client or auditor use a valuation specialist in determining the fair value of property and equipment?
> Explain the purpose of an attestation engagement and provide an example of an assertion a CPA could attest to.
> List the factors that should affect the auditor’s decision whether to analyze an account balance.
> Explain the difference between probabilistic and non-probabilistic sample selection.
> Which documents will be used to verify accrued property taxes and the related expense accounts?
> Describe why the use of MUS sampling provides little, if any, evidence related to the completeness balance-related audit objective.
> Describe two major changes a client may make to its supply-chain management system and discuss how those changes might increase or decrease the risk of material misstatement in specific accounts.
> Identify the nine accounts receivable balance-related audit objectives. For each objective, list one audit procedure.
> Explain why you agree or disagree with the following statement: “In most audits, it is more important to test carefully the cutoff for sales than for cash receipts.” Describe how you perform each type of test, assuming documents are prenumbered.
> Define 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)
> The CPA examines all unrecorded invoices on hand as of February 28, 2020, the last day of the audit. Which of the following misstatements is most likely to be uncovered by this procedure? Explain. a. Accounts payable are overstated at December 31, 2019.
> Describe what is meant by an operational audit.
> Identify the key required reports of the Single Audit Act and OMB Uniform Guidance.
> 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 s
> What is the relationship between ARIA for tests of details of balances and ARO for tests of controls?
> How does stratifying an account balance population for sampling differ from using data analytics to audit the entire balance?
> What are the major differences between (a) audit sampling for tests of controls and substantive tests of transactions and (b) audit sampling for tests of details of balances?
> 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?
> The following misstatements are sometimes found in the sales and collection cycle’s account balances: 1. Several cash receipts were posted to the incorrect customer accounts. 2. A shipment made in the subsequent period is recorded as a current period sal
> With advances in technology, an increasing number of data analysis techniques are being used on audit engagements to increase both efficiency and effectiveness. In an article titled “Introduction to Data Analysis for Auditors and Accountants,” published
> You are responsible for designing the audit of notes receivable for Hickory Appliance Retailers, which sells appliances and electronics to consumers for their homes or small businesses. Hickory Appliance has eight store locations in different cities loca
> Identify two types of substantive analytical procedures an auditor may perform in testing purchases.
> List three audit procedures that are primarily for the detection of fraud and state the type of fraud the procedure is meant to uncover.
> This problem is based on the JA Tires data that was introduced in early chapters. In problem 14-32 you used audit software to test the entire population of transactions for certain attributes. However, assume the following attributes will be tested for a
> The sampling data sheet below is missing selected information for six attributes involving tests of transactions for the sales and collection cycle. Required: a. Use Table 15-8 (p. 519) and Table 15-9 (p. 521) to complete the missing information for ea
> 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 [see Figure 15-2 (p. 505) for e
> This problem requires the use of ACL software, which can be accessed through the textbook website. Information about downloading and using ACL and the commands used in this problem can also be found on the textbook website. You should read all of the ref
> The following are auditor judgments and attributes sampling results for six populations. Assume large population sizes. a. For each population, did the auditor select a smaller sample size than is indicated by using the attributes sampling tables in Ta
> The questions below relate to determining the CUER in audit sampling for tests of controls, using the following table: Required: a. Using nonstatistical sampling, calculate TER - SER for each of columns 1 through 8 and evaluate whether or not the calcu
> The following questions concern the determination of the proper sample size in audit sampling using the following table: a. Assume that the initial sample size for column 1 using nonstatistical sampling is 90 items. For each of columns 2 through 7, use
> The following multiple choice questions concern interest-bearing liabilities. Choose the best response. a. Which of the following controls will most likely justify a reduced assessed level of control risk for the completeness assertion for notes payable?
> The following questions deal with discovering fraud in auditing year-end cash. Choose the best response. a. Which of the following cash transfers results in a misstatement of cash at December b. The auditor should control and verify all liquid assets s
> Why does an auditor review sales returns subsequent to year end? What audit objective does this procedure satisfy?
> 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
> The following questions deal with contingent liabilities and the review for subsequent events. Choose the best response. a. When a contingency is resolved subsequent to the issuance of audited financial statements, which correctly contained disclosure of
> The following questions concern accumulating evidence in the acquisition and payment cycle. Choose the best response. a. In auditing accounts payable, an auditor’s procedures most likely will focus primarily on management’s assertion of (1) existence. (2
> The following questions concern the audit of accounts in the capital acquisition and repayment cycle. Choose the best response. a. Which of the following audit procedures would be most relevant when examining the completeness transaction-related audit ob
> 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 deal with confirmation of accounts receivable. Choose the best response. a. The return of a positive confirmation of accounts receivable without an exception attests to the (1) collectibility of the receivable balance. (2) accurac
> The following questions concern analytical procedures in the sales and collection cycle. Choose the best response. a. As a result of analytical procedures, the auditor determines that the gross profit percentage has declined from 30 percent in the preced
> The following questions concern internal controls in the payroll and personnel cycle. Choose the best response. a. An auditor found that employee time records in one department are not properly approved by the supervisor. Which of the following could res
> The following questions concern internal controls in the acquisition and payment cycle. Choose the best response. a. Which of the following questions is an auditor least likely to include on an internal control questionnaire concerning the initiation and
> The following questions concern internal controls in the acquisition and payment cycle. Choose the best response. a. An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal and the cash disbursements journ
> Identify when an auditor would not use sampling to test the effectiveness of a control or perform a substantive tests of transactions. Explain circumstances when an auditor could test the entire population using a data analytic procedure using audit soft
> The following questions concern audit testing of the payroll and personnel cycle. Choose the best response. a. A common audit procedure in the audit of payroll transactions involves tracing selected items from the payroll journal to employee time records
> 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 (1) insured values greatly in excess of carrying amoun
> 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 (1) select items of equipment from the accounting
> The following questions concern audit objectives and management assertions for accounts receivable. Choose the best response. a. Which of the following will likely provide the most assurance concerning the accuracy balance-related objective for accounts
> The following items concern determining exception rates using random sampling from large populations using attributes sampling. Select the best response. a. The upper precision limit (CUER) in statistical sampling is (1) the percentage of items in a samp
> 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
> The following questions concern information accompanying basic financial statements. Choose the best response. a. The Form 10-K filed by management of a public company includes a section on management’s discussion and analysis (MD&A) in addition to the a
> The following questions concern communications between management, those charged with governance, and the auditor. Choose the best response. a. Which of the following is not a required item to be communicated by the auditor to the audit committee or othe
> 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
> 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 (1) includes an opinion about the suitability of the design of controls at the service
> The auditor will select the MUS sample from the 3,140 inventory items described in Question 17-10 using systematic sampling. Assuming a random starting point of 123,608, identify the cumulative dollar amounts associated with the first five sample items.
> The following are miscellaneous questions about compilation and review services. Choose the best response. a. Which of the following best describes the responsibility of the CPA in performing compilation services for a company? (1) The CPA has to satisfy
> The following questions deal with operational auditing. Choose the best response. a. Which of the following best describes the operational audit? (1) It concentrates on seeking aspects of operations in which waste would be reduced by the introduction of
> The following questions deal with governmental auditing. Choose the best response. a. Although the scope of audits of recipients of federal financial assistance in accordance with federal audit regulations varies, these audits generally have which of the
> The following questions deal with internal auditing. Choose the best response. a. The independence of the internal audit department will most likely be assured if it reports to the (1) audit committee of the board. (2) president. (3) controller. (4) vice
> 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 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 pu
> Define the sampling interval when using MUS sampling. How is it calculated?
> What are the most significant balance sheet and income statement accounts related to the acquisition and payment cycle?
> 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?
> Explain the major difference between statistical and nonstatistical sampling. Are both methods acceptable according to auditing standards?
> An auditor is determining the appropriate sample size for testing inventory valuation using MUS. The population has 3,140 inventory items valued at $19,325,000. The tolerable misstatement is $575,000 at a 10 percent ARIA. No misstatements are expected in
> Distinguish between a positive and a negative confirmation and state the circumstances in which each should be used.
> Which of the nine accounts receivable balance-related audit objectives can be partially satisfied by confirmations with customers?
> Describe two types of substantive analytical procedures often performed in the audit of the sales and collection cycle and describe how they might indicate a possible misstatement in the financial statements.
> What are the steps of the audit sampling process that differ across statistical and nonstatistical sampling approaches? In what ways do they differ?
> How does an auditor evaluate the unadjusted misstatement schedule (also called summary of possible misstatements) at the end of the audit engagement to assess whether the financial statements are fairly presented?
> Explain the purpose of a client letter of representation. What types of information are normally included in the letter?
> Distinguish the three types of service organization reports.
> Distinguish among engagements to prepare, compile, and review financial statements. What is the level of assurance for each?
> 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. As a staff auditor, you need to develop a sampling plan and select an unbiased random sample for each of the three independent scenarios listed below. The in-charge on the audit engagement has instructed you to use the Excel RANDBETWEEN function to se
> Describe how auditors might use data visualization techniques to perform analytical procedures on disaggregate data for sales or accounts receivable. Provide a specific example.
> Auditing standards provide general guidance to auditors regarding audit sampling but do not require statistical versus nonstatistical sampling or specify which sampling method auditors should use. Search the Internet for “PCAOB Audit Sampling” or go to p
> This problem requires the use of ACL software, which can be accessed through the textbook website. Information about downloading and using ACL and the commands used in this problem can also be found on the textbook website. You should read all of the ref
> In the confirmation of accounts receivable for the Reliable Service Company, 85 positive and no negative confirmations were mailed to customers. This represents 35 percent of the dollar balance of the total accounts receivable. Second requests were sent
> The following are various changes in audit circumstances. Audit Circumstance 1. The client began experiencing an increase in returns due to product changes that resulted in increased defects. 2. You found several pricing errors in your substantive tests
