9.37Multiple Choice Questions
Select the best answer for each of the following questions. Explain the reasons for your selection.
a. Which of the following is an element of sampling risk?
(1) Choosing an audit procedure that is inconsistent with the audit objective.
(2) Concluding that no material misstatement exists in a materially misstated population based on taking a sample that includes no misstatement.
(3) Failing to detect an error on a document that has been inspected by an auditor.
(4) Failing to perform audit procedures that are required by the sampling plan
b. In assessing sampling risk, the risk of incorrect rejection and the risk of assessing control risk too high relate to the:
(1) Efficiency of the audit.
(2) Effectiveness of the audit.
(3) Selection of the sample.
(4) Audit quality controls.
c. Which of the following statistical sampling techniques is least desirable for use by the auditors?
(1) Random number table selection.
(2) Block selection.
(3) Systematic selection.
(4) Random number generator selection.
d. The auditors’ primary objective in selecting a sample of items from an audit population is to obtain:
(1) A random sample.
(2) A stratified sample.
(3) A representative sample.
(4) A large sample.
e. Discovery sampling is particularly effective when:
(1) There are a large number of errors in the population.
(2) The auditors are looking for critical deviations that are not expected to be frequent in number.
(3) The auditors know where deviations are likely to occur.
(4) The population is large in size.
f. The auditors are using unstratified mean-per-unit sampling to audit accounts receivable as they did in the prior year. Which of the following changes in characteristics or specifications would result in a larger required sample size this year than that required in the prior year?
(1) Larger variance in the dollar value of accounts.
(2) Smaller population size.
(3) Larger tolerable misstatement.
(4) Higher risk of incorrect acceptance.
g. which of the following sampling techniques is typically used for tests of controls?
(1) Mean-per-unit sampling.
(2) Difference sampling.
(3) Attribute sampling.
(4) Probability-proportional-to-size sampling.
h. Which of the following is accurate regarding tolerable misstatement?
(1) Tolerable misstatement is directly related to materiality.
(2) Tolerable misstatement cannot be determined until the sample results are evaluated.
(3) Tolerable misstatement does not affect sample size.
(4) Tolerable misstatement is a measure of reliability of the sample.
i. In which of the following circumstances is it least likely that tests of controls will be performed?
(1) The expected deviation rate exceeds the tolerable deviation rate.
(2) The planned assessed level of control risk is at a level slightly below the maximum.
(3) The risk of assessing control risk too low is less than the expected deviation rate.
(4) The tolerable deviation rate exceeds the risk of assessing control risk too low.
j. An auditor needs to estimate the average highway weight of tractor-trailer trucks using a state’s highway system. Which estimation method is most appropriate?
(1) Mean per unit.
(4) Probability proportional to size.
10.46 During the audit of Sunset Building Supply, you are given the following year-end bank reconciliation prepared by the client:
Sunset Building supply
Balance per 12/31 bank statement 48734
Add: Deposit in Transit 4467
Less check out standing 20758
Balance per ledger, 12/31 32443
According to the client’s accounting records, checks totaling $31,482 were issued between January 1 and January 14 of the following year. You have obtained a cutoff bank statement dated January 14 containing paid checks amounting to $50,440. Of the checks outstanding at December 31, checks totaling $3,600 were not returned in the cutoff statement, and of those issued per the accounting records in January, checks totaling $8,200 were not returned.
a. Prepare a working paper comparing (1) the total of all checks returned by the bank or still outstanding with (2) the total per the client’s records of checks outstanding at December 31 plus checks issued from January 1–14.
b. Suggest four possible explanations for the situation disclosed in your working paper. State what action you would take in each case, including any adjusting entry you would propose.
11.25You have been assigned to the audit of Processing Solutions, Inc., a privately held corporation that develops and sells computer systems. The systems are sold under one- to five-year contracts that provide for a fixed price for licensing, delivery, and setup of the systems and maintenance and technical support for the life of the contract. Your review of the working papers reveals that premature revenue recognition is a risk that must be addressed in the audit.
a. Describe the criteria from SEC Staff Accounting Bulletin No. 104 that must be met to recognize revenue under generally accepted accounting principles.
b. Describe two techniques that management of Processing Solutions might use to overstate revenue.
c. For the two techniques identified in (b), describe an auditing procedure that might be employed by the auditors to detect the overstatement of revenue.