Area III: Performing Procedures

An auditor is assessing the risk of material misstatement for a nonissuer's complex financial instruments. The entity uses a third-party pricing service to value its portfolio of mortgage-backed securities. Which of the following procedures should the auditor perform to assess the reliability of the pricing service's data?

An auditor is evaluating the results of attribute sampling performed on a population of 2,000 purchase orders to test the authorization control. The sample size was 100. The auditor found 2 deviations. The calculated upper deviation rate at a 95% confidence level is 6.3%. The tolerable deviation rate established during planning was 7%. What is the auditor's MOST appropriate conclusion?

An auditor uses probability-proportional-to-size (PPS) sampling to select a sample of accounts receivable for confirmation. A customer account with a recorded balance of $10,000 was selected. The audit value was determined to be $8,000. The sampling interval is $50,000. What is the projected misstatement for this item?

An auditor is performing substantive analytical procedures on the payroll expense of a nonissuer. The auditor develops an expectation of payroll expense based on the number of employees and average pay rates. The difference between the auditor's expectation and the recorded amount exceeds the auditor's established threshold. Which of the following is the MOST appropriate next step?

An auditor is testing the completeness assertion for accounts payable of a nonissuer. Which of the following procedures would provide the MOST reliable evidence?

An auditor is auditing the allowance for doubtful accounts of a nonissuer. The auditor is concerned that management has understated the allowance by failing to account for deteriorating economic conditions affecting a major customer. Which of the following procedures would provide the MOST persuasive evidence regarding the adequacy of the allowance?

An auditor is designing confirmation requests for a nonissuer's accounts receivable. The auditor anticipates a low response rate and several disputed balances. Which type of confirmation request is MOST appropriate to maximize response rates and evidence quality?

An auditor is performing an audit of a nonissuer's financial statements. The auditor identifies a subsequent event occurring after the balance sheet date but before the financial statements are issued: the settlement of a lawsuit for an amount significantly different from the year-end accrual. The cause of the lawsuit existed at the balance sheet date. How should this event be treated?

An auditor is evaluating the sufficiency of audit evidence for a nonissuer's fair value estimate of investment property. The auditor has tested management's significant assumptions and found them to be reasonable. However, the auditor notes that the valuation is highly sensitive to minor changes in the capitalization rate. What is the auditor's BEST course of action?

An auditor is auditing the financial statements of a nonissuer. The auditor concludes that there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time. Management has developed a plan that the auditor concludes is probable of being effectively implemented and probable of mitigating the conditions. The financial statements adequately disclose the conditions and the plan. What type of report should the auditor issue?

An auditor is performing a statistical sample of inventory counts. The recorded book value of the population is $1,000,000. The auditor selects a sample with a book value of $100,000. The audit value of the sample is $98,000. Using ratio estimation, what is the projected misstatement for the population?

An auditor is performing an audit of a nonissuer's accounts receivable. The auditor decides to use probability-proportional-to-size (PPS) sampling. Which of the following is a DISADVANTAGE of this method compared to classical variables sampling?

An auditor is testing the valuation of a nonissuer's inventory. The auditor notes that the company uses a standard cost system. Which of the following procedures is MOST appropriate to determine if the standard costs approximate actual costs?

An auditor is testing the rights and obligations assertion for a nonissuer's inventory. The auditor notes that a significant portion of inventory is segregated in the warehouse. Which of the following inquiries is MOST relevant?

An auditor is using non-statistical sampling to test the operating effectiveness of a control. The auditor selects a sample of 50 items and finds 0 deviations. The auditor concludes that the control is operating effectively. Which of the following statements is TRUE regarding this conclusion?

An auditor is performing a review of a nonissuer's financial statements. The auditor inquires about subsequent events. Which of the following events occurring after the balance sheet date but before the report date would MOST likely require adjustment to the financial statements?

An auditor is testing the completeness of sales for a nonissuer. Which of the following audit procedures is MOST relevant?

An auditor is auditing the financial statements of a nonissuer. The auditor sends a confirmation request to a bank. The bank confirms the cash balance but does not answer the specific question regarding contingent liabilities (loans). What should the auditor do?

An auditor is testing the existence of a nonissuer's investments in securities. The securities are held by a custodian. Which of the following procedures provides the MOST reliable evidence?

An auditor is performing an audit of a nonissuer. The auditor identifies a risk that the entity may be capitalizing repairs and maintenance expenses to inflate assets. Which of the following procedures is MOST appropriate to address this risk?

An auditor is determining the sample size for a test of controls. Which of the following factors has an INVERSE relationship with sample size?

An auditor is performing an audit of a nonissuer. The auditor uses a classical variables sampling plan (mean-per-unit) to estimate the value of inventory. The recorded book value is $2,000,000. The point estimate of the population is $1,800,000. The precision (allowance for sampling risk) is $150,000. The tolerable misstatement is $250,000. What is the auditor's conclusion?

During the audit of a manufacturing company's inventory, the auditor utilizes a variables sampling plan to estimate the total value of inventory. The recorded book value is $5,000,000. The auditor's sample results indicate a projected misstatement of $150,000 (overstatement). The allowance for sampling risk is calculated at $75,000. Tolerable misstatement is $200,000. Which of the following conclusions is MOST appropriate?

Scenario: An auditor is testing the completeness assertion for accounts payable of a nonissuer. The auditor selects a sample of cash disbursements made subsequent to year-end and examines the supporting documentation (invoices and receiving reports).<br/><br/>Which of the following findings would represent a misstatement related to the completeness of accounts payable?

An auditor is calculating the sample size for a test of details of balances using probability-proportional-to-size (PPS) sampling. The recorded amount of the population is $1,000,000. The auditor determines a reliability factor of 3.0 (based on risk of incorrect acceptance), a tolerable misstatement of $50,000, and an expected misstatement of $10,000. The expansion factor is 1.6. What is the sampling interval?

An auditor is evaluating the sufficiency of evidence regarding the fair value of a complex financial instrument (Level 3 input) held by a nonissuer. Management has used a specialist to value the instrument. The auditor has tested the specialist's competence and objectivity. Which of the following additional procedures is MOST appropriate?

Scenario: An auditor is testing the existence of inventory for a retail client with multiple locations. The auditor observes the physical count at the main warehouse but not at the smaller retail stores. The retail stores hold 30% of the total inventory value. The auditor performs analytical procedures on the retail store inventory and finds the gross margins to be consistent with prior years. <br/><br/>Is this evidence sufficient and appropriate to support the existence assertion for the retail store inventory?

An auditor is performing an audit of a nonissuer. The auditor sends a confirmation request to a bank. The bank responds but includes a disclaimer stating: 'Information is furnished as a matter of courtesy and without responsibility on the part of the bank or its officers.' How should the auditor assess the reliability of this confirmation?

An auditor is testing the operating effectiveness of a control that requires the credit manager to approve all sales over $10,000. The auditor selects a sample of 50 sales over $10,000. The auditor finds that for 2 items, the credit manager's signature is missing, but the credit manager claims to have verbally approved them. How should the auditor classify these items?

Which of the following events occurring after the balance sheet date but before the auditor's report date would require ADJUSTMENT to the financial statements?

An auditor is auditing the financial statements of an issuer. The auditor is using Audit Data Analytics (ADA) to test the revenue account. The auditor analyzes 100% of the sales transactions for the year and identifies 50 transactions that fall outside the auditor's expected range (notable items). What is the auditor's NEXT step?

An auditor is testing the completeness of the dividend income account for a nonissuer investor. Which of the following audit procedures is MOST effective?

Scenario: An auditor is auditing the allowance for doubtful accounts of a nonissuer. The auditor notes that the company's aging schedule shows a significant increase in receivables over 90 days past due. Management argues that these are due to a few large customers who are 'slow payers but reliable'.<br/><br/>Which of the following procedures provides the MOST persuasive evidence regarding the valuation of these receivables?

An auditor is performing a search for unrecorded liabilities. Which of the following document populations should the auditor sample from?

Scenario: An auditor is auditing the financial statements of a nonissuer. The auditor has determined that the risk of material misstatement for the existence of accounts receivable is high. Which of the following confirmation strategies is MOST appropriate?

An auditor is testing the rights and obligations assertion for a client's machinery. Which of the following procedures would provide the BEST evidence?

An auditor is using attribute sampling to test a control. The auditor specifies a tolerable deviation rate of 5%, a risk of assessing control risk too low of 5%, and an expected population deviation rate of 1%. The sample size is 93. The auditor finds 1 deviation. The table shows that for 1 deviation in a sample of 93, the upper deviation rate is 4.8%. What is the auditor's conclusion?

An auditor is performing analytical procedures as a substantive test for payroll expense. The auditor develops an expectation of payroll expense by multiplying the average number of employees by the average wage rate. Which of the following factors would MOST significantly affect the precision of this expectation?

Scenario: An auditor is auditing the financial statements of a nonissuer. The auditor discovers that the client has been sued for patent infringement. Management's legal counsel refuses to provide an estimate of the potential loss, stating only that the outcome is 'uncertain'. Management has disclosed the lawsuit in the notes but has not accrued a liability. <br/><br/>What is the auditor's responsibility?

Scenario: An auditor is auditing the cash account of a nonissuer. The auditor suspects that the controller is writing checks to pay vendors but holding them in her desk to manage cash flow, while recording them as paid to reduce accounts payable. <br/><br/>Which audit procedure would BEST detect this 'held check' scheme?

An auditor is determining the sample size for a test of controls. Which of the following changes would result in a DECREASE in sample size?

An auditor is preparing a letter of audit inquiry to the client's legal counsel. Which of the following is the primary objective of this letter?

An auditor is testing the valuation of a client's investment in a non-traded equity security. The client uses the cost method. The auditor observes that the investee company has reported significant recurring losses and has lost a major customer. What is the auditor's primary concern?

Which of the following statements regarding the 'Management Representation Letter' is CORRECT?

Scenario: An auditor is testing the allocation of overhead to inventory. The client uses a standard costing system. The auditor notes that production volume dropped significantly this year, but the overhead absorption rate remained the same as the prior year. <br/><br/>What is the likely impact on the financial statements?

An auditor is testing the completeness of the liability for claims and assessments. Which of the following procedures is MOST appropriate?

An auditor is testing the valuation of inventory. The auditor notes that the client has a large quantity of 'slow-moving' electronic components. The client has not written them down. Which of the following procedures provides the BEST evidence of the net realizable value of these items?

Which of the following is a 'Type 2' subsequent event?

An auditor is using 'probability-proportional-to-size' (PPS) sampling. Which of the following is a characteristic of this method?

Which of the following is a 'substantive analytical procedure'?

An auditor is testing the 'occurrence' assertion for sales. Which of the following directions of testing is appropriate?

Scenario: An auditor is testing the fair value of a Level 2 financial asset. The client uses a matrix pricing model based on similar securities. <br/><br/>Which of the following is the MOST important audit consideration?

An auditor is performing a 'test of details' on the existence of accounts receivable. The auditor selects a sample of customers and sends positive confirmations. This procedure primarily addresses which type of risk?

An auditor is using attribute sampling to test the operating effectiveness of a control. The auditor specifies a tolerable deviation rate of 5%. The sample of 100 items yields 2 deviations. The calculated upper deviation rate at the 95% confidence level is 6.2%. What is the auditor's MOST appropriate conclusion?

In probability-proportional-to-size (PPS) sampling, which of the following accounts would have the HIGHEST probability of being selected?

An auditor sends positive confirmation requests to a sample of customers. A customer responds stating, 'We do not owe $15,000; we paid this amount on December 28.' The auditor's client has a year-end of December 31. The auditor investigates and finds the check was received and deposited by the client on January 3. Which of the following is the MOST likely conclusion?

An auditor is testing the completeness assertion for accounts payable. Which of the following procedures is MOST appropriate?

An auditor is auditing the fair value of Level 3 assets (complex derivatives) for an issuer. Management has used a specialist to develop the valuation model. Under PCAOB standards, which of the following is the auditor's responsibility regarding the specialist's assumptions?

An auditor is reviewing the legal letter received from the client's external counsel. The letter states that the outcome of a significant lawsuit against the client is 'probable' and the potential loss is 'reasonably estimable' at $1,000,000. The client has disclosed the lawsuit in the notes but has NOT accrued a liability. What is the appropriate audit response?

An auditor is performing a Single Audit under the Uniform Guidance (2 CFR 200). The auditor has identified a 'major program' to test. Which of the following determines the auditor's testing strategy for internal controls over compliance for this major program?

An auditor concludes that there is substantial doubt about a nonissuer client's ability to continue as a going concern for a reasonable period of time. Management has developed a plan to alleviate this doubt, and the auditor concludes the plan is effective and the doubt is alleviated. How should this be reported?

An auditor is testing the 'Rights and Obligations' assertion for inventory. Which of the following procedures is MOST relevant?

An auditor is testing the valuation of a client's allowance for doubtful accounts. The auditor reviews the aging of receivables and discusses the collectibility of large overdue balances with the credit manager. This approach is best described as:

An auditor is performing a 'search for unrecorded liabilities' and selects a sample of cash disbursements recorded in January (subsequent period). The auditor identifies a payment of $5,000 for utility services covering the period December 1 to December 31. The payment was recorded as an expense in January. The client's year-end is December 31. The materiality threshold is $10,000. What is the auditor's conclusion?

An auditor is testing the 'Existence' of equipment. Which of the following procedures is MOST appropriate?

An auditor uses the 'ratio estimation' method for variables sampling. The book value of the population is $1,000,000. The sample has a book value of $100,000 and an audited value of $110,000. What is the point estimate of the audited value of the population?

An auditor is auditing the cash account. Which of the following procedures is MOST effective for detecting 'kiting'?

An auditor is performing a 'review' of a nonissuer's financial statements. The auditor inquires about subsequent events. Which of the following events occurring after year-end but before the report release date would require adjustment to the financial statements?

An auditor is testing the completeness of sales. Which of the following audit trails represents the correct direction of testing?

An auditor is testing the 'Presentation and Disclosure' assertion. Which of the following procedures is MOST relevant?

An auditor is testing the 'Valuation' of inventory. The auditor notes that the client uses a standard cost system. Which of the following procedures is necessary to ensure the inventory is valued correctly?

An auditor is using 'Stop-or-Go' sampling (Sequential Sampling). This method is most appropriate when the auditor expects:

An auditor is testing the 'Completeness' of the dividend income account. Which of the following procedures is MOST appropriate?

An auditor is testing the 'Cutoff' assertion for sales. Which of the following procedures is MOST appropriate?

An auditor is using 'Mean-per-unit' estimation in variables sampling. The sample mean is $50. The population contains 10,000 items. The standard error of the mean is $2. What is the point estimate of the total population value?

An auditor is testing the 'Rights and Obligations' assertion for accounts receivable. Which of the following procedures is MOST appropriate?

An auditor is using 'stratification' in sampling. What is the primary benefit of this technique?

An auditor is testing the 'Accuracy' of the payroll expense. Which of the following procedures is MOST appropriate?