Which of the following matters would an auditor most likely consider to be a significant deficiency in internal control to be communicated to management and those charged with governance?
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1 .The optimal capitalization for an organization usually can be determined by the:
A Maximum degree of financial leverage (DFL). B Maximum degree of total leverage (DTL). C Intersection of the marginal cost of capital and the marginal efficiency of investment. D Lowest total weighted-average cost of capital (WACC).
2 .An audit partner is developing an office training program to familiarize his professional staff with statistical decision models applicable to the audit of dollar value balances. He wishes to demonstrate the relationship of sample sizes to population size and variability and the auditor's specifications as to tolerable misstatement and risk of incorrect acceptance. The partner prepared the following table to show comparative population characteristics and audit specifications of two populations.Characteristics ofPopulation 1 Relativeto Population 2Audit Specifications as to a Samplefrom Population 1 Relative to aSample from Population 2SizeVariabilitySpecifiedTolerableMisstatementSpecified Riskof IncorrectAcceptanceCase 1EqualEqualEqualLowerCase 2EqualLargerLargerEqualCase 3LargerEqualSmallerHigherCase 4SmallerSmallerEqualHigherCase 5LargerEqualEqualLowerYou are to indicate for the specified case from the above table the required sample size to be selected from population 1 relative to the sample from population 2.In case 5 the required sample size from population 1 is:
A Indeterminate relative to the required sample size from population 2. B Equal to the required sample size from population 2. C Larger than the required sample size from population 2. D Smaller than the required sample size from population 2.
3 .Which one of a firm's sources of new capital usually has the lowest after tax cost?
A Common stock. B Preferred stock. C Bonds. D Retained earnings.
4 .Which of the following sample planning factors would influence the sample size for a substantive test of details for a specific account?Expectedamount ofmisstatementsMeasure oftolerablemisstatement
A Yes........No B No.........No C No.........Yes D Yes........Yes
5 .Return on investment (ROI) is criticized as a performance measure since it is not a well balanced measure. What characteristic of effective performance measures does the ROI lack?
A ROI is not controlled or influenced by the manager. B ROI is not understood. C ROI is not easily measured. D ROI does not balance long and short-term issues.
7 .Which of the following terms refers to a performance measurement that is calculated as an investment center’s after-tax operating income minus the product of its total assets multiplied by the company’s weighted average cost of capital (WACC)?
A Return on investment. B Economic value added. C Net realizable value. D Profitability index.
8 .With respect to the audit of a nonissuer, significant deficiencies are matters that come to an auditor's attention, which should be communicated to an entity's management and those charged with governance because they represent:
A Material irregularities or illegal acts perpetrated by high-level management. B Intentional attempts by client personnel to limit the scope of the auditor's fieldwork. C Deficiencies in the design or operation of internal control that are important enough to merit attention by those responsible fo...
9 .A company has daily cash receipts of USD150,000. The treasurer of the company has investigated a lockbox service whereby the bank that offers this service will reduce the company's collection time by four days at a monthly fee of USD2,500. If money market rates average four percent during the year, the additional annual income (loss) from using the lockbox service would be:
A USD(6,000) B USD6,000 C USD12,000 D USD(12,000)
10 .Which of the following statements describes an auditor's obligation to identify deficiencies in the design or operation of internal control in a financial statement audit of a nonissuer?
A The auditor should design and apply tests of controls to discover significant deficiencies in internal control that could result in material misstatements. B The auditor need not search for significant deficiencies in internal control but should document and communicate any such deficiencies that ...
