When performing a substantive test of a random sample of cash disbursements an auditor is supplied?

With respect to planning of a year-end audit, which of the following statements is always true?

A) An engagement should not be accepted after the fiscal year-end.

B) An inventory count should be observed at the balance sheet date.

C) The client’s audit committee should not be told of the specific audit procedures which will be performed.

D) It is an acceptable practice to carry out parts of the audit at interim dates.

D) It is an acceptable practice to carry out parts of the audit at interim dates.

This answer is correct because it is an acceptable practice for the auditor to carry out parts of the audit at interim dates.

To measure how effectively an entity employs its resources, an auditor calculates inventory turnover by dividing average inventory into

A) Net sales.
B) Cost of goods sold.
C) Operating income.
D) Gross sales.

B) Cost of goods sold.

The requirement is to identify the factor that average inventory is divided into to calculate inventory turnover. Answer (b) is correct because the average inventory is divided into the cost of goods sold to calculate the inventory turnover.

An auditor plans to apply substantive tests to the details of asset and liability accounts as of an interim date rather than as of the balance sheet date. The auditor should be aware that this practice

A) Eliminates the use of certain statistical sampling methods that would otherwise be available.

B) Presumes that the auditor will reperform the tests as of the balance sheet date.

C) Should be especially considered when there are rapidly changing economic conditions.

D) Potentially increases the risk that errors that exist at the balance sheet date will not be detected.

D) Potentially increases the risk that errors that exist at the balance sheet date will not be detected.

This answer is correct because such interim testing increases detection risk since end-of-year balances will receive less testing.

In an environment that is highly automated, an auditor determines that it is not possible to reduce detection risk solely by substantive tests of transactions. Under these circumstances, the auditor most likely would

A) Perform tests of controls to support a lower level of assessed risk of misstatement.

B) Increase the sample size to reduce sampling risk and the detection risk.

C) Adjust the materiality level and consider the effect on inherent risk.

D) Apply analytical procedures and consider the effect on control risk.

A) Perform tests of controls to support a lower level of assessed risk of misstatement.

This answer is correct because tests of controls may be used to support a lower level of the assessed risk of misstatement, and thereby restrict audit risk appropriately.

When performing a substantive test of a random sample of cash disbursements, an auditor is supplied with a photocopy of vendor invoices supporting the disbursements for one particular vendor rather than the original invoices. The auditor is told that the vendor’s original invoices have been misplaced. What should the auditor do in response to this situation?

A) Increase randomly the number of items in the substantive test to increase the reliance that may be placed on the overall test.

B) Reevaluate the risk of fraud, and design alternate tests for the related transactions.

C) Increase testing by agreeing more of the payments to this particular vendor to the photocopies of its invoices.

D) Count the missing original documents as misstatements, and project the total amount of error based on the size of the population and the dollar amount of the errors.

B) Reevaluate the risk of fraud, and design alternate tests for the related transactions.

This answer is correct because alternate tests should be designed, and because the unavailability of the documents may indicate a higher risk of fraud.

Which of the following procedures would an auditor most likely perform prior to the balance sheet date?

A) Review subsequent events.

B) Perform search for unrecorded liabilities.

C) Send inquiry letter to client’s legal counsel.

D) Review detail and test significant travel and entertainment expenses.

D) Review detail and test significant travel and entertainment expenses.

This answer is correct because the auditor may review the detail and test significant expenses prior to that date and then update the analysis at a subsequent date.

Which of the following explanations best describes why an auditor may decide to reduce tests of details for a particular objective?

A) The audit is being performed soon after the balance sheet date.

B) Audit staff are experienced in performing the planned procedures.

C) Analytical procedures have revealed no unusual or unexpected results.

D) There were many transactions posted to the account during the period.

C) Analytical procedures have revealed no unusual or unexpected results

This answer is correct because analytical procedures performed as substantive procedures which reveal no likely misstatements may reduce the needed extent of other substantive procedures.

Auditors sometimes use comparison of ratios as audit evidence. For example, an unexplained decrease in the ratio of gross profit to sales may suggest which of the following possibilities?

A) Unrecorded purchases.

B) Unrecorded sales.

C) Merchandise purchases being charged to selling and general expense.

D) Fictitious sales.

Unrecorded sales.

This answer is correct because unrecorded sales would decrease both sales and gross profit by equal amounts and thus decrease the ratio. Note that the ratio is less than 1.0.

Which of the following ratios would an engagement partner most likely consider in the overall review stage of an audit?

A) Total liabilities/net sales.
B) Accounts receivable/inventory.
C) Cost of goods sold/average inventory.
D) Current assets/quick assets.

C) Cost of goods sold/average inventory.

This ratio is called "inventory turnover," which is a traditional ratio that is useful in evaluating whether inventory might be slow-moving. In that event, inventory might need to be written down to better reflect the estimated future benefits. This might be appropriately considered in the partner's review.

The element of the audit planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the
Evidence to be gathered to provide a sufficient basis for the auditor's opinion.
Procedures to be undertaken to discover litigation, claims, and assessments.
Pending legal matters to be included in the inquiry of the client's attorney.
Timing of inventory observation procedures to be performed.

Timing of inventory observation procedures to be performed.
You Answered Correctly!
Determination of the timing of inventory observation procedures to be performed would be most likely to be agreed upon with the client before implementation, because the auditor would need to be informed as to the timing of, and procedures related to, the physical inventory-taking by the client.

Which of the following factors would most likely influence an auditor's determination of the auditability of an entity's financial statements?
The complexity of the accounting system.
The existence of related party transactions.
The adequacy of the accounting records.
The operating effectiveness of control procedures.

The adequacy of the accounting records.

The factor most likely to influence an auditor's determination of the auditability of an entity's financial statements is the adequacy of the accounting records. The lack of adequate accounting records is a scope limitation which could prevent the auditor from obtaining sufficient evidence to render an opinion.

At the conclusion of an audit, an auditor is reviewing the evidence gathered in support of the financial statements. With regard to the valuation of inventory, the auditor concludes that the evidence obtained is not sufficient to support management's representations. Which of the following actions is the auditor most likely to take?
Consult with the audit committee and issue a disclaimer of opinion.
Consult with the audit committee and issue a qualified opinion.
Obtain additional evidence regarding the valuation of inventory.
Obtain a statement from management supporting their inventory valuation.

Obtain additional evidence regarding the valuation of inventory.

The auditor would seek to obtain the additional evidence needed to support the valuation of inventory.

Which of the following is an analytical procedure?
Comparing current-year balances to prior-year balances.
Matching sales invoices to shipping documents.
Confirming accounts receivable.
Making inquiries of client management.

Comparing current-year balances to prior-year balances.

CORRECT! Analytical procedures are defined as “evaluations of financial information through analysis of plausible relationships among both financial and nonfinancial data.” That definition encompasses evaluating the current-year balances by comparing them to prior-year balances for reasonableness.

Which of the following best identifies the effect of an increase in the risk of material misstatement on detection risk and the extent of substantive procedures?
The acceptable level of detection risk decreases, and the extent of substantive procedures increases.
The acceptable level of detection risk increases, and the extent of substantive procedures increases.
The acceptable level of detection risk decreases, and the extent of substantive procedures decreases.
The acceptable level of detection risk increases, and the extent of substantive procedures decreases.

The acceptable level of detection risk decreases, and the extent of substantive procedures increases.

CORRECT! As the risk of material misstatement increases, the auditor should decrease detection risk accordingly. The auditor may lower detection risk by increasing the extent of substantive procedures (e.g., by increasing sample sizes).