After partially completing an internal control review of the accounts payable department, the auditor suspects that some type of fraud has occurred. To ascertain whether the fraud is present, the best sampling approach would be to use

• A. Simple random sampling to select a sample of vouchers processed by the department during the past year.
• B. Discovery sampling to select a sample of vouchers processed by the department during the past year.
• C. Judgmental sampling to select a sample of vouchers processed by clerks identified by the department manager as acting suspiciously.
• D. Probability-proportional-to-size sampling to select a sample of vouchers processed by the department during the past year.

A firm's inventory consisted of 5,000 various types of stocks, 100 of which accounted for 75% of the total monetary value. The most recent regular quarterly manual count revealed that there was an unnecessary two years' supply of the more expensive items.
The control that would best help to correct this oversupply problem is

• A. Maintain perpetual inventory of the larger dollar value items in the inventory.
• B. Use of authorising signatures on requisitions for inventory requested by production.
• C. Limit check on the total monetary value of the inventory.
• D. Use of a control total over the number of unique inventory items.

The internal auditing department has been assigned to perform an audit of a division. Based on background review, the auditor knows the following about management policies:
Company policy is to rapidly promote divisional managers who show significant success. Thus, successful managers rarely stay at a division for more than three years.
A significant portion of division management's compensation comes in the form of bonuses based on the division's profitability.
The division was identified by senior management as a turnaround opportunity. The division is growing, but is not scheduled for a full audit by the external auditors this year. The division has been growing about 7% per year for the past three years and uses a standard cost system.
During the preliminary review, the auditor notes the following changes in financial data compared to the prior year:
Sales have increased by 10%.
Cost of goods sold has increased by 2%.
Inventory has increased by 15%.
Divisional net income has increased by 8%.
Assume the auditor found that there was a plan to overstate inventory and therefore increase reported profits for the division. If reported correctly, the division would not have shown an increase in net income. The auditor has substantial evidence that the divisional manager was aware of and approved the plan to overstate inventory. There is also some evidence that the manager may have been responsible for the implementation of the plan.
The appropriate audit action would be to

• A. Inform management and the audit committee of the findings and discuss proper follow-up action and/or further investigation with them.
• B. Inform the divisional manager of the audit suspicions and obtain the manager's explanation of the findings before pursuing the matter further.
• C. Document the case thoroughly and report the suspicions to the external auditor for further review and external reporting.
• D. Continue to conduct interviews with subordinates until a clear-cut case is made and then report the case to the audit committee.

Deteriora Ltd has recently started up the audit of a new client, Thatch plc. The auditor has identified that Thatch plc has few employees in its accounting department.
Which of the following is the MOST appropriate approach that should be used by Deteriora Ltd under this circumstance?

• A. No test is required
• B. Substantive procedures only
• C. Tests of control only
• D. A mix of tests of control and substantive procedures