Test Bank Of Auditing The Art and Science of Assurance Engagements, Canadian 12th Edition By Alvin A. Arens

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Test Bank Of Auditing The Art and Science of Assurance Engagements, Canadian 12th Edition By Alvin A. Arens

 

Auditing, 12e (Arens)

Chapter 3   Professional Relationships: The Role of Ethics and Independence

 

3.1   Describe ethics and their relevance

 

1) Ethical behaviour is considered to be a cornerstone for trust in everyday life as well as in business practices. Ethics are

  1. A) beliefs that we have about our own behaviour.
  2. B) a set of moral principles or values.
  3. C) rules in society that help us to do the right thing.
  4. D) laws that govern how businesses should behave.

Answer:  B

Diff: 1     Type: MC     Page Ref: 48

Learning Obj.:   3-1  Describe ethics and their relevance

 

2) Ethical dilemmas occur when

  1. A) you know what you want to do but the rules say otherwise.
  2. B) businesses disregard the laws and engage in illegal behaviour.
  3. C) a person chooses to act in his/her own interest.
  4. D) a choice must be taken about appropriate behaviour.

Answer:  D

Diff: 2     Type: MC     Page Ref: 49

Learning Obj.:   3-1  Describe ethics and their relevance

 

3) A public accountant would be facing an ethical dilemma when deciding whether or not to

  1. A) overlook a material overstatement of revenues to maintain a good client relationship.
  2. B) overlook a non material error in the financial statements.
  3. C) accept an invitation from the client to go golfing in order to maintain a good client relationship.
  4. D) participate in a charitable activity organized by the client.

Answer:  A

Diff: 3     Type: MC     Page Ref: 49-50

Learning Obj.:   3-1  Describe ethics and their relevance

 

4) Formal frameworks have been developed to help people resolve ethical dilemmas. After obtaining the relevant facts and identifying the ethical issues from the facts, what is the next step in the six-step ethical framework?

  1. A) Decide on the appropriate action to be taken in resolving the ethical dilemma.
  2. B) Identify the likely consequences of actions that will be taken.
  3. C) Determine who is affected by the outcome of the dilemma and how they are affected.
  4. D) Identify the alternatives available to the person who must resolve the dilemma.

Answer:  C

Diff: 3     Type: MC     Page Ref: 50

Learning Obj.:   3-1  Describe ethics and their relevance

 

5) Frank has discovered that his employer is part of a group of banks that is manipulating interest rates. He would like to stop this practice at his employer, and is not sure how best to talk to his boss. He has heard of the GVV (Giving Voice to Values) approach, and thinks he may be able to use it successfully because his company has recently implemented new initiatives to empower employees to speak of improvements to business practices. The first step of the GVV approach includes

  1. A) identifying the stakeholders, what is at stake for them, and how to connect with them.
  2. B) identifying the values underpinning the different positions in the conflict and the possibilities for action.
  3. C) considering Frank’s personal and professional purpose and choices in this situation.
  4. D) development and practice of a powerful response that Frank can use with his boss.

Answer:  B

Diff: 2     Type: MC     Page Ref: 50

Learning Obj.:   3-1  Describe ethics and their relevance

 

6) Frank has discovered that his employer is part of a group of banks that is manipulating interest rates. He would like to stop this practice at his employer, and is not sure how best to talk to his boss. He has heard of the GVV (Giving Voice to Values) approach, and thinks he may be able to use it successfully because his company has recently implemented new initiatives to empower employees to speak of improvements to business practices. After identifying and clarifying the ethical issue, what should Frank do next?

  1. A) identify the stakeholders, what is at stake for them, and how to connect with them
  2. B) identify the values underpinning the different positions in the conflict and the possibilities for action
  3. C) consider his personal and professional purpose and choices in this situation
  4. D) develop and practice a powerful response that he can use with his boss

Answer:  C

Diff: 2     Type: MC     Page Ref: 50

Learning Obj.:   3-1  Describe ethics and their relevance

 

7) Frank has discovered that his employer is part of a group of banks that is manipulating interest rates. He would like to stop this practice at his employer, and is not sure how best to talk to his boss. He has heard of the GVV (Giving Voice to Values) approach, and thinks he may be able to use it successfully because his company has recently implemented new initiatives to empower employees to speak of improvements to business practices. After considering his personal and professional purpose and choices, what should Frank do next?

  1. A) identify the stakeholders, what is at stake for them, and how to connect with them
  2. B) identify the values underpinning the different positions in the conflict and the possibilities for action
  3. C) practice what he is going to say, with help from a mentor or coach
  4. D) develop a powerful response that he can use with his boss, using external research or resources

Answer:  A

Diff: 2     Type: MC     Page Ref: 50

Learning Obj.:   3-1  Describe ethics and their relevance

 

8) Frank has discovered that his employer is part of a group of banks that is manipulating interest rates. He would like to stop this practice at his employer, and is not sure how best to talk to his boss. He has heard of the GVV (Giving Voice to Values) approach, and thinks he may be able to use it successfully because his company has recently implemented new initiatives to empower employees to speak of improvements to business practices Frank has identified who is affected, what is at stake for them, and how to connect with them. What is his next step, using the GVV analysis framework?

  1. A) list the values underpinning the different positions in the conflict
  2. B) consider his personal and professional purpose and choice in this situation
  3. C) practice what he is going to say, with help from a mentor or coach
  4. D) craft a useful, powerful response that he could use, taking into account multiple options

Answer:  D

Diff: 2     Type: MC     Page Ref: 50

Learning Obj.:   3-1  Describe ethics and their relevance

 

9) Frank has discovered that his employer is part of a group of banks that is manipulating interest rates. He would like to stop this practice at his employer, and is not sure how best to talk to his boss. He has heard of the GVV (Giving Voice to Values) approach, and thinks he may be able to use it successfully because his company has recently implemented new initiatives to empower employees to speak of improvements to business practices. Frank has crafted a useful, powerful response that he could use, taking into account multiple options. He has conducted research to make him more informed on the issue, and has consulted a friend who is expert in this area. What should is the next thing he should do before talking to his boss?

  1. A) review the values underpinning the different positions in the value conflict
  2. B) further develop and practice his response (scripting) and get help (coaching)
  3. C) review the different possibilities for action to make sure that he has considered enough
  4. D) check his stakeholder analysis to make sure that it is thorough and complete

Answer:  B

Diff: 2     Type: MC     Page Ref: 50

Learning Obj.:   3-1  Describe ethics and their relevance

 

 

10) Describe an ethical dilemma that an auditor or an accountant might face in his or her business career, then illustrate how the auditor or accountant might use the six-step approach presented in Chapter 3 to resolve that dilemma. Be specific.

Answer:  Although students’ answers will vary depending on the dilemma, their answer should list the following six steps, along with a discussion of how each step relates to their particular dilemma:

  1. Obtain the relevant facts. Students should list the key facts from their dilemma.
  2. Identify the ethical issues from the facts. Students should identify the key ethical issue(s) in their dilemma.
  3. Determine who is affected by the outcome of the dilemma and how each person or group is affected. Students should identify who is involved and how each party is affected by the dilemma.
  4. Identify the alternatives available to the person who must resolve the dilemma. Students should list the alternatives available to the auditor or accountant.
  5. Identify the likely consequence of each alternative. Students should identify both the short- and long-term effects of each alternative.
  6. Decide on the appropriate action.

Note: Students could be asked to use the 5-step GVV approach instead, discussed on pages 50 to 52.

Diff: 3     Type: ES     Page Ref: 50

Learning Obj.:   3-1  Describe ethics and their relevance

3.2   Explain how PAs are different from other professionals

 

1) Society has attached a special meaning to the term professional. A professional is

  1. A) someone who has passed a qualifying exam to enter the job market.
  2. B) any person who receives pay for the services performed.
  3. C) a person who is expected to conduct himself or herself at a higher level than the requirements of society’s laws or regulations.
  4. D) someone who has both an education in the trade and on-the-job experience received under an experienced supervisor.

Answer:  C

Diff: 1     Type: MC     Page Ref: 52

Learning Obj.:   3-2  Explain how PAs are different from other professionals

 

2) The underlying reason for a high level of professional conduct, such as exemplified in a code of conduct, for any profession is

  1. A) the need for public confidence in the quality of service of the profession.
  2. B) that it provides a safeguard to keep unscrupulous people out.
  3. C) that it is required by federal legislation.
  4. D) that it allows licensing agencies to have a yardstick to measure deficient performance.

Answer:  A

Diff: 1     Type: MC     Page Ref: 53

Learning Obj.:   3-2  Explain how PAs are different from other professionals

 

 

3) It is not practical for users to evaluate the quality of the performance of most professional services because of their

  1. A) complexity.
  2. B) legal standing.
  3. C) veracity.
  4. D) salaries and working conditions.

Answer:  A

Diff: 1     Type: MC     Page Ref: 53

Learning Obj.:   3-2  Explain how PAs are different from other professionals

 

4) Financial statement users cannot be expected to evaluate audit performance because they will not have the time or the competence to do so. In such a situation, how is public confidence in the quality of professional services enhanced? When there are

  1. A) only business majors hired to work as auditing students with public accounting firms.
  2. B) adequate controls at the public accounting firm to limit the amount of overtime worked.
  3. C) high standards of performance and conduct on the part of all practitioners.
  4. D) strict rules about the type of work that employees should complete on a daily basis.

Answer:  C

Diff: 2     Type: MC     Page Ref: 53

Learning Obj.:   3-2  Explain how PAs are different from other professionals

5) The need to implement philosophies and practices commonly referred to as “improved business practices” comes from

  1. A) increased competition resulting in public accounting firms being concerned about keeping clients and maintaining a reasonable profit.
  2. B) a CAS pronouncement.
  3. C) a GAAP pronouncement.
  4. D) a need to increase profitability on assurance type mandates.

Answer:  A

Diff: 2     Type: MC     Page Ref: 53

Learning Obj.:   3-2  Explain how PAs are different from other professionals

 

6) In a code of conduct, the advantage of general statements of ideal conduct, as opposed to specific rules of behaviour, is

  1. A) the emphasis on positive activities that encourage a high level of performance.
  2. B) the ability to enforce the ideals.
  3. C) the enforceability of minimum behaviour and performance standards.
  4. D) the tendency to define the rules as maximum rather than minimum standards.

Answer:  A

Diff: 2     Type: MC     Page Ref: 54-55

Learning Obj.:   3-2  Explain how PAs are different from other professionals

 

 

7) PAs are members of a professional association that can impose sanctions for violations of the professional code of conduct. What is an example of a severe penalty that can be imposed by a professional association?

  1. A) Publication of information about the offence in a newsletter
  2. B) Requirement of the completion of training courses
  3. C) Requirement to have another peer review conducted within one year
  4. D) Expulsion from the professional association

Answer:  D

Diff: 2     Type: MC     Page Ref: 55, 66

Learning Obj.:  3-2  Explain how PAs are different from other professionals; 3-3  Examine the threats to independence and explain how the threats can be mitigated

 

8) The disadvantage of general statements in codes of professional conduct is

  1. A) the emphasis on positive activities.
  2. B) that they identify ideal conduct.
  3. C) the difficulty of enforcing general ideals without minimum standards of behaviour.
  4. D) that there are too many to remember.

Answer:  C

Diff: 1     Type: MC     Page Ref: 55

Learning Obj.:   3-2  Explain how PAs are different from other professionals

 

9) A code of professional conduct typically includes principles, rules of conduct, and interpretations or examples. What is the purpose of the principles?

  1. A) state what a practitioner must do for each audit engagement conducted
  2. B) provide discussions of the rules of conduct and how they relate to practical situations
  3. C) provide minimum standards of ethical conduct stated specifically
  4. D) provide ideal standards of ethical conduct stated in philosophical terms

Answer:  D

Diff: 2     Type: MC     Page Ref: 56

Learning Obj.:   3-2  Explain how PAs are different from other professionals

10) Which portions of the code of professional conduct are enforceable?

  1. A) Principles and rules
  2. B) The rules of conduct
  3. C) Interpretations
  4. D) Rules and interpretations

Answer:  B

Diff: 3     Type: MC     Page Ref: 56-57

Learning Obj.:   3-2  Explain how PAs are different from other professionals

 

 

11) One difference between auditors and other professionals is that most professionals

  1. A) need not be concerned about maintaining independence.
  2. B) don’t have requirements for continuing education beyond university.
  3. C) don’t have to pass a rigorous examination.
  4. D) aren’t expected to act in the public interest.

Answer:  A

Diff: 2     Type: MC     Page Ref: 57

Learning Obj.:   3-2  Explain how PAs are different from other professionals

 

12) Generally, all of the rules of professional conduct for CAs apply to

  1. A) students in public practice.
  2. B) students and members.
  3. C) all members.
  4. D) members in public practice.

Answer:  D

Diff: 3     Type: MC     Page Ref: 57

Learning Obj.:   3-2  Explain how PAs are different from other professionals

 

13) As a member of a professional accounting association, when considering the applicability of the rules of professional conduct, a PA would be responsible for compliance by

  1. A) themselves only.
  2. B) their partners in the practice and themselves.
  3. C) their employees.
  4. D) themselves, their employees, and partners.

Answer:  D

Diff: 2     Type: MC     Page Ref: 57

Learning Obj.:   3-2  Explain how PAs are different from other professionals

14) Discuss the ways the accounting profession and society encourage public accountants to conduct themselves in a professional manner; i.e., the factors that influence the ethical conduct of audit practitioners.

Answer:  There are many factors that encourage public accountants to conduct themselves at a high level, including:

  • GAAS and interpretations.
  • Rules of Professional Conduct.
  • Legal liability.
  • Public accounting firm quality control standards.
  • Practice inspection.
  • Canadian Public Accountability Board.
  • Continuing professional education requirements.
  • Professional examinations such as the CICA Uniform Final Examination.
  • Provincial securities commissions.
  • Audit committees.

Diff: 2     Type: ES     Page Ref: 54-57

Learning Obj.:   3-2  Explain how PAs are different from other professionals

 

 

15) Identify and describe each of the three parts to the Code of Professional Conduct. Also discuss which parts are officially enforceable and which are not.

Answer:  The three parts to the Code are:

  • Principles. These establish ideal standards of ethical conduct stated in philosophical terms. They are not officially enforceable.
  • Rules of conduct. These are the minimum standards of ethical conduct stated as specific rules. They are officially enforceable.
  • Interpretations. Interpretations of rules are intended to clarify the rules of conduct. They are not officially enforceable, but a practitioner must justify any departure.

Diff: 2     Type: ES     Page Ref: 56-57

Learning Obj.:   3-2  Explain how PAs are different from other professionals

 

 

16) Each of the following situations involves a possible violation of the independence requirements of the provincial institutes’ Rules of Professional Conduct. For each situation, (1) decide whether the Rules have been violated, and (2) briefly explain how the situation violates (or does not violate) the Rules.

 

  1. A) Mike Lednicky, public accountant, is a partner in the Oshawa office of Arthur & Thompson, public accountants. Mike’s brother is employed as an inventory warehouse supervisor (an audit-sensitive position) by Sweeny Appliances, a publicly-held company in Manitoba. Sweeny Appliances is one of Arthur & Thompson’s audit clients. Neither Mike nor the Oshawa office of Arthur & Thompson is involved in the audit of Sweeny Appliances.

Violation? Yes No

Explanation:

 

  1. B) The accounting firm of Finke & Hersley, public accountants, provides bookkeeping and tax services for Hendershot Corporation. Finke & Hersley also performs the annual audit of Hendershot Corporation.

Violation? Yes No

Explanation:

 

  1. C) Brent Shaw, public accountant, is the auditor of Cafe Eccel. A couple of weeks ago, Cafe Eccel’s management expressed an intention to commence litigation against Brent, alleging he was negligent in last year’s audit. Brent believes there is a strong possibility that management will proceed with the litigation. However, Cafe Eccel has not fired Brent as its auditor, and he is now working on the current year’s audit of Cafe Eccel.

Violation? Yes No

Explanation:

 

  1. D) Melissa Barry, public accountant, is the auditor of Audio Video Inc. Audio Video has not paid Melissa’s audit fee for the past two years. Melissa is working on the current year’s audit of Audio Video.

Violation? Yes No

Explanation:

 

Answer:

  1. A) No violation. Although partners in a public accounting firms are not allowed to have close relatives employed in a position of significant influence by a client, it is acceptable to have a close relative employed in an audit-sensitive position (with no significant influence), particularly as Mike is not involved in the audit engagement.
  2. B) No violation. The Rules of Professional Conduct do not prohibit public accounting firms from providing bookkeeping, tax, and audit services to the same client, as long as the client is not a listed entity and management approves the transactions and journal entries.
  3. C) Violation. When there is a lawsuit or intent to start a lawsuit between a public accountant and an audit client’s management, independence is impaired.

 

  1. D) No violation. While independence may be impaired if fees remain unpaid for services provided more than one year prior to the date of the report in some cases, there is no requirement under the Rules of Professional Conduct not to continue in the role as auditor. Melissa should document in her audit file how she has dealt with this self-interest threat and the steps that the client is taking to pay fees.

Diff: 3     Type: ES

Learning Obj.:  3-2  Explain how PAs are different from other professionals; 3-3 Examine the threats to independence and explain how the threats can be mitigated

 

 

17) Each of the following situations involves a possible violation of the provincial institutes’ Rules of Professional Conduct. For each situation (1) decide whether or not the rules have been violated, and (2) briefly explain how the situation violates (or does not violate) the rules.

 

  1. A) Carla is the CFO of Xenon Company. Carla was very happy after her husband Dwayne, a partner at a large PA firm was assigned as the new auditor of the company. Carla is confident that this will be helpful to Xenon since Dwayne already knows so much about the business.

Violation? Yes No

Explanation:

 

  1. B) Jeremy accepted a summer internship at a PA firm. Jeremy’s parents own 0.1% of Raven Inc, a large public company in Austria. Raven Inc. is a client of the Austrian branch of the PA firm. Jeremy reported this to the partner of his office.

Violation? Yes No

Explanation:

 

  1. C) Ken Burns is a partner at Burns and Fields LLP, a PA firm. Ken was approached by a friend who asked him to invest in Safran Group Inc., a growing high tech company. The proposal would be for Ken to invest $650,000 to obtain 1% of the company. Ken decided to go ahead with the investment because Safran is a client from their Seattle office and he has never provided any services to Safran Inc. Ken indicates that he will ensure that he does not work on the audit of Safran.

Violation? Yes No

Explanation:

 

  1. D) Sintron Inc. is a payroll processing company. Over the past 5 years, Clarkson Coppers LLP, a PA firm, has outsourced its payroll processing and other human resources tasks to Sintron. Clarkson Coopers LLP is happy to outsource more functions to Sintron as Sintron has asked Clarkson for additional consulting services with regards to system implementation and application of new accounting policies.

Violation? Yes No

Explanation:

 

Answer:

  1. A) Violation. Independence is violated as a direct family member holds a position overseeing the financial reporting.
  2. B) No violation. Since Jeremy is only a student, this will not be a violation as long as Jeremy is not staffed to work on any mandate for Raven. Jeremy did the right thing by reporting his interest in Raven to the Partner.
  3. C) Violation. As a partner, Ken is not able to own more than 0.1% of any company audited by the PA firm, even if it is not a direct client of Ken’s office.
  4. D) No Violation. The type of services that Clarkson Coopers appears to be providing are non-assurance services. Therefore, this would not create a conflict of interest.

Diff: 3     Type: ES

Learning Obj.:  3-2  Explain how PAs are different from other professionals; 3-3  Examine the threats to independence and explain how the threats can be mitigated

18) Raul, PA, received a call from his friend Cristobal Franco. He needed an audit urgently, because the bank might call his loan for his computer store CF Ltd. Since Cristobal had been his high school friend and they still played soccer together every two weeks, Raul agreed. Raul and Cristobal had a quick meeting, where Raul fixed the audit fee at $10,000. Cristobal stressed the importance of an unqualified opinion for the bank.

Raul sent two available junior staff to CF’s offices. The junior staff were experienced in review engagements, and had been working for Raul for about six months. The two staff had a quick look around the store, noting the documents strewn everywhere. The accounting staff came in and chatted briefly after their smoke break. They were about a month behind on recording transactions, because Cristobal had laid off one sales person. The accounting staff also helped out with providing sales quotes and Cristobal did all of the technical work.

At the end of the day, the junior staff were each given a $250 gift certificate to be used in the computer store. This was great, because CF also sold MP3 players and supplies such as CDs and DVDs.

At dinner that night, the junior staff told their family that it would probably be a great idea to hold off on any computer supplies or equipment purchases that they needed, since CF would likely hold a sale in the next month or two to improve cash flow.

Required:

Identify and discuss the violations in the rules of conduct with respect to CF.

Answer:  Raul is too familiar (familiarity threat) with Cristobal (i.e. they are close friends socially, and have known each other for many years). This violates independence.

Raul set a fixed price for the audit without even assessing the amount of work to be conducted. This is a self-interest threat (the appropriate amount of work may not be completed as it will cost Raul money to do so), and jeopardizes the ability of the work to be properly completed in accordance with GAAS.

Cristobal indicated that he needed a clean audit opinion, and Raul complied. This could be as a consequence of the familiarity threat, but means that Raul could be associating himself with false and misleading financial information.

The junior staff are not competent to conduct an audit, so technical competence (GAAS) has been violated. They were also not properly supervised (a violation of GAAS).

Junior staff were bribed (the gift certificate) and should not have accepted the certificates.

The junior staff violated confidentiality when they discussed the likelihood of a sale at CF with their families.

Diff: 2     Type: ES

Learning Obj.:  3-2  Explain how PAs are different from other professionals; 3-3  Examine the threats to independence and explain how the threats can be mitigated

 

19) You are having lunch with a former employee of your firm, a friend of yours. Gino had been laid off last year when he had failed to pass his professional examinations for the third year in a row. Gino told you that he managed to obtain a CMA designation in the past year, and has started his public practice.

He has been circulating flyers and electronic email announcements with fixed rates: $400 for a compilation engagement, $1,000 for a review, and $5,000 for an audit where revenues are less than $1 million, $15,000 for an audit for a client with revenues up to $5 million. He already has clients to keep him busy for the next three months. He even has some feelers for clients that he personally handled while he was working for your firm – there were a lot of contacts developed during the five years that he was working there! To help attract some of the larger clients, he is considering not charging any fee for the first ten hours spent on tax-related services.

Gino ended the conversation by asking you if you would like to join him in his new firm, because at this rate he’ll need a second person real soon!

Required:

Identify the violations in the professional rules of conduct and explain why they are violations.

Answer:  Gino is actively soliciting clients of other firms (including his former employer) which is a violation. He should be placing general advertisements or providing only announcements. Gino

is providing fixed fee engagements, without conducting any planning or assessing the risk in the engagements. This means that he may be likely to conduct inadequate field work, violating GAAS.

Not charging for the tax work is also a violation, since this creates the same type of pressure for Gino to not conduct his remaining audit work in accordance with GAAS.

Diff: 2     Type: ES

Learning Obj.:  3-2  Explain how PAs are different from other professionals; 3-3  Examine the threats to independence and explain how the threats can be mitigated

 

3.3   Examine the threats to independence and explain how the threats can be mitigated

 

1) “Independence” in auditing means

  1. A) remaining aloof from the client.
  2. B) not being financially dependent on the client.
  3. C) impartiality in performing professional services.
  4. D) being an advocate for the client.

Answer:  C

Diff: 1     Type: MC     Page Ref: 58

Learning Obj.:   3-3  Examine the threats to independence and explain how the threats can be mitigated

 

2) When public accountants are able to maintain an independent attitude in fulfilling their responsibility, it is referred to as independence in

  1. A) fact.
  2. B) appearance.
  3. C) conduct.
  4. D) total.

Answer:  A

Diff: 1     Type: MC     Page Ref: 58

Learning Obj.:   3-3  Examine the threats to independence and explain how the threats can be mitigated

3) When the users of financial statements have confidence in the independence of the public accountant, it is referred to as independence in

  1. A) fact.
  2. B) appearance.
  3. C) conduct.
  4. D) total.

Answer:  B

Diff: 2     Type: MC     Page Ref: 58

Learning Obj.:   3-3  Examine the threats to independence and explain how the threats can be mitigated

 

4) When should a PA assess the five threats to independence with respect to an audit engagement?

  1. A) When deciding to accept a client or whether to continue an existing engagement
  2. B) After signing the engagement letter and before commencing field work
  3. C) After the completion of this year’s audit, before starting the next engagement
  4. D) After a discussion with the Board of Directors

Answer:  A

Diff: 2     Type: MC     Page Ref: 58

Learning Obj.:   3-3  Examine the threats to independence and explain how the threats can be mitigated

 

5) Which of the following situations would be an example of a self-interest threat that would prevent a PA from auditing the client?

  1. A) The PA’s uncle owns the business that the PA is auditing.
  2. B) For the last two years, the client could not pay their fees, so the PA created a loan agreement covering the fees, with the client paying 10% interest on the fees.
  3. C) The PA has a small bank loan at normal business interest rates with the bank that his firm is auditing.
  4. D) The PA has purchased a used car from one of the employees of the client.

Answer:  B

Diff: 3     Type: MC     Page Ref: 58-59

Learning Obj.:   3-3  Examine the threats to independence and explain how the threats can be mitigated

 

6) Which of the following situations best describes an advocacy threat? PA has been hired to

  1. A) consult with the corporate controller and the bank manager about the conditions for financing a loan.
  2. B) manage the accounting department for three weeks while the corporate controller is on vacation.
  3. C) complete the personal tax returns of all executive management.
  4. D) prepare the year end journal entries for a subsidiary company.

Answer:  A

Diff: 3     Type: MC     Page Ref: 58-59

Learning Obj.:   3-3  Examine the threats to independence and explain how the threats can be mitigated

7) Which of the following situations would be an example a of self-review threat? Prior to commencing the audit engagement, PA has completed

  1. A) personal and corporate tax returns.
  2. B) audit of a company where the client owns a minority interest.
  3. C) purchase price allocation calculation for a company that the client purchased during the year.
  4. D) audit of the non-for profit organization of the client.

Answer:  C

Diff: 3     Type: MC     Page Ref: 58-59

Learning Obj.:   3-3  Examine the threats to independence and explain how the threats can be mitigated

 

8) Why does a self-review threat pose a problem when conducting an audit engagement?

  1. A) The audit can be conducted more efficiently.
  2. B) You are auditing your own work, and may not detect inadequacies.
  3. C) The audit is more expensive, as you have to provide clear documentation.
  4. D) The auditor may not have the expertise to complete the special work.

Answer:  B

Diff: 2     Type: MC     Page Ref: 58-59

Learning Obj.:   3-3  Examine the threats to independence and explain how the threats can be mitigated

 

9) According to the profession’s ethical standards, an auditor would be considered independent in which of the following instances? The

  1. A) auditor’s chequing account, which is fully insured by CDIC, is held at a client financial institution.
  2. B) client comprises 75% of the auditor’s fees.
  3. C) auditor does not have enough employees to meet the client’s reporting deadline.
  4. D) client owes the auditor fees for two consecutive annual audits.

Answer:  A

Diff: 2     Type: MC     Page Ref: 58-59

Learning Obj.:   3-3  Examine the threats to independence and explain how the threats can be mitigated

 

10) Which of the following situations best describes a familiarity threat?

  1. A) Design and implementation of a new payroll system
  2. B) Preparation and entry of bookkeeping transactions
  3. C) Completion of corporate transactions for subsidiary companies
  4. D) PA has been working with this client for ten years, first as a manager, now as a partner

Answer:  D

Diff: 2     Type: MC     Page Ref: 59

Learning Obj.:   3-3  Examine the threats to independence and explain how the threats can be mitigated

 

 

11) A familiarity threat at an audit engagement occurs when

  1. A) the member has a financial interest in the client.
  2. B) it is difficult to behave with professional skepticism.
  3. C) PA promotes the client’s position to third parties.
  4. D) the member discloses financial information about the client.

Answer:  B

Diff: 2     Type: MC     Page Ref: 59

Learning Obj.:   3-3  Examine the threats to independence and explain how the threats can be mitigated

12) Which of the following is the best example of an intimidation threat? Management

  1. A) has decided to sue you because the audit fee was twice as high as they expected.
  2. B) has changed auditors of all of its subsidiary companies as they can get the audit done for a lower cost.
  3. C) threatens to change auditors if you do not let them overstate accounts receivable by $100,000 (the bad debt allowance is too low).
  4. D) threatens to resign from the company if the board of directors does not give them a 15% raise.

Answer:  C

Diff: 3     Type: MC     Page Ref: 59

Learning Obj.:   3-3  Examine the threats to independence and explain how the threats can be mitigated

 

13) An intimidation threat occurs when

  1. A) it is difficult to believe the actions of management because there is a suspicion of irregular activity with respect to the recording of transaction activity.
  2. B) the auditor suspects that fraud has occurred at the middle management level of the organization.
  3. C) the auditor has been working on a client engagement for many years and has trouble believing that management would deceive the auditors.
  4. D) a client threatens the firm or its staff with respect to the content of the financial statements or with respect to the conduct of the audit.

Answer:  D

Diff: 2     Type: MC     Page Ref: 59

Learning Obj.:   3-3  Examine the threats to independence and explain how the threats can be mitigated

 

14) If a PA firm provided corporate finance services to a company during the year, which of the following engagements could the PA firm accept to provide to the same company?

  1. A) Non-assurance services
  2. B) Audit of listed entity
  3. C) Audit of non-listed entity
  4. D) Other assurance engagement

Answer:  A

Diff: 1     Type: MC     Page Ref: 60

Learning Obj.:   3-3  Examine the threats to independence and explain how the threats can be mitigated

 

15) Some independence rules apply to all assurance engagements, while others apply only to a listed entity. For the purposes of assessing the independence rules, a listed entity is defined as

  1. A) an organization with share capital exceeding $10 million that has public accountability.
  2. B) an entity whose debt or shares is listed on a stock exchange, with market capitalization and total assets greater than $10 million.
  3. C) any organization that has shares or debt listed on a stock exchange.
  4. D) an organization that has shares or debt listed on a stock exchange, and that has redeemed shares.

Answer:  B

Diff: 1     Type: MC     Page Ref: 60

Learning Obj.:   3-3  Examine the threats to independence and explain how the threats can be mitigated

16) Where an independence threat occurs, it may be that only the person affected needs to be removed from the engagement. In this case, other members of the firm can complete the engagement. An example of a situation where only the student or member would be excluded from the engagement is where PA

  1. A) has a significant financial interest in the client, such that influence could be exerted.
  2. B) used to be a controller at the client, but now works for the PA firm.
  3. C) owns ten percent of the shares of the client.
  4. D) is a board member of the client with signing authority for cheques.

Answer:  B

Diff: 2     Type: MC     Page Ref: 60

Learning Obj.:   3-3  Examine the threats to independence and explain how the threats can be mitigated

 

17) At a small practice where the bulk of the work is accounting, bookkeeping, and review engagements, what is an important procedure that should be followed by the PA to help ensure independence?

  1. A) Management should be trained in accounting principles so that they can adequately assess the PAs work.
  2. B) All transactions should be prepared and processed by client personnel.
  3. C) Transactions and journal entries should be discussed with and approved by the client.
  4. D) The accountant should avoid doing bookkeeping for review engagements, and restrict this to compilation engagements only.

Answer:  C

Diff: 3     Type: MC     Page Ref: 61

Learning Obj.:   3-3  Examine the threats to independence and explain how the threats can be mitigated

 

 

18) To ensure that employees remain independent, an audit firm should

  1. A) ask employees to sign a form confirming that they do not have an investment in a company that they are auditing.
  2. B) prohibit an employee from the Toronto office to have an investment in a company audited by the Hong Kong branch of the PA firm.
  3. C) include a section in the code of conduct indicating that the employees should not invite their client to dinner.
  4. D) refuse an audit mandate where the cousin of a staff member works in the marketing department.

Answer:  A

Diff: 3     Type: MC     Page Ref: 61

Learning Obj.:   3-3  Examine the threats to independence and explain how the threats can be mitigated

 

19) For listed clients, the audit committee should approve both the appointment of the auditor and

  1. A) all services that the PA firm provides to the client.
  2. B) an engagement that might affect the appearance of independence, such as design of control systems.
  3. C) any services that are provided for senior management.
  4. D) the material that is included in the management letter by the PA firm.

Answer:  A

Diff: 3     Type: MC     Page Ref: 62

Learning Obj.:   3-3  Examine the threats to independence and explain how the threats can be mitigated

20) In which of the following circumstances would a public accountant be bound by ethics to refrain from disclosing any confidential information obtained during the course of a professional engagement?

  1. A) The public accountant is issued a subpoena that orders the public accountant to present confidential information.
  2. B) A major shareholder of a client company seeks accounting information from the public accountant after management declined to disclose the requested information.
  3. C) Confidential client information is made available as part of a practice inspection of the public accountant’s practice.
  4. D) An inquiry by a disciplinary body of a provincial institute requests confidential client information.

Answer:  B

Diff: 2     Type: MC     Page Ref: 63

Learning Obj.:   3-3  Examine the threats to independence and explain how the threats can be mitigated

 

 

21) The confidential relationship will be violated if, without the client’s permission, the public accountant provides working papers about a client to

  1. A) a court of law which subpoenas them.
  2. B) the relevant provincial institute as part of a practice inspection.
  3. C) another public accounting firm which has just purchased the public accountant’s entire practice.
  4. D) an investigative or disciplinary body of the relevant provincial institute which is conducting a review of the public accountant’s practice.

Answer:  C

Diff: 3     Type: MC     Page Ref: 63

Learning Obj.:   3-3  Examine the threats to independence and explain how the threats can be mitigated

 

22) The rules of accounting bodies in Canada require their members to behave in the best interest of the profession and the public. Identify the situation where the accountant is acting in the best interest of the profession. An accountant

  1. A) reports a fellow accountant after noticing that the accountant helped a client with tax evasion.
  2. B) openly criticizes a fellow accountant’s competencies after having lost a bid for a new client.
  3. C) brags about his competence and professional title, and encourages clients to invest in a new venture he is starting.
  4. D) refuses to cooperate with the new auditor after having lost a client.

Answer:  A

Diff: 2     Type: MC     Page Ref: 63

Learning Obj.:   3-3  Examine the threats to independence and explain how the threats can be mitigated

 

23) The provincial institutes’ Rules of Professional Conduct state, in part, that a public accountant should maintain integrity and due care. Integrity in the Rules refers to a public accountant’s

  1. A) ability to maintain an impartial attitude on all matters that come under the public accountant’s review.
  2. B) ability to distinguish independently between accounting practices that are acceptable and those that are not.
  3. C) ability to be unyielding in all matters dealing with auditing procedures.
  4. D) reputation for honesty and fair dealing.

Answer:  D

Diff: 1     Type: MC     Page Ref: 64

Learning Obj.:   3-3  Examine the threats to independence and explain how the threats can be mitigated

 

24) What should a PA do if approached by a client where he and his firm lack or do not have access to the technical knowledge required to complete the audit?

  1. A) Subcontract the audit to another firm
  2. B) Indicate that they can do a review engagement, not an audit
  3. C) Decline the new audit engagement
  4. D) Conduct the engagement, but prepare a qualified audit report

Answer:  C

Diff: 2     Type: MC     Page Ref: 64

Learning Obj.:   3-3  Examine the threats to independence and explain how the threats can be mitigated

 

25) How is use of an applicable accounting framework enforced via legislation?

  1. A) The Canada Business Corporations Act and many provincial incorporating acts require that financial statements be prepared in accordance with the CICA Handbook.
  2. B) PAs who do not prepare financial statements in accordance with such frameworks are expelled from their professional association.
  3. C) Tax authorities may sue corporations who do not prepare their financial statements in accordance with such frameworks.
  4. D) Financial executives may be sued if the financial statements prepared by their company are not in conformance with such frameworks.

Answer:  A

Diff: 3     Type: MC     Page Ref: 65

Learning Obj.:   3-3  Examine the threats to independence and explain how the threats can be mitigated

 

26) Which one of the following forms of advertisement would violate solicitation rules? PA

  1. A) placed an advertisement in a newspaper indicating the opening of a new office.
  2. B) conducted a cold-calling campaign where companies were asked if they would like to change PA firms.
  3. C) placed a media advertisement listing the different types of expertise available at the firm’s major office locations.
  4. D) conducted a survey asking companies about the types of services that are provided by their accounting firms.

Answer:  B

Diff: 2     Type: MC     Page Ref: 65

Learning Obj.:   3-3  Examine the threats to independence and explain how the threats can be mitigated

 

 

27) Which one of the following situations is a violation of the professional rules of conduct? PA

  1. A) looked the other way when he noticed that one of his firm’s accounting staff accepted money from client management.
  2. B) resigned so that he could accept a position on the Board of Directors at a major client.
  3. C) prepared personal and corporate tax returns for a client and all of its executive officers.
  4. D) placed an advertisement in the local paper indicating that she conducted audit engagements for five major insurance companies.

Answer:  A

Diff: 3     Type: MC     Page Ref: 65

Learning Obj.:   3-3  Examine the threats to independence and explain how the threats can be mitigated

28) For which of the following engagements is a contingent fee permitted?

  1. A) An audit engagement of a large listed corporation
  2. B) A tax consulting assignment assessing the excise tax payment processes
  3. C) A review engagement of a small manufacturing corporation
  4. D) An assurance engagement of leasehold payments for a rental agreement

Answer:  B

Diff: 2     Type: MC     Page Ref: 66

Learning Obj.:   3-3  Examine the threats to independence and explain how the threats can be mitigated

 

29) PA has been asked to accept the audit engagement of BarneyBlues Corporation. PA sent a letter to the predecessor auditor asking whether there was any reason why he should not accept the engagement. Assuming that the prior year audit went smoothly, what would be an appropriate response by the predecessor auditor?

  1. A) Provide a brief statement that there is no reason of which he or she is aware that would prevent accepting the engagement.
  2. B) Send a copy of the entire working paper file to PA.
  3. C) Telephone PA and say that PA should not take the engagement because the fee charged was too large.
  4. D) Send a copy of the tax returns and tax assessments to PA.

Answer:  A

Diff: 2     Type: MC     Page Ref: 66

Learning Obj.:   3-3  Examine the threats to independence and explain how the threats can be mitigated

 

 

30) The Rules of Professional Conduct require a successor auditor to communicate with the previous auditor. The primary concern in this communication is

  1. A) to acquire information which will help the successor auditor determine whether the client management has integrity.
  2. B) to learn about the client by examining the predecessor’s working papers.
  3. C) to enable the successor to perform a more efficient audit.
  4. D) to save the successor auditor time and money in gathering data.

Answer:  A

Diff: 1     Type: MC     Page Ref: 66

Learning Obj.:   3-3  Examine the threats to independence and explain how the threats can be mitigated

 

31) Many PAs prepare tax returns for individuals and for corporations. Under what circumstances is liability insurance required to cover the preparation of tax returns? When

  1. A) the PA is a member of a professional accounting association.
  2. B) any number of tax returns are prepared, including no charge tax returns.
  3. C) fees are being charged and more than a handful of returns are being prepared.
  4. D) the bulk of the PA’s income comes from preparing tax returns.

Answer:  C

Diff: 2     Type: MC     Page Ref: 66

Learning Obj.:   3-3  Examine the threats to independence and explain how the threats can be mitigated

 

 

32) Each of the following situations involves a possible violation of the provincial institutes’ Rules of Professional Conduct. For each situation, (1) decide whether or not the Rules have been violated, and (2) briefly explain how the situation violates (or does not violate) the Rules.

 

  1. A) Johnny Line has a successful dentistry practice in Calgary. Johnny has recommended one of his patients to Leslie King, public accountant. To show gratitude for the referral, Leslie has agreed to pay Johnny 5% of the fee for audit services rendered by Leslie to Johnny’s patient. Leslie discloses the payment agreement to her new client.

Violation? Yes No

Explanation:

 

  1. B) The accounting firm of Bayer & Peng, public accountants, is negotiating a fee with a new audit client. They agree the client will pay $75,000 if Bayer & Peng issues a clean, unqualified opinion, $50,000 if a qualified opinion is issued, $40,000 if an adverse opinion is issued, and $10,000 if a denial of opinion is issued.

Violation? Yes No

Explanation:

 

  1. C) Don Smith, public accountant, takes part in the audit of Shaw Corporation. Don is not a partner or a manager in the public accounting firm, and does not own any stock in Shaw Corporation. Don’s five year-old daughter, Betty Lou, received one share of Shaw Corporation’s common stock for her fifth birthday. The stock was a gift from Betty Lou’s grandmother. Betty Lou treasures that share of stock and is absolutely unwilling to part with it.

Violation? Yes No

Explanation:

 

  1. D) On August 5, 2012, Page Dane, public accountant, issued the audit report on Borhut Corporation’s June 30, 2012 financial statements. On August 30, 2012, Borhut paid Page’s audit fee with stock rather than cash. Page sold the stock on September 15, 2012, two months prior to the beginning of the planning phase for the audit of the June 30, 2013, financial statements.

Violation? Yes No

Explanation:

 

Answer:

  1. A) Violation. A public accountant may not pay a referral fee to a non-public accountant.
  2. B) Violation. This is a contingent fee agreement which is prohibited by the Rules of Professional Conduct.
  3. C) Violation. Participants in an audit are prohibited from having a financial interest in the client. The rule also applies to the participant’s dependents.
  4. D) Violation. Public accountants are prohibited from owning stock in a client.

Diff: 3     Type: ES     Page Ref: 58-60

Learning Obj.:   3-3  Examine the threats to independence and explain how the threats can be mitigated

 

33) You are the senior in charge of the accounts receivable section of the audit of a large clothing manufacturer downtown in the clothing district. The client sells to local clothing stores as well as to other retailers in the province.

Accounts receivables seem to be deteriorating, with many more accounts in the over 90 days column than in the past. You sent out twenty accounts receivable confirmations, but only six were returned. Of these six, only three confirmed the balance as in agreement with the client, while the others indicated that they kept their records on an open item basis (rather than a balance forward basis) and were unable to respond to the confirmation request. When you looked at the prior year’s file, it seemed that the same thing had happened last year.

When you phoned the supervisor in charge of the audit engagement, she told you to not bother with follow up, as the engagement was already over budget and costs need to be kept down. You were concerned that you would be unable to state a conclusion with respect to the fairness of the accounts receivable balance and she was really angry with you, saying that she would have to sign off for you then.

Required:

Discuss the ethical and quality issues raised by this audit engagement.

Answer:  The engagement indicates a lack of planning, as you were only aware of the problems with the accounts receivable confirmation process after you had received the replies. The likelihood of non-response should have been considered before selecting and sending the confirmations.

The pressures by the supervisor to sign off on the audit engagement without completing the necessary audit procedures indicate a poor human resources environment at your audit firm. It also means that this audit (and other audits) may have inadequate evidence on file to support an opinion on the financial statements. This violates the general principle of due care and the third examination standard of sufficient appropriate audit evidence under GAAS.

Diff: 2     Type: ES     Page Ref: 64

Learning Obj.:   3-3  Examine the threats to independence and explain how the threats can be mitigated

 

34) Kimora is a senior manager at a public accounting firm. Kimora was assigned to the audit of Toble Corp. Upon arriving at the client, Kimora met with the controller, Brad, who was a classmate in college, 20 years ago. She had not been in contact with Brad since college, but they realized that they still had many friends in common. Brad invited Kimora to go to the company box to watch a hockey game and catch up.

Discuss the issue of independence between Kimora and Toble Corp.

Answer:  Kimora might not be independent in appearance, given that she knows Brad who is overseeing the financial reporting of the company. However, Kimora can likely remain independent in fact because:

  • she has not been in contact with Brad for 20 years.
  • she doesn’t have any close relationship with Brad or any personal interest in the company
  • going to a hockey game with a client is not a breach of independence.

Diff: 2     Type: ES     Page Ref: 58-59

Learning Obj.:   3-3  Examine the threats to independence and explain how the threats can be mitigated

 

35) Xiao, PA, is the audior of Minkle Credit Union, a medium-sized credit union. Xiao has prepared a management letter with several serious control weaknesses. Management agrees with the facts, but does not want to present the letter with the weaknesses to the audit committee or the board of directors. Management has implied that they will request a change of auditors if your firm presents the management letter to the board.

Required: Discuss the actions that Xiao should take. Justify your response.

Answer:  Xiao is being faced with an intimidation threat. Xiao needs to consult GAAS (the CICA Handbook), standards employees and other resources to first determine what must be reported to the audit committee. Xiao should also consider that if management does not want to disclose these matters, that there could be other issues that management is hiding, making it difficult to complete the audit. If the weaknesses could lead to potential material misstatements, Xiao is required to report them to the audit committee.

Diff: 2     Type: ES     Page Ref: 58-59

Learning Obj.:   3-3  Examine the threats to independence and explain how the threats can be mitigated

Auditing, 12e (Arens)

Chapter 11   Audit Sampling Concepts

 

11.1   Define sampling. Decide when an auditor would use statistical rather than nonstatistical sampling

 

1) CAS 530 has a very specific definition of sampling. Assuming that each item (described as a sampling unit) in the populations below could be selected as part of the sample, which of the following illustrates the other part of the CAS 530 definition of sampling?

  1. A) looking at 50 sales invoices from the current population of 100,000
  2. B) recalculating interest calculations for notes payable
  3. C) estimating the gross profit by product for all company products
  4. D) inspecting all legal invoices for potential contingent liabilities

Answer:  A

Diff: 2     Type: MC     Page Ref: 337

Learning Obj.:  11-1  Define sampling. Decide when an auditor would use statistical rather than nonstatistical sampling

 

2) A sample in which the characteristics of the sample are the same as those of the population is a(n)

  1. A) random sample.
  2. B) variables sample.
  3. C) attribute sample.
  4. D) representative sample.

Answer:  D

Diff: 1     Type: MC     Page Ref: 338

Learning Obj.:  11-1  Define sampling. Decide when an auditor would use statistical rather than nonstatistical sampling

 

3) Assume that the client’s internal controls require a clerk to attach a shipping document to every duplicate sales invoice. But this procedure is not followed exactly 3 percent of the time. If the auditor selects a sample of 200 duplicate sales invoices, which of the following sample results is most representative of the population?

  1. A) three shipping documents are missing
  2. B) six shipping documents are missing
  3. C) five shipping document are missing
  4. D) there were no shipping documents missing

Answer:  B

Diff: 2     Type: MC     Page Ref: 338

Learning Obj.:  11-1  Define sampling. Decide when an auditor would use statistical rather than nonstatistical sampling

 

 

4) Nonsampling errors occur when audit tests do not uncover existing exceptions in the

  1. A) population.
  2. B) sample.
  3. C) planning stage.
  4. D) financial statements.

Answer:  B

Diff: 2     Type: MC     Page Ref: 338

Learning Obj.:  11-1  Define sampling. Decide when an auditor would use statistical rather than nonstatistical sampling

5) One of the causes of nonsampling error is

  1. A) the use of inappropriate or ineffective audit procedures.
  2. B) failure to draw a random sample.
  3. C) failure to draw a representative sample.
  4. D) the use of attribute sampling instead of variables sampling.

Answer:  A

Diff: 1     Type: MC     Page Ref: 338

Learning Obj.:  11-1  Define sampling. Decide when an auditor would use statistical rather than nonstatistical sampling

 

6) One of the ways to eliminate nonsampling risk is through

  1. A) proper supervision and instruction of the client’s employees.
  2. B) proper supervision and instruction of the audit team.
  3. C) the use of attribute sampling rather than variables sampling.
  4. D) controls which ensure that the sample drawn is random and representative.

Answer:  B

Diff: 1     Type: MC     Page Ref: 338

Learning Obj.:  11-1  Define sampling. Decide when an auditor would use statistical rather than nonstatistical sampling

 

7) Sampling risk (sampling error) is an inherent part of sampling that results from

  1. A) inappropriate audit procedures.
  2. B) failure to recognize exceptions.
  3. C) testing less than the entire population.
  4. D) weaknesses in the client’s internal control system.

Answer:  C

Diff: 1     Type: MC     Page Ref: 338

Learning Obj.:  11-1  Define sampling. Decide when an auditor would use statistical rather than nonstatistical sampling

 

 

8) One of the ways to reduce sampling risk is to

  1. A) use an appropriate method of selecting sample items from the population.
  2. B) carefully design the audit procedures to be used.
  3. C) provide proper supervision and instruction of the audit team.
  4. D) use variables sampling rather than attribute sampling.

Answer:  A

Diff: 2     Type: MC     Page Ref: 339

Learning Obj.:  11-1  Define sampling. Decide when an auditor would use statistical rather than nonstatistical sampling

 

9) One of the purposes of using statistical sampling is to quantify sampling risk. For which of the following audit tests would sampling risk be zero? The auditor

  1. A) used monetary unit sampling to select a sample of payroll payments.
  2. B) used attribute sampling to select a sample of shipping documents.
  3. C) sent empty (zero balance) external confirmations to suppliers with large dollar balances.
  4. D) sent external confirmations to all financial institutions used by the client.

Answer:  D

Diff: 3     Type: MC     Page Ref: 339

Learning Obj.:  11-1  Define sampling. Decide when an auditor would use statistical rather than nonstatistical sampling

10) Carrie found an error in the sample she tested from the population of accounts receivable that was over 90 days old.  The error found by Carrie should be extrapolated to the population of

  1. A) all past due accounts receivable.
  2. B) accounts receivable over 90 days.
  3. C) all accounts receivable.
  4. D) current accounts receivable.

Answer:  B

Diff: 3     Type: MC     Page Ref: 339

Learning Obj.:  11-1  Define sampling. Decide when an auditor would use statistical rather than nonstatistical sampling

 

11) An advantage of using statistical over nonstatistical sampling methods in tests of controls is that the statistical methods

  1. A) afford greater assurance and clarity than a nonstatistical sample of equal size.
  2. B) provide an objective basis for quantitatively evaluating sample risks.
  3. C) can more easily convert the sample into a dual-purpose test useful for substantive testing.
  4. D) eliminate the need to use judgment in determining appropriate sample sizes.

Answer:  B

Diff: 3     Type: MC     Page Ref: 339

Learning Obj.:  11-1  Define sampling. Decide when an auditor would use statistical rather than nonstatistical sampling

 

 

12) The auditing standards indicate that

  1. A) it is preferable to use statistical sampling instead of non-statistical sampling.
  2. B) it is preferable to use non-statistical sampling instead of statistical sampling.
  3. C) it is equally acceptable to use either statistical or non-statistical sampling.
  4. D) non-statistical sampling should only be used if statistical sampling is too costly to use.

Answer:  C

Diff: 2     Type: MC     Page Ref: 340

Learning Obj.:  11-1  Define sampling. Decide when an auditor would use statistical rather than nonstatistical sampling

 

13) An example of judgmental sampling is

  1. A) block sampling.
  2. B) simple random sample selection.
  3. C) systematic sample selection.
  4. D) proportionate-to-size sample selection.

Answer:  A

Diff: 1     Type: MC     Page Ref: 340

Learning Obj.:  11-1  Define sampling. Decide when an auditor would use statistical rather than nonstatistical sampling

14) The auditor has decided to audit all accounts receivable amounts that are over 120 days old and over $5,000. What type of sample selection method is the auditor using?

  1. A) haphazard
  2. B) systematic
  3. C) directed
  4. D) block

Answer:  C

Diff: 2     Type: MC     Page Ref: 340

Learning Obj.:  11-1  Define sampling. Decide when an auditor would use statistical rather than nonstatistical sampling

 

15) The auditor has selected a sequence of 200 payroll cheques to verify the numerical continuity of the cheque numbers. What type of sampling is the auditor doing?

  1. A) haphazard
  2. B) systematic
  3. C) directed
  4. D) block

Answer:  D

Diff: 2     Type: MC     Page Ref: 341

Learning Obj.:  11-1  Define sampling. Decide when an auditor would use statistical rather than nonstatistical sampling

 

 

16) A common use of block testing is testing

  1. A) cut-off.
  2. B) existense.
  3. C) authorization.
  4. D) valuation.

Answer:  A

Diff: 2     Type: MC     Page Ref: 341

Learning Obj.:  11-1  Define sampling. Decide when an auditor would use statistical rather than nonstatistical sampling

 

17) When the auditor goes through a population and selects items for the sample without regard to their size, source, or other distinguishing characteristics, it is called

  1. A) block selection.
  2. B) haphazard selection.
  3. C) systematic selection.
  4. D) statistical selection.

Answer:  B

Diff: 1     Type: MC     Page Ref: 342

Learning Obj.:  11-1  Define sampling. Decide when an auditor would use statistical rather than nonstatistical sampling

18) Which of the following statements is a valid criticism of the use of non-statistical sampling methods?

  1. A) Many audit tests, such as footing of journals, must be performed outside a statistical sampling context.
  2. B) The cost of performing random selection or testing often exceeds the benefits.
  3. C) Nonstatistical sampling does not differ substantially from statistical sampling methods.
  4. D) The difficulty of remaining unbiased in the selection of items.

Answer:  D

Diff: 2     Type: MC     Page Ref: 342

Learning Obj.:  11-1  Define sampling. Decide when an auditor would use statistical rather than nonstatistical sampling

 

19) The auditor wants to trace credits from the accounts receivable transaction history files to the duplicate bank deposit slips and other authorized sources as a test for fictitious credits in the data files. Which of the following sampling methods would be the least costly to use in this situation?

  1. A) simple random
  2. B) block
  3. C) systematic
  4. D) probability proportionate-to-size

Answer:  B

Diff: 3     Type: MC     Page Ref: 342

Learning Obj.:  11-1  Define sampling. Decide when an auditor would use statistical rather than nonstatistical sampling

 

 

20) An underlying feature of the random-based selection of items is that each

  1. A) stratum of the population be given equal representation in the sample.
  2. B) each item in the population must be randomly ordered.
  3. C) each item in the population should have an equal opportunity to be selected.
  4. D) each item must be systematically selected using replacement.

Answer:  C

Diff: 2     Type: MC     Page Ref: 342

Learning Obj.:  11-1  Define sampling. Decide when an auditor would use statistical rather than nonstatistical sampling

21) A) Discuss what is meant by “sampling risk.”

 

  1. B) Discuss what is meant by “nonsampling risk.”

 

  1. C) Discuss two causes of nonsampling risk. Also discuss ways the auditor can control nonsampling risk.

 

  1. D) Discuss two ways the auditor can control sampling risk.

 

Answer:

  1. A) Sampling risk occurs when the sample is not representative of the population; that is, the characteristics of interest in the sample are not the same as those in the population. Occurs from testing less than the entire population.
  2. B) Nonsampling risk occurs when audit tests do not uncover existing exceptions in the sample.
  3. C) The two causes of nonsampling risk are (1) the auditor’s failure to recognize exceptions and (2) inappropriate or ineffective audit procedures. The auditor can control nonsampling risk through careful design of audit procedures, and through proper instruction, supervision, and review.
  4. D) Two ways the auditor can control sampling risk are (1) adjust sample size and (2) use an appropriate method of selecting sample items from the population.

Diff: 1     Type: ES     Page Ref: 338-339

Learning Obj.:  11-1  Define sampling. Decide when an auditor would use statistical rather than nonstatistical sampling

 

22) A) Describe the differences between statistical and nonstatistical sampling in terms of (1) the sample selection methods used, and (2) measurement (quantification) of sampling risk.

 

  1. B) Describe each of the three types of sample selection methods commonly associated with nonstatistical audit sampling.

 

  1. C) Directed sample selection is the selection of each item in the sample based on some judgment criteria established by the auditor. Describe three commonly used criteria.

 

Answer:

  1. A) Nonstatistical sampling differs from statistical sampling in that nonprobabilistic sampling can be used for nonstatistical sampling but not for statistical sampling. In addition, sampling risk can be quantified when using statistical sampling, but not when using nonstatistical sampling.
  2. B) Three types of sample selection methods commonly associated with nonstatistical audit sampling are:
  • Directed sample selection. Each item in the sample is selected on the basis of some judgmental criteria established by the auditor.
  • Block sample selection. Several items in the population are selected in sequence.
  • Haphazard sample selection. Sample items are selected from the population without regard to their size, source, or other distinguishing characteristics.
  1. C) Commonly-used criteria used in directed sample selection are:
  • Items most likely to contain misstatements; e.g., unusual or complex transactions, overdue receivables.
  • Items containing selected population characteristics, such as transactions selected from each month during the year or from each location.
  • Large dollar coverage in which the auditor focuses on selecting the relatively large items in the population for testing.

Diff: 2     Type: ES     Page Ref: 339-340

Learning Obj.:  11-1  Define sampling. Decide when an auditor would use statistical rather than nonstatistical sampling

 

 

23) Kyle is performing a test of detail using a non-statistical sample.

 

  1. A) Can Kyle formally measure sampling error?

 

  1. B) What should Kyle consider in determining the sampling error?

 

Answer:

  1. A) No, Kyle cannot formally measure the sampling error if non-statistical sampling is used.
  2. B) Kyle must subjectively consider the possibility that the true population misstatement aggregated with other misstatements exceeds materiality. This includes consideration for:

–  the difference between the point estimate and materiality

–  the extent to which items in the population have been audited 100%

–  whether misstatements tend to be offsetting or in only one direction

–  the amounts of individual misstatements

–  sample size

Diff: 2     Type: ES     Page Ref: 339-342

Learning Obj.:  11-1  Define sampling. Decide when an auditor would use statistical rather than nonstatistical sampling

11.2   Explain the three different ways that an auditor can select a statistical sample

 

1) When statistical sampling is used, the sample selected must be a probabilistic one. In addition, the auditor should

  1. A) use the haphazard selection method to make sure that the sample is properly selected.
  2. B) use appropriate statistical evaluation methods of non-sampling risk computations.
  3. C) request the client to review the sample and approve all items that are selected.
  4. D) use appropriate statistical evaluation methods of sampling risk computations.

Answer:  D

Diff: 3     Type: MC     Page Ref: 340

Learning Obj.:  11-2  Explain the three different ways that an auditor can select a statistical sample

 

2) When the auditor intends to evaluate a sample statistically, the only acceptable selection method is

  1. A) probabilistic selection.
  2. B) judgmental selection.
  3. C) haphazard selection.
  4. D) block selection.

Answer:  A

Diff: 1     Type: MC     Page Ref: 342

Learning Obj.:  11-2  Explain the three different ways that an auditor can select a statistical sample

 

 

3) When does the auditor use simple random sampling?

  1. A) when the auditor has a particular judgmental criteria that is used to select the sample
  2. B) where the auditor wants numbers in sequence and would like to select the sample rapidly
  3. C) for testing of cut-off after the year end with respect to accounts payable
  4. D) for populations where each item is considered to have the same characteristics for audit purposes

Answer:  D

Diff: 3     Type: MC     Page Ref: 342

Learning Obj.:  11-2  Explain the three different ways that an auditor can select a statistical sample

 

4) The process which requires the calculation of an interval and then selects the items based on the size of the interval is

  1. A) statistical sampling.
  2. B) random selection.
  3. C) systematic selection.
  4. D) computerized selection.

Answer:  C

Diff: 1     Type: MC     Page Ref: 343

Learning Obj.:  11-2  Explain the three different ways that an auditor can select a statistical sample

 

5) In systematic selection, population size is divided by the number of sample items desired in order to determine the

  1. A) interval.
  2. B) tolerable exception rate.
  3. C) computed upper exception rate.
  4. D) mean.

Answer:  A

Diff: 1     Type: MC     Page Ref: 343

Learning Obj.:  11-2  Explain the three different ways that an auditor can select a statistical sample

6) When systematic sample selection is used, the first item is selected randomly and all other items are selected automatically.  If the characteristic of interest is not distributed randomly in the population, the systematic selection creates the possibility of

  1. A) bias.
  2. B) abnormal frequency distribution.
  3. C) judgmental intervention in the process.
  4. D) selecting mostly larger dollar items.

Answer:  A

Diff: 1     Type: MC     Page Ref: 343

Learning Obj.:  11-2  Explain the three different ways that an auditor can select a statistical sample

 

 

7) In performing a review of his client’s cash disbursements, a public accountant uses systematic sampling with a random start. The primary disadvantage of systematic sampling is that population items

  1. A) must be reordered in a systematic pattern before the sample can be drawn.
  2. B) may occur in a systematic pattern, thus negating the randomness of the sample.
  3. C) may occur twice in the sample.
  4. D) must be replaced in the population after sampling to permit valid statistical inference.

Answer:  B

Diff: 2     Type: MC     Page Ref: 343

Learning Obj.:  11-2  Explain the three different ways that an auditor can select a statistical sample

 

8) A method of sampling in which all the items in the population are divided into two or more subpopulations is

  1. A) variables sampling.
  2. B) attribute sampling.
  3. C) stratified sampling.
  4. D) divisible sampling.

Answer:  C

Diff: 2     Type: MC     Page Ref: 344

Learning Obj.:  11-2  Explain the three different ways that an auditor can select a statistical sample

 

9) When the auditor would like to improve the efficiency of the audit by focusing work on transactions that may be more subject to material error in a particular area of the population, the auditor will use

  1. A) block testing.
  2. B) haphazard sample selection.
  3. C) random sample selection.
  4. D) stratified sample selection.

Answer:  D

Diff: 2     Type: MC     Page Ref: 344

Learning Obj.:  11-2  Explain the three different ways that an auditor can select a statistical sample

 

10) Which of the following best describes what the auditor means by the exception rate in the attribute sampling plan? The

  1. A) number of errors that can reasonably be expected to be found in a population.
  2. B) frequency with which a certain characteristic occurs within a population.
  3. C) degree of confidence that the sample is representative of the population.
  4. D) dollar range within which the true population total can be expected to fall.

Answer:  B

Diff: 2     Type: MC     Page Ref: 344

Learning Obj.:  11-2  Explain the three different ways that an auditor can select a statistical sample

 

11) A statistical method used to estimate the proportion of items in a population containing a characteristic of interest is

  1. A) population-proportional-to-size sampling.
  2. B) attribute sampling.
  3. C) variables sampling.
  4. D) estimation sampling.

Answer:  B

Diff: 2     Type: MC     Page Ref: 344

Learning Obj.:  11-2  Explain the three different ways that an auditor can select a statistical sample

 

12) A public accountant examining inventory may appropriately apply sampling for attributes in order to estimate the

  1. A) average price of inventory items.
  2. B) percentage of slow-moving inventory items.
  3. C) dollar value of inventory.
  4. D) physical quantity of inventory items.

Answer:  B

Diff: 3     Type: MC     Page Ref: 344

Learning Obj.:  11-2  Explain the three different ways that an auditor can select a statistical sample

 

13) The occurrence rate or exception rate for attribute sampling is defined as the

  1. A) exception rate that the auditor will permit in the population and still be willing to use the assessed control risk.
  2. B) risk that the auditor is willing to take of accepting a balance as correct when the true misstatement in the balance is greater than materiality.
  3. C) exception rate that the auditor expects to find in the population before testing begins.
  4. D) ratio of the items containing a specific attribute to the total number of population items.

Answer:  D

Diff: 2     Type: MC     Page Ref: 344

Learning Obj.:  11-2  Explain the three different ways that an auditor can select a statistical sample

 

14) If an auditor would like to estimate how many sales invoices have errors (such as no required order number showing or authorization for customers exceeding their credit limit) , the auditor would likely use

  1. A) random sampling with replacement.
  2. B) sampling for attributes.
  3. C) sampling for variables.
  4. D) stratified random sampling.

Answer:  B

Diff: 3     Type: MC     Page Ref: 344

Learning Obj.:  11-2  Explain the three different ways that an auditor can select a statistical sample

 

 

15) The auditor is going to select a sample to find out whether any potentially fraudulent transactions have been processed. The auditor should use what type of sampling?

  1. A) attribute sampling
  2. B) discovery sampling
  3. C) monetary unit sampling
  4. D) variable estimation sampling

Answer:  B

Diff: 3     Type: MC     Page Ref: 344

Learning Obj.:  11-2  Explain the three different ways that an auditor can select a statistical sample

16) The auditor is going to select a sample of accounts receivable to circulate external confirmations, and then estimate the total dollar value of the accounts receivable balance. The auditor should use what type of sampling?

  1. A) attribute sampling
  2. B) discovery sampling
  3. C) monetary unit sampling
  4. D) variable estimation sampling

Answer:  D

Diff: 3     Type: MC     Page Ref: 344

Learning Obj.:  11-2  Explain the three different ways that an auditor can select a statistical sample

 

17) The most common method used for performing statistical tests of controls is

  1. A) variables sampling.
  2. B) attribute sampling.
  3. C) judgment sampling.
  4. D) random selection of samples.

Answer:  B

Diff: 2     Type: MC     Page Ref: 345

Learning Obj.:  11-2  Explain the three different ways that an auditor can select a statistical sample

 

18) Attribute sampling would be an appropriate method to use on which one of the following procedures in an audit program?

  1. A) Review sales transactions for large and unreasonable amounts.
  2. B) Observe whether the duties of the accounts receivable clerk are separate from handling cash.
  3. C) Examine a sample of duplicate sales invoices for credit approval by the credit manager.
  4. D) Review the aged schedule of accounts receivable to determine if amounts receivable from officers are included.

Answer:  C

Diff: 3     Type: MC     Page Ref: 348

Learning Obj.:  11-2  Explain the three different ways that an auditor can select a statistical sample

 

19) A) Describe three types of sample selection methods commonly associated with statistical audit sampling.

 

  1. B) Explain the difference between sampling with replacement and without replacement. Which method is more common in audit practice?

 

  1. C) Describe the steps involved in systematic sampling.

 

Answer:

  1. A) Three types of sample selection methods commonly associated with statistical audit sampling are:
  • Simple random sample selection. Every possible combination of elements in the population has an equal chance of constituting the sample.
  • Systematic sample selection. A probabilistic method of sampling in which the auditor calculates an interval (the population size divided by the number of sample items desired), and selects the items for the sample based on the size of the interval and a randomly selected number between zero and the interval size.
  • Probability proportional to size sample selection. The probability of selecting any individual population item is proportional to its recorded amount.
  1. B) In replacement sampling, an element in the population can be included in the sample more than once, whereas in nonreplacement sampling, an element can be included only once. Nonreplacement sampling is more common in audit practice.
  2. C) In systematic selection, the auditor calculates an interval (the population size divided by the number of sample items desired) called the selection, or skip, interval. The auditor then randomly selects a number between zero and the interval size less one (i.e interval equals 20, the random number is selected from 0 to 19). This number is the starting point for the sample selection; i.e., the document or transaction corresponding to the random number plus the first number in the population constitutes the first item in the sample. The second sample item is the interval added to the first number (first document number in the population plus the random number); the third item is determined by adding the interval to the second number, the fourth item is determined by adding the interval to the third number, and so on.

Diff: 2     Type: ES     Page Ref: 342-343

Learning Obj.:  11-2  Explain the three different ways that an auditor can select a statistical sample

 

20) You have recently been hired as an audit trainee with an internal audit department. Your first assignment will be to select the sample for a test of new capital assets acquired over the last two years. Your review of the internal audit files indicates that the last time this work was done the sample to be tested was selected on a judgmental nonstatistical basis.

However, based on your university/college audit course, you believe the work offers good potential for the use of statistical sampling techniques. You know that you will have to be able to explain and justify your opinion to the internal audit manager.

 

Required:

Both statistical sampling as well as nonstatistical or judgmental sampling have advantages and disadvantages. Briefly state two advantages and two disadvantages of statistical sampling and one advantage and one disadvantage of nonstatistical sampling.

Answer:

Advantages of statistical sampling:

  • Results are more defensible.
  • Can quantify the impact of errors or exceptions (including sampling risk).
  • Enables more pragmatic and objective recommendations to management.
  • More defensible in the courts,

Disadvantages of statistical sampling:

  • May be more time consuming and therefore more costly.
  • Requires a higher level of expertise or more experienced staff.
  • Often requires the use of CAATs (computer assisted audit techniques).
  • Often need additional training or expertise to use and interpret the results.

Advantage of nonstatistical sampling:

  • Can be designed to be just as useful as statistical sampling.
  • Can focus work on high dollar errors (where there might be a greater potential for error).
  • Less costly/less time required to implement.

Disadvantages of nonstatistical sampling:

  • Cannot extrapolate the results across the population with as much confidence.
  • Cannot quantify sampling risk.
  • Less defensible in the courts due to bias and subjectiveness.

Diff: 3     Type: ES     Page Ref: 339-340

Learning Obj.:  11-2  Explain the three different ways that an auditor can select a statistical sample

 

 

11.3   Describe the 14 steps in planning and selecting a sample, performing the tests, and evaluating the sample

 

1) The overall objectives of the audit test must be stated in terms of the

  1. A) anticipated results.
  2. B) transaction cycle being tested.
  3. C) risks addressed and the transaction cycle being tested.
  4. D) risk addressed and the anticipated results.

Answer:  C

Diff: 2     Type: MC     Page Ref: 347

Learning Obj.:  11-3  Describe the 14 steps in planning and selecting a sample, performing the tests, and evaluating the sample

2) As part of the audit program for the audit of sales, the auditor will “review sales transactions for large and unusual amounts.” Which of the following types of sampling would be suitable for this audit procedure?

  1. A) systematic
  2. B) attribute
  3. C) block
  4. D) directed

Answer:  D

Diff: 2     Type: MC     Page Ref: 347

Learning Obj.:  11-3  Describe the 14 steps in planning and selecting a sample, performing the tests, and evaluating the sample

 

3) During the audit of the fixed asset section, the auditor decided to inspect source documents supporting all fixed asset additions exceeding $3,000. This type of audit procedure is called a

  1. A) census of the strata over $3,000
  2. B) analytical review
  3. C) attribute sample
  4. D) monetary unit sample

Answer:  A

Diff: 1     Type: MC     Page Ref: 348

Learning Obj.:  11-3  Describe the 14 steps in planning and selecting a sample, performing the tests, and evaluating the sample

 

4) As part of the audit of sales, the auditor has used attribute sampling to select a sample of sales invoices. The auditor has examined the duplicate sales invoice to determine whether it was approved for credit. Which of the following would be termed the “attribute?” The

  1. A) sales invoice number
  2. B) approval initials
  3. C) name of the person who approves credit
  4. D) absence of an authorization

Answer:  B

Diff: 2     Type: MC     Page Ref: 348

Learning Obj.:  11-3  Describe the 14 steps in planning and selecting a sample, performing the tests, and evaluating the sample

 

5) As part of the audit of sales, the auditor has used attribute sampling to select a sample of sales invoices. The auditor has examined the duplicate sales invoice to determine whether it was approved for credit. Which of the following would be termed the “exception?” The

  1. A) sales invoice number.
  2. B) approval initials.
  3. C) name of the person who approves credit.
  4. D) absence of an authorization.

Answer:  D

Diff: 2     Type: MC     Page Ref: 348

Learning Obj.:  11-3  Describe the 14 steps in planning and selecting a sample, performing the tests, and evaluating the sample

6) As part of the audit of sales, the auditor has used attribute sampling to select a sample of sales invoices. The auditor has examined the duplicate sales invoice to determine whether it was approved for credit. The client has a December year end. In October, the auditor conducted the interim audit and drew a sample of 40 items that covered the period from January to September. In order to be able to generalize to the sales population, the auditor should also

  1. A) select sample items from the rest of the year.
  2. B) increase the sample size in proportion to the total population size.
  3. C) use statistical methods to calculate sampling risk.
  4. D) use statistical methods to calculate non-sampling risk.

Answer:  A

Diff: 2     Type: MC     Page Ref: 349

Learning Obj.:  11-3  Describe the 14 steps in planning and selecting a sample, performing the tests, and evaluating the sample

 

7) To ensure that all the population items will be properly subjected to the sample selection process, the auditor should

  1. A) use a random number generator for sample selection.
  2. B) use monetary unit sample selection methods.
  3. C) document the range of document numbers in use by the client.
  4. D) test the population for completeness.

Answer:  D

Diff: 3     Type: MC     Page Ref: 349

Learning Obj.:  11-3  Describe the 14 steps in planning and selecting a sample, performing the tests, and evaluating the sample

 

 

8) The exception rate the auditor will permit in the population and still be willing to use the assessed level of control risk is called the

  1. A) tolerable exception rate.
  2. B) estimated population exception rate.
  3. C) acceptable risk of overreliance.
  4. D) sample exception rate.

Answer:  A

Diff: 1     Type: MC     Page Ref: 349

Learning Obj.:  11-3  Describe the 14 steps in planning and selecting a sample, performing the tests, and evaluating the sample

 

9) Establishing the tolerable exception rate (TER) requires

  1. A) statistical frequency probability tables.
  2. B) random number tables.
  3. C) a computer program.
  4. D) professional judgment.

Answer:  D

Diff: 2     Type: MC     Page Ref: 349

Learning Obj.:  11-3  Describe the 14 steps in planning and selecting a sample, performing the tests, and evaluating the sample

10) The tolerable exception rate (TER) has a significant effect on sample size. The relationship of TER to sample size is

  1. A) direct (larger TER = larger sample).
  2. B) inverse (larger TER = smaller sample).
  3. C) variable (sometimes larger, sometimes smaller).
  4. D) not determinable.

Answer:  B

Diff: 3     Type: MC     Page Ref: 349

Learning Obj.:  11-3  Describe the 14 steps in planning and selecting a sample, performing the tests, and evaluating the sample

 

11) In statistical terms, acceptable risk of assessing control risk too low (ARACR) corresponds with

  1. A) sampling risk.
  2. B) inherent risk.
  3. C) control risk.
  4. D) nonsampling risk.

Answer:  A

Diff: 3     Type: MC     Page Ref: 350

Learning Obj.:  11-3  Describe the 14 steps in planning and selecting a sample, performing the tests, and evaluating the sample

 

 

12) The acceptable risk of incorrect acceptance (ARIA) has a significant effect on sample size. The relationship of ARIA to sample size is

  1. A) direct (larger ARIA = larger sample).
  2. B) inverse (larger ARIA = smaller sample).
  3. C) variable (sometimes larger, sometimes smaller).
  4. D) not determinable.

Answer:  B

Diff: 3     Type: MC     Page Ref: 350

Learning Obj.:  11-3  Describe the 14 steps in planning and selecting a sample, performing the tests, and evaluating the sample

 

13) In attribute sampling, an advance estimate of the expected population exception rate is necessary to plan the appropriate sample size. The relationship of expected population exception rate (EPER) to sample size is

  1. A) direct (small EPER = small sample).
  2. B) inverse (small EPER = large sample).
  3. C) a variable (sometimes small, sometimes large) dependent on other factors present.
  4. D) indeterminate.

Answer:  A

Diff: 3     Type: MC     Page Ref: 351

Learning Obj.:  11-3  Describe the 14 steps in planning and selecting a sample, performing the tests, and evaluating the sample

14) If all other factors specified in a sampling plan remain constant, changing the estimated population exception rate (EPER) from 2% to 4% would cause the required sample size to

  1. A) increase.
  2. B) remain the same.
  3. C) decrease.
  4. D) become indeterminate.

Answer:  A

Diff: 3     Type: MC     Page Ref: 351

Learning Obj.:  11-3  Describe the 14 steps in planning and selecting a sample, performing the tests, and evaluating the sample

 

15) The sample exception rate equals the number of

  1. A) exceptions in the population divided by the sample size.
  2. B) items in the population multiplied by the number of exceptions in the sample.
  3. C) exceptions in the sample divided by the sample size.
  4. D) exceptions in the population divided by the population size.

Answer:  C

Diff: 2     Type: MC     Page Ref: 352

Learning Obj.:  11-3  Describe the 14 steps in planning and selecting a sample, performing the tests, and evaluating the sample

 

 

16) Helen found that the expense reports were not properly approved while the senior accounts payable clerk was on vacation in July.  Helen decided to perform a test of control on the authorization of expense reports for all the months except for July which she will test substantively.  Helen is allowed to do this because

  1. A) the authorized expense reports for July are not material.
  2. B) it would not be cost beneficial to test the entire population substantively.
  3. C) the authorizations for the month of July are not representative of the population as a whole.
  4. D) compensating controls exist in the payroll reconciliation process.

Answer:  C

Diff: 3     Type: MC     Page Ref: 353

Learning Obj.:  11-3  Describe the 14 steps in planning and selecting a sample, performing the tests, and evaluating the sample

 

17) The final step in the evaluation of the audit results is the decision to

  1. A) determine the acceptability of the population.
  2. B) determine sampling error and calculate the estimated total population error.
  3. C) analyze exceptions or misstatements.
  4. D) determine the error in each sample.

Answer:  A

Diff: 2     Type: MC     Page Ref: 354

Learning Obj.:  11-3  Describe the 14 steps in planning and selecting a sample, performing the tests, and evaluating the sample

18) An increase in the sample size has the effect of decreasing the sampling error if the

  1. A) actual sample exception rate increases.
  2. B) actual sample exception rate does not increase.
  3. C) number of exceptions in the sample does not increase.
  4. D) number of exceptions in the sample increases.

Answer:  B

Diff: 2     Type: MC     Page Ref: 354

Learning Obj.:  11-3  Describe the 14 steps in planning and selecting a sample, performing the tests, and evaluating the sample

 

19) An auditor who uses statistical sampling for attributes in testing internal controls should increase the assessed level of control risk when the

  1. A) sample rate of exceptions is less than the expected rate of exception used in planning the sample.
  2. B) tolerable exception rate less the allowance for sampling risk exceeds the sample rate of deviation.
  3. C) sample rate of exceptions plus the allowance for sampling risk exceeds the tolerable exception rate.
  4. D) sample rate of exceptions plus the allowance for sampling risk equals the tolerable exception rate.

Answer:  C

Diff: 3     Type: MC     Page Ref: 354

Learning Obj.:  11-3  Describe the 14 steps in planning and selecting a sample, performing the tests, and evaluating the sample

20) There are 14 steps to audit sampling, divided into four sections: plan the sample, select the sample, perform the audit procedures, and evaluate the results. Discuss each of the steps that comprise the “plan the sample” section for attribute sampling.

Answer:  The steps that comprise the “plan the sample” section in attribute sampling are:

  1. State the objectives of the audit test. Typically, in attribute sampling, the overall objective is to test the application of controls and determine whether transactions contain monetary misstatements.
  2. Decide if audit sampling applies. Audit procedures involving documentation normally can be performed using sampling, whereas procedures involving observation, inquiry of the client, and analytical procedures are not suited to audit sampling.
  3. Define attributes and exception or error conditions. In this step, the auditor carefully defines the attributes of interest and the conditions that constitute exceptions or errors.
  4. Define the population. The population is the body of data about which the auditor wishes to generalize from, from which the sample must be drawn.
  5. Define the sampling unit. In attribute sampling, the sampling unit is normally a document, identified by document numbers, or a transaction recorded in a journal or file.
  6. Specify tolerable exception rate. This is the exception rate that the auditor will permit in the population and still be willing to rely on internal controls.
  7. Specify acceptable risk of assessing control risk too low. This is the risk that the auditor is willing to take of accepting a control as effective when the true population exception rate is greater than the tolerable exception rate.
  8. 8. Estimate the population exception rate. This is the exception rate the auditor expects to find in the population before testing begins.
  9. Determine the initial sample size. The initial sample size is determined from tables, based on values for the tolerable exception rate, acceptable risk of assessing control risk too low, and the estimated exception rate.

Diff: 3     Type: ES     Page Ref: 346-352

Learning Obj.:  11-3  Describe the 14 steps in planning and selecting a sample, performing the tests, and evaluating the sample

 

 

21) You are working on the testing of internal controls over price changes in the inventory system. You completed the controls testing to determine whether all price changes were approved by the senior accountant, by reference to master file change forms.

 

In order to place reliance on this control, your audit supervisor has decided that the error rate in the population should be less than 1%. When you calculated your sample size, you used a confidence level of 90% and predicted an error rate in the population of less than one percent. Based on these decisions, you examined 150 inventory price master file change forms.

 

In your testing, you uncovered two deviations. Based on these results, you calculate that the actual error rate in the population could be as high as 2.33 %.

 

Required:

 

  1. A) What actions are available to you regarding your planned reliance on the master file change controls?

 

  1. B) What are the advantages and disadvantages of each action?

 

  1. C) How would you decide which action to take?

 

Answer:   The problem here is that the actual error rate in the population is higher than expected, too high to place reliance upon the control.

A), B)

Potential action Advantages Disadvantages
Revise the TER (tolerable error rate) from 1% to a higher number This would allow the auditor to rely upon the population, but likely with a lower level of assurance. Difficult to justify (particularly from a quality control perspective). The amount of reliance on the control will have to be less, resulting in the need to do additional substantive tests.
Expand the sample size The estimated error in the population will decrease IF there are no errors in the additional items sampled. There may also be errors in the additional items tested, resulting in an even larger estimated error for the population.
Revise assessed control risk This action is most supportable and demonstrates good use of judgment. This will require either looking for and relying upon a compensating control (if available) or conducting additional tests of details.

 

 

  1. C) In order to decide on which action to take, the audit staff should:
  • First consult with the engagement senior, supervisor or manager.
  • Carefully investigate the errors to determine whether they are representative (for example, if they occurred while the senior accountant was on holiday; perhaps only that holiday period would require additional substantive tests).
  • Carefully check to see that the sample was selected properly and is representative.
  • Compare the costs of the alternative approaches.
  • Consider how much time is left to complete the audit.

Diff: 3     Type: ES     Page Ref: 354

Learning Obj.:  11-3  Describe the 14 steps in planning and selecting a sample, performing the tests, and evaluating the sample

 

22) You have just been given the approval to conduct statistical sampling for the audit of capital assets acquisitions. Previously, this work was completed using a judgmental sample.

 

Required:

Explain the key areas where decisions need to be made when conducting audit work using a statistical sample.

Answer:

Decisions are made or professional judgment used in the following areas:

∙ Planning the sample (i.e. where sampling will be used in the engagement; where the sample will be taken from).

∙ Determining which statistical sampling method to use.

∙ Conducting the sample selection process.

∙ Performing the audit tests.

∙ Evaluating the results of the audit tests.

Diff: 3     Type: ES     Page Ref: 347-354

Learning Obj.:  11-3  Describe the 14 steps in planning and selecting a sample, performing the tests, and evaluating the sample

 

23) You are analyzing the exceptions that arose after your control testing of credit limit approvals. There were four exceptions where credit had not been approved. One was for a customer that was subsequently placed on C.O.D. (cash on delivery), and three occurred while the business was in the middle of its busy season, processing three times more transactions than most other times of the year. The company’s busy season normally lasts about two months.

 

Required:

 

  1. A) What is an anomaly?

 

  1. B) Are any of the exceptions that you found anomalous? Why or why not?

 

  1. C) Provide an example of a credit approval testing exception that would be anomalous.

 

Answer:

  1. An anomaly is an exception or misstatement that is non-representative of the population as a whole.
  2. No, the exceptions found were not anomalous. The C.O.D. situation is not an exception, since credit was appropriately awarded – no approval was required because there was no credit granted. The other three are exceptions (credit was not approved), but are not anomalous because this is a normal business time period (two months). The company should have controls in place for effective granting that addresses the fact that there are two months of the year when they are very busy.
  3. An example of an anomaly would be if credit was not granted while the person responsible was ill or on holidays, and it could be determined that this situation was different from other times of the year (i.e. the exceptions did not occur at other times).

Diff: 2     Type: ES     Page Ref: 353

Learning Obj.:  11-3  Describe the 14 steps in planning and selecting a sample, performing the tests, and evaluating the sample

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