Audit Final Exam

The auditors' report should be dated as of the date the:

Auditors have accumulated sufficient appropriate evidence

Ordinarily, the most significant assertion relating to accounts payable is:

Completeness

in addition to reconciliation, confirmation, and analytical procedures (prior audit steps), the auditor will also:

examine transactions that were recorded following year-end

what are the two additional sections in an audit opinion called for a public company?

explanatory paragraph (first two bullets) and emphasis of a matter (third bullet)

the nature and timing of the trade accounts payable may change ______ within a few weeks

greatly

balance sheet item: PPE is related to what revenue account?

rent, gains on sale

balance sheet item: accounts receivable is related to what revenue account?

sales

confirmation requests should be sent to any vendors that made __________ purchases during the year

substanital; even if those supplier accounts show zero balances

confirmation is good for evidence about completeness but better for _____ and _______.

establishing existence and valuation

balance sheet item: accounts and notes receivable is related to what expense account?

uncollectible accounts and notes expense

if there is an inability to obtain sufficient appropriate audit evidence and the auditor considers it not material what opinion should be given by the auditor?

unmodified

auditors should be alert for misstatements due to _________ ___________.

unrecorded liabilities

to make the confirmation procedure effective at addressing the completeness of accounts payable, auditors will often:

use a blank form--fill in the amount of the liability rather than confirm an amount

when is the auditors' verification of the rapidly changing liabilities most effective?

when performed immediately after the balance sheet date

balance sheet item: interest-bearing debt is related to what expense account?

interest

accounts payable confirmation is considered ______ necessary than the confirmation of accounts receivable

less

To determine that each voucher is submitted and paid only once, when a payment is approved, supporting documents should be canceled by the:

Individual who signs the checks

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

Loss Contingency

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

identified misstatements

Misstatements found by the auditors during their audit. These misstatements may or may not be corrected by management.

In an audit report on combined financial statements, reference to the fact that a portion of the audit was performed by a component auditor is:

Not to be construed as a qualification, but rather as a division of responsibility between the two CPA firms

what is the most effective means of disclosing unrecorded accounts payable?

a comparison of cash payments occurring after the balance sheet date with the accounts payable trial balance

vouchers

a document authorizing a cash disbursement--usually provides space for initials of employees performing various approval functions

general-purpose financial reporting framework

a financial reporting framework designed to meet the common financial needs of a wide range of users--GAAP

unmodified opinion--additional financial statement-related information included in audit report

a financial statement-related matter is required to be described in the audit report through the inclusion of an additional section--example: company makes change in accounting principles (FIFO/LIFO)

voucher register

a journal used in a voucher system to record liabilities requiring cash payment in the near future. every liability recorded in a voucher register corresponds to a coucher authorizing future payment

what are modified opinions?

a qualified, adverse, or disclaimer of opinion

what is an emphasis-of-matter paragraph?

a section included in the nonpublic company auditor's' report that is required by GAAS or is included at the auditors' discretion, and that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor's judgement, is of such importance that it is fundamental to the users' understanding of the financial statements

unmodified opinion--additional audit-related information included in the audit report

auditors add a section to the audit report to include a description of an audit related matter--example: alerting readers about the intended use of an audit report when it is mot for general use

if there is an inability to obtain sufficient appropriate audit evidence and the auditor considers it material and pervasive what opinion should be given by the auditor?

disclaimer

what are the two additional sections in an audit opinion called for nonpublic companies?

emphasis-of-matter paragraph and other-matter paragraph

factual (known) misstatement

misstatements for which there is no doubt

failure to record a liability will cause a ________.

overstatement in the financial position

What will auditors often do to determine whether controls are being used by the client?

perform a walk-through of several purchase transactions and observe implementation

the search for unrecorded liabilities includes that procedures?

procedures performed near the date of the auditors' report, such as examining cash disbursements these procedures were designed to detect liabilities that existed at year-end but were omitted from the liabilities recorded in the client's financial statements

What is a pro forma financial statement?

projected, or forecast, income statements and balance sheets as if they had occurred as of the balance sheet date--this form of disclosure is only used with the subsequent event has a significant effect upon the asset structure or capital structure of the business

what are type 1 subsequent events?

providing additional evidence as to conditions that existed at the date of the financial statements

balance sheet item: inventories is related to what expense account?

purchases, cost of goods sold, and payroll

if misstated financial statements are judged as material but not pervasive what opinion should be given by the auditor?

qualifed

What are the headings in the Audit Report for an Unmodified Opinion for a nonpublic client?

title: independent audit report 1. opinion 2. basis for opinion 3. responsibilities of management for the financial statements 4. auditor's responsibilities for the audit of the financial statements

what are the headings in the audit report for an unqualified opinion for public clients?

title: report of independent registered public accounting firm 1. opinion on the financial statements 2. basis for opinion 3. critical audit matters

what are some other accounts auditors often confrim?

1. accounts for which monthly statements are not available 2. accounts reflecting unusual transactions 3. accounts with parent or subsidiary corporations 4. accounts secured by pledged assets

what are the 3 types of identified misstatements?

1. factual (known) misstatements 2. judgemental misstatements 3. projected misstatements

what are the two reporting alternative under GAAS and PCAOB standards for group auditors?

1. make reference to the component auditors--dividing responsibility (shared responsibility opinion) 2. make no reference to the component auditors--assume whole responsibility for the audit

how are substantial suppliers identified?

1. reference to cash disbursement records or computer printouts of purchase volume by the individual supplier 2. inquiry of purchasing department personnel 3. the examination of the accounts payable subsidiary ledger

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

trade accounts payable

Current liabilities arising from the purchase of goods and services from trade creditors, generally evidenced by invoices or statements received from the creditors.

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

Date of the auditors' report

An audit of the balance in the accounts payable account is ordinarily not designed to:

Detect accounts payable that are substantially past due

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.

Which of the following is the best audit procedure for determining the existence of unrecorded liabilities?

Examine selected cash disbursements in the period subsequent to year-end

In performing a test of controls, the auditors vouch a sample of entries in the purchases journal to the supporting documents. Which assertion would this test of controls most likely test?

Existence

An audit report for a public client indicates that the financial statements were prepared in conformity with:

Generally accepted accounting principles (United States)

Critical audit matters are most likely to include those matters that:

Involve challenging, subjective or complex auditor judgment

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

Performing analytical procedures

What type or types of audit opinion are appropriate when financial statements are materially and pervasively misstated?

Qualified: No Adverse: Yes

An audit report for a public client indicates that the audit was performed in accordance with:

Standards of the Public Company Accounting Oversight Board (United States)

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

group audit

The audit of the financial statements of a company composed of more than one component.

vendor statements

a monthly statement prepared by a vendor (supplier) showing the beginning balance, charges during the month for goods and services, amounts collected, and ending balance. This externally created document should correspond (expect for timing differences) with an account in the client's accounts payable subsidiary ledger

subsequent period

The time extending from the balance sheet date to the date of the auditors' report.

Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because:

There is likely to be other reliable external evidence available to support the balances

component auditors

Under AICPA standards, auditors who perform work on the financial information of a component that will be used as audit evidence for the group audit. The term "other auditors" is used in the PCAOB standards.

if misstated financial statements are judged as material and pervasive what opinion should be given by the auditor?

adverse

judgemental misstatement

arise from differences between the judgements of management and the auditors concerning accounting estimates or the selection of accounting policies that the auditors consider inappropriate

when should the representation letter be dated?

at the date of the audit report

balance sheet item: accrued liabilities is related to what expense account?

commissions, fees, bonuses, product warranty expenses, and others

what are the primary audit objectives in the search for unrecorded accounts payable?

completeness and cutoff

what are the primary audit objectives in the conforming of accounts payable by direct correspondence with vendors?

completeness, existence, occurrence, obligations, valuation, accuracy, and cutoff

the unpaid voucher file changes _______.

daily

balance sheet item: PPE is related to what expense account?

depreciation, repairs and maintenance, and depletion

all vouchers should be stamped with what date?

the date received

The auditors who wish to draw reader attention to a financial statement note disclosure on significant transactions with related parties should disclose this fact in:

An emphasis-of-matter paragraph to the auditors' report

component (of a financial statement)

An entity or business activity for which group or component management prepare financial information that is required by the applicable financial reporting framework to be included in group financial statements.

subsequent event

An event occurring between the date of the financial statements and the date of the auditor's report.

Assume that the opinion paragraph of an auditors' report begins as follows: "With the explanation given in Note 6, . . . the financial statements referred to above present fairly . . ." This is:

An improper type of reporting

The aggregated misstatement in the financial statements is made up of:

Factual Misstatements: Yes Projected Misstatements: Yes Judgemental Misstatements: Yes

balance sheet item: intangible assets is related to what expense account?

amortization

what does a type 2 subsequent event require in the financial statements?

an adjustment is not required in the financial statements, however, they should be disclosed in the financial statement notes if the statements otherwise would be misleading

after considering all misstatements, auditors conclude that the risk of material misstatement is too high. what happens with each of the types of identified misstatements?

factual: request that management record the adjustments needed to correct misstatements judgemental: management should be asked to review the assumptions and methods used to generate their estimate projected: auditors should request that management examine additional items in the account in order to identify and correct other misstatements

what are unmodified opinions?

for nonpublic companies, the opinion expressed by the auditors when they conclude that the financial statements are prepared, in all material aspects, in accordance with the applicable financial reporting framework

what are unqualified opinions?

for public companies, the opinion expressed when they conclude that the financial statements are prepared, in all material aspects, in accordance with the applicable financial reporting framework

what are the primary audit objectives when vouching balances payable to selected creditors by inspection of supporting documents?

existence, occurrence, obligations, valuation, accuracy, and cutoff

qualified opinion

A modification of the auditors' standard report, employing a clause such as except for to limit the auditors' opinion on the financial statements. A qualified opinion indicates that, except for the effects of some limitation on the scope of the audit or some departure from generally accepted accounting principles, the financial statements are fairly presented.

emphasis of a matter

A paragraph included in the auditor's report that is required by GAAS, or is included at the auditor's discretion, and that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor's professional judgment, is of such importance that it is fundamental to users' understanding of the financial statements (Issue of consistency, on-going concern, goes after the opinion)

if there is an inability to obtain sufficient appropriate audit evidence and the auditor considers it material but not pervasive what opinion should be given by the auditor?

qualified

what is the purpose of a representation letter?

to have the client's principal officers acknowledge that they are primarily responsible for the fairness of the financial statements

adverse opinion

An opinion that the financial statements do not fairly present financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. This situation occurs when the auditors believe that departures from GAAP are both material and pervasive.

the client should maintain a _______ of _______ ________ vouchers.

a list of year-end unpaid vouchers

what are type 2 subsequent events?

event that involves conditions that arose after the date of the financial statements

what will auditors do after they verify internal control of a client's accounts payable?

1. observe and inquire about the segregation of duties for purchases and cash disbursements 2. inspect the various documents and reconciliations that are important to the client's internal control 3. review budgets for cash disbursements

after obtaining an understanding of the client and its environment, including internal control, the auditors will assess the risks of material misstatement and design and what further audit procedures for payroll?

1. perform a test of controls over payroll transactions for selected pay periods' payroll expense 2. perform analytical procedures or data analytics to test payroll expense 3. investigate any extraordinary fluctuations in salaries, wages, and commissions 4. obtain or prepare a summary of compensation of officers for the year and compare it to contracts, minutes of directors' meetings, or other authorization 5. test the period-end accrual of payroll expense 6. test computations of compensation earned under profit-sharing or bonus plans 7. test commission earnings by examination of contracts 8. test pension obligations by reference to the authorized pension plans

what are some common approaches to understanding a client's internal control?

1. prepare a flowchart or use flowcharts prepared by the client 2. prepare a narrative description 3. use a questionnaire (typical question: Is the accounts payable trial balance prepared monthly and reconciled to the general ledger closing account?)

in addition to unrecorded trade payables, what are some other examples of unrecorded liabilities?

1. related to customers deposits recorded as credits to accounts receivable 2. obligation for securities purchases but not settled at balance sheet date 3. unbilled contractor or architect fees for a building under construction at the audit date 4. unpaid attorney or insurance broker fees

what are the primary situations that would result in an audit report with an unmodified opinion but with additional financial statement-related needed?

1. substantial doubt about the company's going concern status 2. generally accepted accounting principles not consistently applied 3. other circumstances that the auditors believe should be emphasised

how should a change in accounting principles be evaluated? (4 criteria)

1. the newly adopted principle if generally accepted 2. the method of accounting for the effect of the change is in conformity with GAAP 3. the disclosures related to the change are adequate 4. management has justified that the new accounting principle is preferable

why is the accounts payable confirmation considered less necessary than the conformation of accounts receivable?

1. there is more externally created evidence in the hands of the client --such as vendors' invoices and statements---for accounts payable than there is for the accounts receivable 2. the greatest risk is in the audit of liabilities is the possibility of unrecorded amounts

what are the two categories of subsequent events?

1. type 1 2. type 2

What are the auditors objectives in the audit of accounts payable?

1. understand the client and its environment to consider inherent risks, including fraud risks, related to accounts payable 2. obtain an understanding of internal control over accounts payable 3. Assess the risks of material misstatement and design tests of controls and substantive procedures: existence, obligation, occurrence, completeness, cutoff, valuation, presentation and disclosure

what are some other potential sources of unrecorded accounts payables?

1. unmatched invoices and unbilled receiving reports--work in process in voucher systems 2. vouchers payable entered in the voucher register subsequent to the balance sheet date 3. invoices received by the client after the balance sheet date 4. consignments in which the client acts as a consignee

what are the three forms of opinions on financial statements

1. unmodified (unqualified for public companies) 2. modified

what are the 4 types of unmodified opinions?

1. unmodified (unqualified) opinion (no additional info is needed) 2. unmodified opinion--additional financial statement-related information included in the audit report 3. unmodified opinion--additional audit-related information included in the audit report 4. unmodified opinion on group financial statements

Which of the following is least likely to result in an additional paragraph being added to an audit report?

A decision not to confirm accounts receivable

misstatements

A difference between the amount, classification, presentation, or disclosure of a reported financial statement item and the amount, classification, presentation, or disclosure that is required for the item to be presented fairly in accordance with the applicable financial reporting framework

disclaimer of opinion

A form of report in which the auditors state that they do not express an opinion on the financial statements; it should include a separate paragraph stating the auditors' reasons for disclaiming an opinion and also disclosing any reservations they may have concerning the financial statements.

emphasis of matter paragraph

A paragraph inserted in an audit report issued under PCAOB standards to describe certain circumstances that the auditors believe should be emphasized (e.g., uncertainties, unusually important subsequent events, a major catastrophe, a division of responsibility for the total audit)

explanatory paragraph

A paragraph inserted in an auditors' report issued under PCAOB standards to describe a matter relating to the financial statements or to the audit.

Contingent Liability

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

loss contingency

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.

representation letter

A single letter or separate letters prepared by officers of the client company at the auditors' request setting forth certain representations about the company's financial position or operations.

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

change in accounting principle

Changes in accounting principles and reporting entities result in an emphasis-of-matter paragraph being added to the auditors' report.

In an audit, the valuation of year-end accounts payable is most likely addressed by:

Confirmation

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.

group auditors

For nonpublic companies, the firm responsible for issuing the audit report on a group of companies

When the matter is properly disclosed in the financial statements of a nonpublic company, the likely result of substantial doubt about the ability of the client to continue as a going concern is the issuance of which of the following audit opinions?

Qualified: No Unmodified with an Additional Paragraph: Yes

A nonpublic company's change in accounting principles that the auditors believe is not justified is likely to result in which of the following types of audit opinions?

Qualified: Yes Unmodified with Emphasis-of-Matter: No

For effective internal control, the accounts payable department should compare the information on each vendor's invoice with the:

Receiving report and the purchase order

A client erroneously recorded a large purchase twice. Which of the following internal control measures would be most likely to detect this error in a timely and efficient manner?

Reconciling vendors' monthly statements with subsidiary payable ledger accounts

Which of the following procedures is least likely to be completed before the balance sheet date?

Search for unrecorded liabilities

When confirming accounts payable, the approach is most likely to be one of:

Selecting the accounts of companies with whom the client has previously done the most business, plus a sample of other accounts

The least likely approach in auditing management's estimate relating to an accrued liability is to:

Send confirmations relating to the estimate

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

other-matter paragraph

This term is used in nonpublic auditing standards for a paragraph (section) included in the auditors' report that is required by GAAS, or is included at the auditor's discretion and that refers to a matter other than those presented or disclosed in the financial statements. Public company auditing standards consider these paragraphs (sections) as one type of explanatory paragraph.

unmodified opinion on group financial statements

When two or more CPA firms are involved in an audit and the group auditor (firm that does most of the work) does not wish to take responsibility for the work of the component auditors.

A material departure from generally accepted accounting principles will result in auditor consideration of:

Whether to issue an adverse opinion rather than a qualified opinion

general risk contingencies

an element of the business environment involves some risk of a future loss. it represents a loss that might occur in the future. examples: risk of accident, price fluctuations, or natural catastrophe. they should NOT be disclosed in the financial statements

when is the verification of the individual vouchers made?

at the balance sheet date, when the voucher will be together in the unpaid vouchers file

when does the tracing of a voucher register and cash disbursements journal happen?

before the balance sheet date as a part of a general test of postings to all records

each step in the verification process of accounts payable should be evidenced by entering the __________ and ___________ on the voucher

date and signature

confirmation

direct communication with vendors or suppliers to determine the amount of an account payable. represents high-quality evidence because it is a document created outside the client organizations and transmitted directly to the auditors

when does the auditor consider vouching selected creditors' balanced to supporting vouches, invoices, purchase orders, and receiving reports?

in situations in which there is a risk of the inaccurate recording of transactions

balance sheet item: notes receivable is related to what revenue account?

interest

balance sheet item: securities and other investments is related to what revenue account?

interest, dividends, gains on sales, share of investee's income

what is the difference between a loss contingency and a general risk contingency?

loss contingency: it represents a loss that might have occured in the past general risk contingency: it represents a loss that might occur in the future.

balance sheet item: intangible assets is related to what revenue account?

royalties

what does a type 1 subsequent event require in the financial statements?

that the financial statement amounts be adjusted to reflect changes in estimates resulting from the additional evidence

what does the voucher register verify?

the amount in the general ledger control account for accounts payable

after the auditors prepared the a flowchart, narrative description, or questionaire of internal control, what is the next step?

the auditor has to determine whether the client is actually using the controls described to them or determine if the controls have been implemented

projected misstatements

the auditors' estimate of misstatements arising from situations in which they used audit sampling to draw conclusions concerning populations

if misstated financial statements are judged as not material what opinion should be given by the auditor?

unmodified