Accounting 408
Test 3a
Name _______________________
Section _______
Row _______
I. Multiple Choice. (2.5 points each) Read the following questions carefully and
indicate your one best answer to the questions by placing an X over the appropriate
letter on the answer sheet.
1.
The process of assessing control risk for account balance assertions is
straightforward for accounts that are affected by a single transaction class.
Which of the following accounts is affected by two transaction cycles?
a.
cash
b.
accounts receivable
c.
inventory
d.
accounts payable
2.
The primary means by which the auditor meets the requirements of the third field
work standard (obtain sufficient appropriate evidence) is through
a.
designing substantive tests.
b.
performing substantive tests.
c.
gathering evidence to support the assessed level of control risk.
d.
preparation of a detailed audit program.
3.
Which of the following is not considered a substantive test?
a.
analytical procedures.
b.
tests of controls.
c.
tests of detail of transactions.
d.
tests of detail of balances.
4.
The least costly form of testing is usually
a.
analytical procedures.
b.
tests of controls.
c.
tests of details of transactions.
d.
tests of details of balances.
5.
A dual purpose test is an audit procedure that
a.
tests two assertions simultaneously.
b.
is used to obtain an understanding of the control structure and also tests
for effectiveness of a control.
c.
both tests for control effectiveness and for monetary error.
d.
can be used in both the planning phase and the testing phase of the audit.
6.
7.
An auditor is examining the detailed debit and credit activity posted in an
account during the year. The auditor is most likely performing
a.
analytical procedures.
b.
tests of controls.
c.
tests of details of transactions.
d.
tests of details of balances.
Tests of details of balances focus on obtaining evidence
a.
by inspecting the individual debit and credit entries to the account.
b.
directly about an account balance.
c.
in the least costly manner.
d.
to refute instead of support an assertion.
8.
In practice, early substantive testing of account balances is done only when
a.
the client has a calendar year end.
b.
the client has reporting requirements under the Securities Acts.
c.
evidence indicates effective control policies and procedures.
d.
the audit is a first time audit.
9.
Audit sampling is least likely to be used when the auditor is
a.
vouching.
b.
tracing.
c.
confirming.
d.
conducting analytical procedures.
10.
If the sample supports the conclusion that the recorded account balance is
materially misstated when it is not materially misstated, then this statement
illustrates the
a.
risk of assessing control risk too low.
b.
risk of assessing control risk too high.
c.
risk of incorrect acceptance.
d.
risk of incorrect rejection.
11.
The greatest impact on audit effectiveness comes from the risks of
a.
assessing control risk too low and assessing control risk too high.
b.
incorrect acceptance and incorrect rejection.
c.
assessing control risk too low and incorrect acceptance.
d.
assessing control risk too high and incorrect rejection.
12.
The critical difference between statistical and nonstatistical sampling is the
a.
required use of judgment in nonstatistical.
b.
use of the laws of probability in statistical.
c.
elimination of nonsampling risk with statistical.
d.
greater competence of the evidence gathered with statistical.
13.
Random selection is used in audit sampling so that
a.
the auditor can minimize time required for the selection process.
b.
larger items are more likely to be selected.
c.
each item has a known and equal chance of being selected.
d.
a representative sample is guaranteed.
14.
The efficiency gained from stratification of a population is based on the fact
that
a.
the subpopulations can be examined by different audit personnel.
b.
it is inherently easier to test several sets of fewer items.
c.
sample size and standard deviation are directly related.
d.
more errors are normally found in the largest and the smallest items of a
population.
15.
The population consists of many individual items for which no book values are
known. The objective is to estimate the financial statement balance for the
item in question. The only appropriate sampling plan here is
a.
attribute sampling.
b.
PPS sampling.
c.
ratio estimation.
d.
mean-per-unit estimation.
e.
difference estimation.
16.
In moving from the traditional file method to a database method, which of the
following can be eliminated?
a.
redundant information across applications.
b.
operating systems.
c.
application programs.
d.
All of the items listed here can be eliminated by adopting the database
method.
17.
Which of the following is not a widely used data processing method?
a.
batch entry/batch processing.
b.
batch entry/on-line processing.
c.
on-line entry/batch processing.
d.
on-line entry/on-line processing.
18.
The most timely information about a certain data item is available with
a.
batch entry/batch processing.
b.
batch entry/on-line processing.
c.
on-line entry/batch processing.
d.
on-line entry/on-line processing.
19.
In general, errors should be corrected by
a.
data conversion clerks.
b.
the control group.
c.
the internal audit department.
d.
the party responsible for the mistake.
20.
The use of the tagging transactions audit approach is most likely in a system
with
a.
batch entry/batch processing.
b.
batch entry/on-line processing.
c.
on-line entry/batch processing.
d.
on-line entry/on-line processing.
21.
Which of the following methods is not a method used by an auditor to audit
through a computer system?
a.
Test data approach.
b.
Integrated test facility.
c.
Audit hooks.
d.
Comparing computer generated results with data manually processed by the
auditor.
22.
Parallel simulation involves
a.
actual company data being reprocessed using an auditor-controlled software
program.
b.
the creation of a small subsystem (a minicompany) within the regular EDP
system.
c.
dummy transactions prepared by the auditor and processed under the
auditor's control by the client's computer program.
d.
placing an indicator on a selected transaction so the transaction can be
traced through the system as it is being processed.
23.
An advantage a disk storage unit has over a magnetic tape drive system is
a.
a disk storage unit does not need an operating system.
b.
a disk storage unit offers random access to data files.
c.
a magnetic tape drive system can only serve as an output device.
d.
a magnetic tape drive system cannot operate on-line.
24.
A computer program that updates the inventory master file with the inventory
transaction file is an example of a(n)
a.
systems program.
b.
application program.
c.
utility program.
d.
operating system.
II.
Problems
Answer each problem in the space provided and SHOW ALL WORK as appropriate!
all monetary answers to the nearest dollar.
Round
1. (6 points) Determine the sample size, upper deviation limit, and identify the
controls that support the auditor's planned control risk for each of the following
attributes. When determining sample size, report the actual sample size you find in
the table, but when determining the upper deviation limit, round each sample size
down to the nearest sample size in the table.
Attribute
Risk of
Overreliance
Expected
Deviation
Rate
a
10%
1%
b
10%
c
d
Tolerable
Deviation
Rate
Support
Upper
Planned
Deviation
CR?
Limit
(Y/N)
Sample
Size
Number
of Sample
Deviations
6%
______
2
______
_____
3%
9%
______
3
______
_____
5%
1%
8%
______
1
______
_____
5%
1.5%
6%
______
1
______
_____
2. (6 points) Given the following information about the accounts receivable of
Wind River Company, calculate the sample size for a probability-proportional-to-size
sampling plan.
Risk of Incorrect Acceptance.
Clients Recorded Book Value .
Number of Accounts. . . . . .
Tolerable Misstatement. . . .
Anticipated Misstatement. . .
Population Standard Deviation
.
.
.
.
.
.
.
.
.
.
.
.
15%
$2,920,000
15,700
$146,000
$7,000
$ 360
3. (14 points) As auditor for the Glacier Company, you decide to use PPS sampling
in determining the fairness of accounts receivable. In executing the plan, you
discover the following errors:
Book Value
$ 525
6,270
Audit Value
$
0
5,016
The total book value of the accounts receivable is $450,000, the risk of incorrect
acceptance is 10%, the sample size is 80, and tolerable misstatement is $27,500.
Required:
(a) Calculate basic precision.
(b)
Calculate total projected misstatement.
(c)
Calculate incremental allowance resulting from the misstatements.
(d)
Do you ACCEPT or REJECT (circle one) the client's account balance.
Why?
4. (9 points)
for MedCo, Inc.
The following information is available for the audit of inventory
Client's book value . . . . .
Population size . . . . . . .
Risk of incorrect acceptance.
Risk of incorrect rejection .
Tolerable misstatement. . . .
Estimated standard deviation.
.
.
.
.
.
.
.
.
.
.
.
.
$95,000
1,000
20%
10%
$9,000
$50
Determine the sample size for a MPU sampling plan (assume sampling without
replacement).
Answers
I.
Multiple Choice
Question
Number
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
Correct
Answer
a
b
b
a
c
c
b
c
d
d
c
b
c
c
d
a
b
d
d
d
d
a
b
b
II. Problems
1.
Attribute Sample Size Upper Deviation
Support
Limit
Planned CR?
a
64
8.6
N
b
58
11.7
N
c
58
8.3
N
d
103
4.7
Y
2.
2,920,000 x 1.9
n = -------------------------146,000 – (7,000 x 1.4)
=
41
3.
a.
BP = RF x SI
SI = N/n = 450000/80 = 5625
= 2.31 x 5625 = 12,994
b.
Errors
1
2
BV
$525
$6,270
AV
$0
$5,016
Difference
$525
$1254
Tainting
100%
*
SI
5625
*
PE
$5625
$1254
$6,879
c.
Ranked PE
$5625
Chg in RF - 1
0. 58
IA
$3,263
d.
UEL =
=
PE
+
BP
+
IA
12994 + 6879 + 3263 = 23,136
ACCEPT
23,136 < 27,500
4.
Not covered currently in Accounting 4080