Question 1

What is an auditor's evaluation of a statistical sample for attributes when a test of 50 documents results in 3 deviations if tolerable rate is 7%, the expected population deviation rate is 5%, and the allowance for sampling risk is 2%.

Accepted Answer

Choice "D" is correct. The auditor's evaluation would be to modify the planned assessed level of control risk because the sample deviation rate of 6% (3/50) plus the allowance for sampling risk of 2% (the sum of which is called the upper deviation rate) exceeded the tolerable rate of 7%. Choice "A" is incorrect. This option does not consider the actual results of the sample. The sample deviation rate plus the allowance for sampling risk is compared to the tolerable rate. Choice "B" is incorrect. The sample results cannot be accepted because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate. Choice "C" is incorrect. The tolerable rate (7%) less the allowance (2%) should be compared to the actual deviation rate (6%).

Question 2

Which of the following strategies would a CPA most likely consider in auditing an entity that processes most of its financial data only in electronic form, such as a paperless system?

Accepted Answer

Choice "A" is correct. In a paperless system, the CPA would most likely need to continuously monitor and analyze transaction processing to ensure that controls were operating effectively throughout the period under audit. An embedded audit module is one way to achieve this goal. Choice "B" is incorrect. While segregation of duties is an important control, there would be no reason to increase reliance on such controls in a paperless system. Choice "C" is incorrect. Verification of encrypted digital certificates used to monitor the authorization of transactions would be used in all computerized systems. Choice "D" is incorrect. Testing of firewall boundaries that restrict the recording of outside network traffic by itself does not ensure the completeness and accuracy of the financial data.

Question 3

In parallel simulation, actual client data are reprocessed using an auditor software program. An advantage of using parallel simulation, instead of performing tests of controls without a computer, is that:

Accepted Answer

Choice "d" is correct. Use of computer assisted audit techniques typically allows a greater number of items to be tested at relatively little additional cost. For example, once the auditor has created the software program, it takes little effort to reprocess additional transactions. Manual tests, on the other hand, must be applied separately to each individual transaction, making it costlier to increase sample size. Choice "a" is incorrect. Reprocessing of actual client data may not include all types of transaction errors and exceptions. Only errors or exceptions in the actual data would be included. Choice "b" is incorrect. The client's computer personnel likely would be providing the actual client data, and so would have some knowledge of when the data was being tested. Choice "c" is incorrect. Neither manual testing nor parallel processing includes a risk of corrupting the client's data, since neither one of them affects the client's live data or files.

Question 4

When an auditor tests a computerized accounting system, which of the following is true of the test data approach?

Accepted Answer

Choice "B" is correct. Test data consists of "dummy" data run through the client's computer system. The data should be processed under the auditor's control. Choice "A" is incorrect. Only transactions that the auditor wishes to test must be used. Choice "C" is incorrect. While the auditor will frequently use many valid and invalid conditions, it is not feasible to test every possible valid and invalid condition using a test data approach. Choice "D" is incorrect. The objective of the test data approach is to test programs that the client uses to process data. Using different programs defeats the primary purpose of the test.

Question 5

An auditor who wishes to capture an entity's data as transactions are processed and continuously test the entity's computerized information system most likely would use which of the following techniques?

Accepted Answer

Choice "B" is correct. Embedded audit modules are sections of an application program code that collect transaction data for the auditor. Such modules allow the auditor to capture specific data as transactions are being processed. Choices "A", "C", and "D" are incorrect, based on the above Explanation.

Question 6

Which of the following most likely would be an advantage in using classical variables sampling rather than probability-proportional-to-size (PPS) sampling?

Accepted Answer

Choice "C" is correct. Inclusion of zero and negative balances requires special design considerations with PPS sampling, but it does not require special design considerations with classical variables sampling. Choice "A" is incorrect. An estimate of the standard deviation of the population's recorded amounts is required for classical variables sampling, but not for PPS sampling. Choice "B" is incorrect. The auditor is less likely to need a computer program to design an efficient sample for PPS sampling than for classical variables sampling. Choice "D" is incorrect. Any amount that is individually significant is more likely to be identified and selected when using PPS sampling than when using classical variables sampling.

Question 7

Which of the following statements is not true of the test data approach to testing an accounting system?

Accepted Answer

Choice "D" is correct. While the auditor will frequently use many valid and invalid conditions, it is not feasible to test every possible valid and invalid condition using a test data approach. Choice "A" is incorrect. Test data consists of a set of fictitious entries or inputs that are processed through the client's computer system under the control of the auditor. Choice "B" is incorrect. The auditor need only include valid and invalid conditions that interest the auditor. Choice "C" is incorrect. Only one transaction of each type need be tested, as the system should process similar transactions in a consistent manner.

Question 8

Using microcomputers in auditing may affect the methods used to review the work of staff assistants because:

Accepted Answer

Choice "D" is correct. When using microcomputers in an auditing task, audit documentation may not contain readily observable details of calculations (e.g., present value calculations). In order to review assistants' work, a supervisor may have to examine the formulas used on the microcomputer rather than simply examining the audit documentation. Choice "A" is incorrect. The standards of fieldwork, specifically planning and supervision, would not change with the use of microcomputers on the audit. Choice "B" is incorrect. Consulting service personnel should not be necessary to document the supervisory review. Choice "C" is incorrect. The familiarity of supervisory personnel with the capabilities and limitations of microcomputers would not have an effect on the review process.

Question 9

As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses control risk lower than appropriate. The most likely Explanation: for this situation is that:

Accepted Answer

Choice "C," is correct. T,he situation given is an example of sampling risk, or the probability that the sample chosen is not representative of the population as a whole. T,his is illustrated by the fact that the sample deviation rate is less than the tolerable rate, but the true deviation rate exceeds the tolerable rate. C,hoice "A," is incorrect. I,f both the deviation rates of the sample and the population exceed the tolerable rate, the auditor would assess control risk at the appropriate level. C,hoice "B," is incorrect. I,f both the deviation rates of the sample and the population are less than the tolerable rate, the auditor would assess control risk at the appropriate level. C,hoice "D," is incorrect. I,f the sample deviation rate exceeds the tolerable rate, but the deviation rate in the population does not, this would also result in sampling risk. I,n this case, however, the auditor would assess control risk at a level higher than appropriate.

Question 10

An auditor most likely would introduce test data into a computerized payroll system to test internal controls related to the:

Accepted Answer

Choice "C" is correct. Test data allows the auditor to determine whether adequate controls exist over data processing. Test data consists of fictitious entries or inputs that are processed through the client's computer system under the control of the auditor. The client's computerized payroll system should have adequate controls to prevent input of invalid employee I.D. numbers. Choice "A" is incorrect. This control does not involve the client's computer system and therefore cannot be tested using test data. Choice "B" is incorrect. This control does not involve the client's computer system and therefore cannot be tested using test data. Choice "D" is incorrect. This control does not involve the client's computer system and therefore cannot be tested using test data.

Question 11

Which of the following is the primary reason that many auditors hesitate to use embedded audit modules?

Accepted Answer

Choice "D" is correct. Embedded audit modules are sections of the application program code that collect transaction data for the auditor. Embedded audit modules are usually built into the application program when the program is developed. This would require that the auditors be involved in the system design of the application to be monitored. Choice "A" is incorrect. Embedded audit modules can be protected from computer viruses the same way any other application program would be protected. Choice "B" is incorrect. Auditors are not required to monitor embedded audit modules continuously to obtain valid results. Choice "C" is incorrect. As long as there are appropriate controls in place, embedded audit modules cannot easily be modified through management tampering.

Question 12

When conducting field work for a physical inventory, an auditor cannot perform which of the following steps using a generalized audit software package?

Accepted Answer

Choice "A" is correct. A generalized audit software package (GASP) is used to perform tests directly on a client's system. Since observing inventory involves personal observations made by the auditor, and is unrelated to the client's system, a GASP would not be useful in this regard. Choice "B" is incorrect. Generalized audit software packages (GASPs) are used to perform tests directly on a client's system. Tasks typically performed by GASPs include selecting items that meet specified criteria. Choice "C" is incorrect. Generalized audit software packages (GASPs) are used to perform tests directly on a client's system. Tasks typically performed by GASPs include performing statistical analysis of data. Choice "D" is incorrect. Generalized audit software packages (GASPs) are used to perform tests directly on a client's system. Tasks typically performed by GASPs include recalculating amounts and totals.

Question 13

An auditor is selecting vouchers for testing an entity's internal control activities related to the proper approval of vouchers before checks are prepared. The auditor is matching random numbers with voucher numbers to determine which vouchers to inspect. If a random number matches a voided voucher, that voucher ordinarily would be replaced by another voucher in the random sample if the voided voucher:

Accepted Answer

Choice "D" is correct. If a random number matches a properly voided voucher, the auditor would ordinarily replace this with another voucher in order to attain the desired sample size. Choice "A" is incorrect. A voucher that cannot be located is normally considered a deviation. Choice "B" is incorrect. The auditor would be particularly concerned with a voided voucher that represents a material amount, but this fact alone would not cause selection of another voucher. Determination of whether to select another voucher or to instead consider this a deviation would depend on whether the voucher was properly voided. Choice "C" is incorrect. If the voided voucher indicates a control deviation, then it would be counted as such.

Question 14

Which of the following courses of action would an auditor most likely follow in planning a sample of cash disbursements if the auditor is aware of several unusually large cash disbursements?

Accepted Answer

Choice "B" is correct. Stratification involves the grouping of transactions sharing some characteristic (such as recorded amounts). The goal of stratification is to ensure selection of items for which potential misstatements may individually equal or exceed tolerable misstatement. Thus, the auditor should stratify the sample such that the unusually large transactions are selected. Choice "A" is incorrect. The tolerable rate of deviation refers to test of controls, rather than substantive tests. Choice "C" is incorrect. Certain items should be individually examined; for example, the auditor should examine those items for which potential misstatements may individually equal or exceed tolerable misstatement. Stratifying the sample is more efficient than increasing the sample size. Choice "D" is incorrect. By stratifying the sample, the auditor can examine each of the unusual transactions and also reduce the sample size.

Question 15

The likelihood of assessing control risk too high is the risk that the sample selected to test controls:

Accepted Answer

Choice "A" is correct. The risk of assessing control risk too high is the risk that the assessed level of control risk based on the sample is greater than the true risk based on the actual operating effectiveness of the control. Choice "B" is incorrect. Tests of controls are not designed to directly detect misstatements. Tests of controls directed toward the operating effectiveness of an internal control are concerned with how the control was applied, the consistency with which it was applied during the audit period, and by whom it was applied. Choice "C" is incorrect. The risk that the sample contains proportionately fewer monetary errors or deviations than exist in the class as a whole is the risk of assessing control risk too low. Choice "D" is incorrect. Tolerable misstatements (errors) are related to the results of substantive tests of details, not tests of controls.

Question 16

An auditor examining inventory most likely would use variables sampling rather than attributes sampling to:

Accepted Answer

Choice "B" is correct. Variables sampling is used to determine whether a given account balance is reasonable. Choice "A" is incorrect. Attribute sampling is used to test the attributes, or characteristics, of each item in a sample. In this case, attribute sampling would be used to determine if proper procedures with respect to pricing were followed for each item in the sample. Choice "C" is incorrect. Attribute sampling is used to test the attributes, or characteristics, of each item in a sample. In this case, attribute sampling would be used to determine if inventory was properly recorded for each item in the sample. Choice "D" is incorrect. Attribute sampling is used to test the attributes, or characteristics, of each item in a sample. In this case, attribute sampling would be used to determine if discounts were properly applied to inventory for each item in the sample.

Question 17

In determining the sample size for a test of controls, an auditor should consider the likely rate of deviations, the allowable risk of assessing control risk too low, and the:

Accepted Answer

Choice "A" is correct. The auditor should consider the tolerable rate of deviation from the control structure policies or procedures being tested, the likely rate of deviations, and the allowable risk of assessing control risk too low. Choice "B" is incorrect. The risk of incorrect acceptance is relevant for substantive tests of details rather than tests of controls. Choice "C" is incorrect. The nature and cause of the deviation is not considered in determining a sample size for tests of controls. Choice "D" is incorrect. The population size is generally not considered in determining a sample size for tests of controls.

Question 18

As a result of tests of controls, an auditor assesses control risk too high. This incorrect assessment most likely occurred because:

Accepted Answer

Choice "D" is correct. The risk of assessing control risk too high is the risk that the assessed level of control risk based on the sample is greater than the true risk based on the actual operating effectiveness of the control. Choice "A" is incorrect. The risk of assessing control risk too low is the risk that the assessed level of control risk based on the sample is less than the true risk based on the actual operating effectiveness of the control. Choice "B" is incorrect. Assessing control risk too high relates to an incorrect evaluation of risk by the auditor, not to whether the control activity relates to the client's assertions. Choice "C" is incorrect. If the auditor believes that a control activity will reduce the extent of substantive testing when, in fact, it will not, this implies that the control risk based on the auditor's sample was less than the true risk based on the actual operating effectiveness of the control. This would be an example of assessing control risk too low, not too high.

Question 19

An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide 1% risk of assessing control risk too low (99% confidence) that not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience that about 2.5% of the sales invoices lacked approval. A sample of 200 invoices was examined and 7 of them were lacking approval. The auditor then determined the upper deviation rate to be 8%. The allowance for sampling risk was:

Accepted Answer

Choice "B" is correct. The allowance for sampling risk is the excess of the 8% upper deviation rate over the 3.5% (= 7 ÷ 200) sample deviation rate, or 4.5%. Choices "A", "C", and "D" are incorrect, based on the above Explanation.

Question 20

Which of the following is an engagement attribute for an audit of an entity that processes most of its financial data in electronic form without any paper documentation?

Accepted Answer

Choice "C" is correct. Continuous performance of audit tests is required when financial data is processed electronically, without provision of paper documentation, to ensure that controls are operating effectively throughout the period under audit. Choice "A" is incorrect. Discrete phases of planning, interim, and year-end fieldwork are not effective when there is no audit trail, because no evidence is then available to support the operation of the controls or the accuracy of the financial records for periods when the auditor was not present to conduct tests. Choice "B" is incorrect. Consideration of the risk of management fraud is required in all audits, regardless of the method used to process financial data or the adequacy of the paper documentation provided. Choice "D" is incorrect. The completeness assertion must be tested in all audit engagements, regardless of the method used to process financial data or the adequacy of the paper documentation provided.

Exam 1: CPA Auditing and Attestation Exam