Question

1. Auditing includes the concept of materiality. Which of the following would be considered material?

a)The auditor confirms accounts receivable and notices one company has not sent in the confirmation form

b)The auditor discovers a $200 error in the inventory account balance of $500,000

c)The auditor discovers related-party transactions are not recorded

d)The auditor notices the name of the new CEO, hired in January 20x2 is not included in the annual report for 20x1

2. Substantive procedures would include:

a)Gathering evidence to ensure the engagement letter is properly written

b)Review of internal controls are in substantial compliance with COSO procedures

c)Tests of account balances

d)Writing recommendations for internal control procedures over cash

3. Analytical procedures would consist of all of the follow except:

a)Common-size financial statements

b)Cross-wire horizontal financial analysis

c)Leverage ratios

d)Liquidity ratios

4. Sampling risk is the risk that the

a)Auditor did not perform proper audit procedures on documents and transactions reviewed

b)Auditor's conclusions may not be representative of the population

c)Monitoring controls were not in place when samples were drawn from the population

d)Samples were taken shortly after the audit was concluded

5. An example of audit sampling would be:

a)analyzing the confidence level and standard deviation for the number of transactions selected by a senior auditor

b)calculating the percentage of increase or decrease for the years covered in the audit period for only assets accounts on the balance sheet

c)reviewing all transactions related to the purchase of new equipment

d)reviewing every 25th invoice prepared checking for proper authorization

Answer 1

1. (c) The auditor discovers related party transactions are not recorded

Reason: Concept of materiality is the method used by the auditor for planning and performing an audit to evaluating the effect of identified misstatements on the audit and the uncorrected misstatents if any on the financial statements and in forming in the auditor's report.

2.(c) Test of account balances

Reason: Substansive procedure is a process/test that gives the completeness,existence,disclosures,rights of assets accounted and on account ledgers of financial statements.

3. (a) Common size financial statements

Reason: Analytical procedure is the process to understand the client business and changes in business and to identify the potential risk of the business to help the auditor to plan other audit procedures

4. (b) Auditor's conclusions may not be representatives of population

Reason: Auditor should not have time to review all items in the population to make a conclusion then he adopt sampling technique/procedure.Sampling risk is the possibility that the items selected in a sample are not truly representative of the population being tested.

5. (d) Reviewing every 25th invoice prepared checking for proper authorization

Reason: Audit sampling is the technique used by the auditor to obtain the maximum information about the characteristics of the population with available sources