ACCT 323 Chapter 16 HW

Which of the following is not a procedure that is designed to provide evidence about the existence of loss contingencies?

Confirming accounts payable.

Which of the following is the best way for the auditors to determine that every name on a company's payroll is that of a bona fide employee presently on the job?

Make a surprise observation of the company's regular distribution of paychecks on a test basis.

Judgemental Misstatements

Misstatements dealing with estimates

Which of the following is a procedure normally performed while completing the audit of a public company?

Obtain a lawyer's letter

Which of the following auditing procedures is ordinarily performed last?

Obtaining a management representation letter.

Employee overtime pay for hours worked before year-end, but paid in the following year, were not recorded in year 2.

Operating expenses, accrued liabilities

Which of the following information need not be reported in the auditors' report of a nonpublic company if the information is determined to be properly stated?

Other information in documents containing audited financial statements.

When examining a client's statement of cash flows, for audit evidence, an auditor will rely primarily upon:

cross-referencing to balances and transactions audited in connection with the examination of the other financial statements.

Material fluctuations revealed by analytical procedures should be investigated to determine whether they are indicative of material __________ in the financial statements.

misstatements

Factual Misstatements

misstatements about which there is no doubt

A surprise observation by an auditor of a client's regular distribution of paychecks is primarily designed to satisfy the auditor that:

names on the company payroll are those of bona fide employees presently on the job.

A major customer of the company is lost.

none

An employee strike is called.

none

When paper paychecks are issued, the company's _____________ should distribute them to the employees of the company.

paymaster

Financial statements that give effect to a subsequent event as though the event had occurred at the balance sheet date are known as __________ financial statements.

pro forma

Which of the following is an analytical procedure that should be applied to the income statement?

Compare the actual revenues and expenses with the corresponding figures of the previous year and investigate significant differences.

Which of the following is most likely to be considered a Type 1 subsequent event?

Customer checks deposited prior to year-end but determined to be uncollectible after year-end.

The auditors' primary means of obtaining corroboration of management's information concerning litigation is a:

Letter of audit inquiry to the client's lawyer.

A common audit procedure in the audit of payroll transactions involves tracing selected items from the payroll journal to employee time cards that have been approved by supervisory personnel. This procedure is designed to provide evidence in support of the audit proposition that:

Employees worked the number of hours for which their pay was computed.

In evaluating whether there is a sufficiently low probability of material misstatement in the financial statements, the auditors accumulate:

Factual, judgmental and projected misstatements and an allowance for undetected misstatements in the financial statements.

Identified misstatements

Misstatements found by the auditors

uncorrected misstatement

Misstatements not reflected in the financial statements

The review of audit working papers by the audit partner is normally completed

Near the completion of the audit.

When a nonpublic audit client has omitted required supplementary information, the audit report should include a(n):

Other-matter paragraph.

The auditors have calculated the total uncorrected identified misstatements as $445,000; materiality for the audit is $450,000. The client has declined to record the related journal entries. In this situation it is most likely that the auditors will:

Perform additional audit procedures to reduce audit risk to an appropriately low level.

On January 3, 20X4, Flowmeter Incorporated received a shipment of raw materials from Canada. The materials had been ordered in October 20X3 and shipped FOB shipping point in December 20X3.

adjustment

"I advise you that at and since December 31, year 1, I have not been engaged to give substantive attention to, or represent, XYZ Co. in connection with any pending or threatened litigation, claims, or assessments, nor am I aware of any loss contingencies. There were fees outstanding of $3,675 due to this office for services provided at December 31, year 1."

6,8

Rollover approach

An approach to making materiality judgments that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting misstatements (including projecting misstatements where appropriate) only during the current year.

The primary objective of analytical procedures used near the end of an audit is to:

Assist the auditor when forming overall conclusions about the financial statements.

If, after issuing an audit report, the auditors find that they have failed to perform certain significant audit procedures they should first:

Attempt to determine whether their report is still being relied upon by third parties.

Which of the following procedures would most likely be performed while evaluating findings at the conclusion of an audit?

Calculate an estimate the total of uncorrected misstatements in the financial statements.

When auditing the statement of cash flows, which of the following would an auditor not expect to be a source of receipts and payments?

Capitalization

Auditors often request that the audit client send a letter of inquiry to those attorneys who have been consulted with respect to litigation, claims, or assessments. The primary reason for this request is to provide the auditors with:

Corroborative audit evidence.

During year 2, a former client sued the company for inappropriate work. Legal counsel has advised that it is "reasonably possible" that the company will be assessed damages. An amount can be estimated.

Disclosure but no entry required x2

A possible loss, stemming from past events that will be resolved as to existence and amounts, is referred to as a(n):

Loss Contingency

An example of an internal control weakness is to assign the human resource department responsibility for:

Maintaining time cards.

It would be appropriate for the payroll accounting department to be responsible for which of the following functions?

Preparation of periodic governmental reports as to employees' earnings and withholding taxes.

Analytical procedures are required as a part of the:

Procedures performed near the end of the audit.

A refusal by a lawyer to furnish information related to litigation included in the letter of inquiry is likely to result in:

Qualification of the audit report.

The statement that best expresses the auditor's responsibility with respect to events occurring between the balance sheet date and the end of the audit is that:

The auditor is responsible for determining that a proper cutoff has been made and performing a general review of events occurring in the subsequent period.

Authorization of which of the following is least likely to be found during a review of the minutes of the board of directors?

Write-off of trade accounts receivable.

2. Depending upon the details of the circumstances involved, some of the events may result in neither adjustment nor note disclosure. Select the two events least likely to be reflected (resulting in adjustment or disclosure) in the financial statements.

c,e

The audit of which of the following balance sheet accounts does not normally result in verification of an income statement account?

cash

Projected Misstatement

7, Misstatements identified by the auditors during the course of the audit that are due to extrapolation of sample results to the entire population.

During the review of a client's payroll procedures, the auditor would consider internal control lacking if a payroll department supervisor was assigned the responsibility for:

Distributing payroll checks to employees.

An event occurring after the date of the balance sheet, but prior to completion of the audit, is called a __________.

subsequent event

Loss Contingency

possible loss, will be resolved in future

Contingent Liability

2, A possible liability, stemming from past events, that will be resolved as to existence and amount by some future event.

L. Peep v. XYZ Co.: This matter commenced in November, year 1. The plaintiff alleges discrimination relating to his termination on March 17, year 1. The case is tentatively settled for $35,000.

4,7

A client has a calendar year-end. Listed below are four events that occurred after December 31. Which one of these subsequent events is most likely to result in adjustment of the December 31 financial statements?

A substantial portion of the company's inventory was written off as obsolete on January 31.

A nonpublic client has provided required supplementary information with its audited financial statements. The auditor's proper reporting responsibility includes:

Adding an other-matter paragraph to the audit report.

rollover approach to materiality

Approach that does not include previous year uncorrected misstatements.

Iron curtain approach to materiality

Approach that includes previous year uncorrected misstatements

An example of an internal control weakness is to assign the payroll department the responsibility for:

Authorizing increases in pay.

January 15, 20X4: Following a series of personal disagreements between Ray Hollis, the president, and his brother-in-law, the treasurer, the latter resigned, effective immediately, under an agreement whereby the corporation would purchase his 10 percent stock ownership at book value as of December 31, 20X3. Payment is to be made in two equal amounts in cash on April 1 and October 1, 20X4. In December, the treasurer had obtained a divorce from his wife, who is Ray Hollis's sister.

Consider disclosure

As a result of analytical procedures, the independent auditors determine that the gross profit percentage has declined from 30 percent in the preceding year to 20 percent in the current year. The auditors should:

Consider the possibility of a misstatement in the financial statements.

The search for unrecorded liabilities for a public company includes procedures usually performed through the:

Date of the auditors' report.

An auditor accepted an engagement to audit the 20X8 financial statements of EFG Corporation and began the fieldwork on September 30, 20X8. EFG gave the auditor the 20X8 financial statements on January 17, 20X9. The auditor completed the audit on February 10, 20X9, and delivered the report on February 16, 20X9. The client's representation letter normally would be dated:

February 10, 20X9.

Which of the following types of matters do not generally require disclosure in the financial statements?

General risk contingencies.

The ______________ department of the company should authorize changes in employee pay rates.

HR

The bank's confirmation reply regarding the company's line of credit indicated that the December, year 2, interest was unpaid at year-end. Accruals for monthly interest expense have been made for 11 months in year 2 by the company.

Interest expense, accrued liabilities

In connection with the annual audit, which of the following is not a "subsequent events" procedure?

Make inquiries with respect to the financial statements covered by the auditors' previously issued report if new information has become available during the current examination that might affect that report.

For which of the following ledger accounts would the auditor be most likely to analyze the details?

Misc. Expense

In the last week of year 2, the company recorded revenue for services rendered to some clients in year 3.

Revenues, Accounts receivable

Which of the following procedures is not a procedure that is completed near the end of the engagement?

Review cash transactions.

In auditing the balance sheet, most revenue and expense accounts are also audited. Which accounts are most likely to be audited when auditing Accounts Receivable?

Sales and Bad Debt Expense.

Which of the following is the best reason why the auditors should consider observing a client's distribution of regular payroll checks?

Separation of payroll duties is less than adequate for effective internal control.

Which of the following events occurring on January 5, 20X2, is most likely to result in an adjusting entry to the 20X1 financial statements?

Settlement of litigation.

Which of the following ledger accounts would be least likely to be analyzed in detail by auditors?

Supplies expense.

Which of the following is least likely to be considered a substantive procedure relating to payroll?

Test whether employee time reports are approved by supervisors.

Auditors must communicate internal control "significant deficiencies" to:

The audit committee.

Which of the following situations has the best chance of being detected when a CPA compares 200X revenues and expenses with the prior year and investigates all changes exceeding a fixed percentage?

The company changed its capitalization policy for small tools in 200X.

Effective internal control over the payroll function would include which of the following?

Total time spent on jobs should be compared with total time indicated on time clock punch cards.

One reason why the independent auditors perform analytical procedures on the client's operations is to identify:

Unusual transactions.

A lawsuit that was begun a year ago is settled.

adjust the financial statements

On January 15, 20X4, the company settled and paid a personal injury claim of a former employee as the result of an accident that had occurred in March 20X3. The company had not previously recorded a liability for the claim.

adjustment

iron curtain approach to materiality

approach that includes previous year uncorrected statements

Revenue and expense accounts are audited in conjunction with related __________ accounts.

balance sheet

formal commitment

contractual obligation

The date of the management representation letter should coincide with the:

date of the auditor's report.

A __________ is a list of all specific disclosures required by financial accounting standards.

disclosure checklist

An example of an internal control weakness is to assign to a supervisor the responsibility for:

distributing payroll checks to subordinate employees.

In estimating the total likely misstatement in the financial statements, the auditors should combine __________ misstatements, projected misstatements, and judgmental misstatements.

factual (known)

If the auditors conclude that the total misstatement in the financial statements is material, they should request management to adjust the financial statements or issue a(n) __________ opinion.

qualified or adverse

other-matter paragraph

relevant to users understanding of the audit

The primary purpose of the __________ is to have the client's principal officers acknowledge that they are primarily responsible for the fairness of the financial statements.

representation letter

Overall analysis of income statement accounts may identify errors, omissions, and inconsistencies not disclosed in the overall analysis of balance sheet accounts. The income statement analysis can best be accomplished by comparing monthly:

revenue and expense account totals to the corresponding figures of the preceding years.

Auditors perform interim work at various times throughout the year. The auditors' subsequent events work should be extended to the date of:

the auditor's report.

A new subsidiary is purchased.

the event should be disclosed

A plant of the company is destroyed by fire.

the event should be disclosed

A significant decline in the value of inventories occurs.

the event should be disclosed

General risk contingency

6, An element of the business environment that involves some risk of a future loss. Examples include the risk of accident, strike, price fluctuations, or natural catastrophe. General risk contingencies should not be disclosed in financial statements.

An auditor's decision concerning whether or not to "dual-date" the audit report is based upon the auditor's willingness to:

Extend auditing procedures.

Material loss contingencies should be recorded in the financial statements if available information indicates it is probable that a loss had been sustained prior to the balance sheet date and the amount of such loss can be reasonably estimated. For a public company these considerations will affect the audit report as follows:

If a loss is probable but the amount cannot be reasonably estimated and is disclosed in the notes to the financial statements, the auditor may issue an unqualified opinion.

Which of the following procedures is most likely to be included near completion of an audit?

Performing analytical procedures.

January 7, 20X4: The mineral content of a shipment of ore en route to Hollis Manufacturing Corporation on December 31, 20X3, was determined to be 72 percent. The shipment was recorded at year-end at an estimated content of 50 percent by a debit to Raw Materials Inventory and a credit to Accounts Payable in the amount of $82,400. The final liability to the vendor is based on the actual mineral content of the shipment.

adjustment

On January 18, 20X4, a major customer filed for bankruptcy. The customer's financial condition had been degenerating over recent years.

adjustment

January 16, 20X4: As a result of reduced sales, production was curtailed in mid-January and some workers were laid off.

consider disclosure

On February 1, 20X4, a plant owned by Flowmeter Incorporated was damaged by a flood, resulting in an uninsured loss of inventory.

consider disclosure

On February 5, 20X4, Flowmeter Incorporated issued to an underwriting syndicate $2 million in convertible bonds.

consider disclosure

On January 25, 20X4, the company agreed to purchase for cash the outstanding stock of Porter Electrical Company. The business combination is likely to double the sales volume of Flowmeter Incorporated

consider disclosure

On January 28, 20X4, a famous analyst who followed the industry provided a negative report on his expectations concerning the short and intermediate term for the industry.

consider disclosure

commitment

1, A contractual obligation to carry out a transaction at specified terms in the future. Material commitments should be disclosed in the financial statements.

"I advise you that at and since December 31, year 1, I have not been engaged to give substantive attention to, or represent, XYZ Co. in connection with any pending or threatened litigation, claims, or assessments, nor am I aware of any loss contingencies. No amounts were due to this office for services provided at December 31, year 1."

1,7

J. Myers v. XYZ Co.: This matter commenced in March, year 2. The plaintiff alleges discrimination relating to his termination on November 17, year 1. The company intends to defend this case vigorously. At this time, we are unable to evaluate the likelihood of an unfavorable outcome. The plaintiff is demanding $50,000.

2,9

K. Bowt v. XYZ Co.: This matter commenced in December, year 1. The plaintiff alleges discrimination relating to his termination on November 17, year 1. The company intends to defend this case vigorously. At this time, we are unable to evaluate the likelihood of an unfavorable outcome or estimate the amount or range of potential loss.

2,9

Loss Contingency

3, A possible loss, stemming from past events, that will be resolved as to existence and amount by some future event. Loss contingencies should be disclosed in notes to the financial statements if there is a reasonable possibility that a loss has been incurred. When loss contingencies are considered probable and can be reasonably estimated, they should be accrued in the accounts.

R. Brown v. XYZ Co.: This matter commenced in November, year 1. The plaintiff alleges discrimination relating to his termination on March 17, year 1. It is reasonably possible that the case will be settled for approximately $35,000.

3,7

Iron curtain approach

4, An approach to making materiality judgments that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting all misstatements (including projecting misstatements where appropriate) existing in the balance sheet at the end of the current year, irrespective of whether the misstatements occurred in the current year or previous years. For example, if expenses were understated by $20,000 in the previous year and $45,000 during the current year, the iron curtain method would quantify the misstatement as $65,000. Also see rollover approach.

Factual Misstatements

8, misstatements about which there is no doubt

Projected Misstatement

A difference in a total account's value based on a projection of sample results to the entire population of the account.

projected misstatements

A difference in a total account's value based on a projection of sample results to the entire population of the account.

Which of the following subsequent events might require an adjustment to the client's financial statements?

A major customer declares bankruptcy causing a material receivable to be uncollectible.

For clients that distribute checks or cash payments and have significant payroll control weakness, which of the following audit procedures is aimed at determining whether every name on the company payroll is a bona fide employee actually on the job?

A surprised observation of a paycheck distribution, while establishing the identity of each employee receiving payment.

To minimize the opportunities for fraud, unclaimed cash payroll should be:

Deposited in a special bank account.

Subsequent to the issuance of the auditor's report, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. After determining that the information is reliable, the auditor should next:

Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.

Specific misstatement in one of a client's 2,000 accounts receivable is referred to as a(n):

Factual misstatement.

When an audit report is dual-dated for a subsequent event occurring after the completion of fieldwork but before issuance of the auditors' report, the auditors' responsibility for events occurring subsequent to the date of the audit report is:

Limited to the specific event referred to.

The auditors' best course of action with respect to "other information (not including required supplemental information)" included in an annual report containing the auditors' report is to:

Read and consider the manner of presentation of the "other financial information."

In searching for unrecorded liabilities, an auditor most likely would examine the:

Receiving reports for items received before year end, but not yet recorded.

The date the auditor grants the client permission to use the audit report in connection with the financial statements is the:

Report release date.

Which of the following is not a procedure normally performed while completing the audit of a public company?

Update internal control questionnaire.

The auditors should obtain a letter from the client's attorneys describing __________.

claims, litigation, and assessments