ACC 374 - Auditing - Module 5 + 6 + 7 + 8 + 9 Questions
Which of the following controls would most likely reduce the risk of diversion of customer receipts by a client's employees? (1) A bank lockbox system. (2) Prenumbered remittance advices. (3) Monthly bank reconciliations. (4) Daily deposit of cash receipts.
(1) A bank lock box is a post office box controlled by a company's bank where payments from customers are received. With such a system the bank collects the remittances, immediately credits the cash to the company's bank account, and forwards the remittance advices to the company. This makes it extremely difficult for employees to divert cash receipts. The other internal controls listed ordinarily are not as effective at preventing employee theft of mail receipts.
In which of the following reports should a CPA not express negative (limited) assurance? (1) A standard compilation report on financial statements of a nonpublic entity. (2) A standard review report on interim financial statements of a public entity. (3) A standard review report on financial statements of a nonpublic entity. (4) A comfort letter on financial information included in a registration statement filed with the Securities and Exchange Commission.
(1) A compilation report contains a disclaimer regarding the financial statements; it should not include the expression of negative assurance.
The auditors should confirm accounts receivable unless the auditors' assessment of the risk of material misstatement is low: (1) And accounts receivable are immaterial, or the use of confirmations would be ineffective. (2) And accounts receivable are composed of large accounts. (3) And the effectiveness of confirmations is absolutely determined. (4) Or accounts receivable are from extremely reputable customers.
(1) A presumption that receivables will be confirmed requires a combined assessment of inherent risk and control risk at the low level, immaterial receivables, or circumstances in which the use of confirmations would be ineffective.
When performing an examination, if a CPA finds one or more significant assumptions are not reasonable for a forecast, the most appropriate report is: (1) Adverse. (2) Disclaimer. (3) Qualified. (4) Unqualified with emphasis-of-matter paragraph.
(1) Adverse. - Unreasonable significant assumptions for a forecast result in an adverse opinion.
The auditors would be most likely to find unrecorded long-term liabilities by analyzing: (1) Interest payments. (2) Discounts on long-term liabilities. (3) Premiums on long-term liabilities. (4) Recorded long-term liability accounts.
(1) Auditors will test the relationship between interest payments and recorded long term liabilities. When interest payments seem too high, it may be due to the existence of unrecorded liabilities. Also, the process of performing procedures to determine who interest is paid to may reveal unrecorded debt.
Ordinarily, the most significant assertion relating to accounts payable is: (1) Completeness. (2) Existence. (3) Presentation. (4) Valuation.
(1) Completeness - Because the risk of misstatement for accounts payable is the risk of understatement and understated liabilities overstate income, auditors are ordinarily most concerned with the completeness assertion for payables
In an audit, the valuation of year-end accounts payable is most likely addressed by: (1) Confirmation. (2) Examination of cash disbursements immediately prior to year-end. (3) Examination of cash disbursements immediately subsequent to year-end. (4) Analytical procedures applied to vouchers payable at year-end.
(1) Confirmation - The best procedure to determine valuation of payables is confirmation.
Which of the following procedures would the auditors most likely perform to test controls relating to management's assertion about the completeness of cash receipts for cash sales at a retail outlet? (1) Observe the consistency of the employees' use of cash registers and tapes. (2) Inquire about employees' access to recorded but undeposited cash. (3) Trace deposits in the cash receipts journal to the cash balance in the general ledger. (4) Compare the cash balance in the general ledger with the bank confirmation request.
(1) Employees' consistent use of cash registers and tapes helps ensure that all retail sales that should be recorded are, in fact, recorded. Thus, this I/C is related to the Completeness assertion. Employees' access to recorded cash is irrelevant here since the cash has already been recorded
Internal control practices governing retirements of machinery and equipment include:
(1) Numbered retirement work orders requiring written executive approval. (2) Forwarding a copy of the retirement work order for every asset sold, scrapped, or transferred to the property accounting department. (3) Removal of metal identification tags from units retired and submission of tags to property accounting department.
The auditors' objectives in the examination of trade accounts payable are to:
(1) Substantiate the existence of accounts payable and the client's obligation to pay the liabilities. (2) Establish the completeness of recorded accounts payable. (3) Establish the proper valuation of accounts payable. (4) Determine that the presentation and disclosure of accounts payable in the financial statements are appropriate
An audit of the balance in the accounts payable account is ordinarily not designed to: (1) Detect accounts payable that are substantially past due. (2) Verify that accounts payable were properly authorized. (3) Ascertain the reasonableness of recorded liabilities. (4) Determine that all existing liabilities at the balance sheet date have been recorded.
(1) The auditors do not have as an objective the determination of whether accounts payable are past due. However, when testing controls related to accounts payable, the auditor will verify the procedures in place to ensure the authorization and recording of accounts payable
identify the control that is most likely to prevent the concealment of a cash shortage resulting from the improper write-off of a trade account receivable: (1) Write-offs must be approved by a responsible official after review of credit department recommendations and supporting evidence. (2) Write-offs must be approved by the accounts receivable department. (3) Write-offs must be authorized by the shipping department. (4) Write-offs must be supported by an aging schedule showing that only receivables overdue by several months have been written off.
(1) Write-offs of receivables should be approved by a responsible officer after a review of the account by the credit department. Answer (2) is incorrect because accounts receivable, a recordkeeping function, should not authorize such entries. Answer (3) is incorrect because other procedures (e.g., a review of shipping documents) may be used to determine that the goods were received and because the shipping department would have no other information on whether the receivable is likely to be collectible. Answer (4) is incorrect because the account need not be overdue by several months as a "current" receivable may become worthless due to, for example, a bankruptcy
An auditor most likely would inspect loan agreements under which an entity's inventories are pledged to support management's financial statement assertion of: (1) Presentation and disclosure. (2) Valuation or allocation. (3) Existence or occurrence. (4) Completeness.
(1) is correct because any asset pledged as collateral for a loan is required by GAAP to be disclosed in the financial statement footnotes.
Which of the following procedures is least likely to be completed before the balance sheet date? (1) Confirmation of receivables. (2) Search for unrecorded liabilities. (3) Observation of inventory. (4) Review of internal accounting control over cash disbursements.
(2) Because the search for unrecorded liabilities deals with transactions recorded after year-end, it is least likely to be completed before the balance sheet date. The observation of inventory is most likely to be performed on the balance sheet date.
Which assertion relating to sales is most directly addressed when the auditors compare a sample of shipping documents to related sales invoices? (1) Existence or occurrence. (2) Completeness. (3) Rights and obligations. (4) Presentation and disclosure.
(2) Comparing shipping documents to related sales invoices addresses the completeness assertion relating to sales. More specifically, it addresses whether all items that have been shipped have been recorded as sales.
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? (1) Completeness. (2) Existence. (3) Valuation. (4) Rights.
(2) Existence.
A CPA who is not independent may perform which of the following services for a nonpublic company? Compilation Review (1) Yes Yes (2) Yes No (3) No Yes (4) No No
(2) Independence is not required for compilations because no assurance is provided by the CPA in such engagements. Independence is required on a review engagement.
Benchmarks that are objective and permit reasonably consistent measurement in an engagement performed under Statements on Standards for Attestation Services are referred to as: (1) Written assertions. (2) Suitable criteria. (3) Subject matter. (4) Generally accepted auditing standards.
(2) Suitable criteria.
The auditors' plan for the examination of long-term debt should include steps that require the: (1) Verification of the existence of the bondholders. (2) Examination of copies of debt agreements. (3) Inspection of the accounts payable subsidiary ledger. (4) Investigation of credits to the bond interest income account.
(2) The auditors' examination of long-term debt always includes an examination of copies of debt agreements to ensure the client is not in violation of the covenants of these agreements.
The primary objective of a CPA's observation of a client's physical inventory count is to: (1) Discover whether a client has counted a particular inventory item or group of items. (2) Obtain direct knowledge that the inventory exists and has been properly counted. (3) Provide an appraisal of the quality of the merchandise on hand on the day of the physical count. (4) Allow the auditor to supervise the conduct of the count in order to obtain assurance that inventory quantities are reasonably accurate.
(2) The primary objective of the CPAs' observation of inventories is to provide sufficient competent evidence as to the existence of the inventory and the controls over the inventory-taking process.
A likely reason that consideration of client compliance with debt provisions is important to an audit is that violation of such debt provisions may affect the total recorded: (1) Number of debt restrictions. (2) Current liabilities. (3) Long-term assets. (4) Capital stock.
(2) When debt provisions (i.e., debt covenants) are violated, long term debt becomes immediately due and payable, and therefore, constitutes a current liability
To test the existence assertion for recorded receivables, the auditors would select a sample from the: (1) Sales orders file. (2) Customer purchase orders. (3) Accounts receivable subsidiary ledger. (4) Shipping documents (bills of lading) file.
(3) Accounts receivable subsidiary ledger. The objective is to determine the population the auditors would sample from to test the existence assertion for recorded receivables. The direction of testing should be from the accounts receivable subsidiary ledger to the supporting documents (e.g., sales invoices, bills of lading, sales orders, and customers' orders).
a. Which of the following is not typically performed when the auditors are performing a review of client financial statements? (1) Analytical procedures applied to financial data. (2) Inquiries about significant subsequent events. (3) Confirmation of accounts receivable. (4) Obtaining an understanding of accounting principles followed in the client's industry.
(3) Audits of financial statements include confirmations of accounts receivable, reviews generally do not.
An effective procedure for identifying unrecorded retirements of equipment is to: (1) Foot related property records. (2) Recalculate depreciation on the related equipment. (3) Select items of equipment in the accounting records and then locate them in the plant. (4) Select items of equipment and then locate them in the accounting records.
(3) Select items of equipment in the accounting records and then locate them in the plant. - An inability to locate assets may reveal to the auditors that unrecorded retirements have occurred. This will also signal a weakness in the client's system of I/C
Which of the following is least likely to be the subject matter of an attestation engagement? (1) Behavior. (2) Historical events. (3) Suitable criteria. (4) Systems or processes.
(3) Suitable criteria are the criteria followed in the preparation of the subject matter. Accordingly, suitable criteria are not the subject matter.
To assure accountability for fixed-asset retirements, management should implement an internal control that includes: (1) Continuous analysis of miscellaneous revenue to locate any cash proceeds from the sale of plant assets. (2) Periodic inquiry of plant executives by internal auditors as to whether any plant assets have been retired. (3) Utilization of serially numbered retirement work orders. (4) Periodic observation of plant assets by the internal auditors.
(3) Utilization of serially numbered retirement work orders. - Serially numbered retirement work orders provide a systematic means of assuring that units of plant and equipment are not retired without authorization by management.
Which of the following is the best audit procedure for determining the existence of unrecorded liabilities? (1) Examine confirmation requests returned by creditors whose accounts appear on a subsidiary trial balance of accounts payable. (2) Examine unusual relationships between monthly accounts payable balances and recorded purchases. (3) Examine a sample of invoices a few days prior to and subsequent to year-end to ascertain whether they have been properly recorded. (4) Examine selected cash disbursements in the period subsequent to year-end.
(4) Examine selected cash disbursements in the period subsequent to year-end. - By examining disbursements made subsequent to the balance sheet date, the auditors may find liabilities that should have been recorded as accounts payable at the balance sheet date, but were not recorded.
In testing controls over cash disbursements, the auditors most likely would determine that the person who signs checks also: (1) Reviews the monthly bank reconciliation. (2) Returns the checks to accounts payable. (3) Is denied access to the supporting documents. (4) Is responsible for mailing the checks.
(4) Once checks are signed, they should be mailed immediately to prevent alteration of the payee by an employee (i.e., not returned to employees who work in the accounts payable department). Employees separate from those processing cash transactions should prepare the monthly bank reconciliations. The individual signing checks needs the supporting documents to ensure that disbursements are appropriate.
Which of the following is least likely to be considered an inherent risk relating to receivables and revenues? (1) Restrictions placed on sales by laws and regulations. (2) Decline in sales due to economic declines. (3) Decline in sales due to product obsolescence. (4) Over-recorded sales due to a lack of control over the sales entry function.
(4) Over-recorded sales due to a lack of control over the sales entry function relates to control risk not inherent risk. The other three replies all relate to inherent risk.
Which of the following forms of accountant association is least likely to result in issuance of an accountant's report on financial statements or financial information? (1) Compilation. (2) Review. (3) Preparation. (4) Agreed-upon procedures.
(4) Preparation of financial statements does not ordinarily result in an accountant's report.
Which of the following accounts should be reviewed by the auditors to gain reasonable assurance that additions to property, plant, and equipment are not understated? (1) Depreciation. (2) Accounts Payable. (3) Cash. (4) Repairs.
(4) Repairs. - In recording expenditures on property, plant, and equipment, the logical choice usually is between a revenue expenditure and a capital expenditure.
The least likely approach in auditing management's estimate relating to an accrued liability is to: (1) Independently develop an estimate of the amount to compare to management's estimate. (2) Review and test management's process of developing the estimate. (3) Review subsequent events or transactions bearing on the estimate. (4) Send confirmations relating to the estimate.
(4) Send confirmations relating to the estimate. Auditors audit estimates of accrued liabilities via - (1) independently developing an estimate, (2) reviewing management's process, and (3) reviewing subsequent events. There is no party that could confirm an estimate.
When an accountant examines a financial forecast that fails to disclose several significant assumptions used to prepare the forecast, the accountant should describe the assumptions in the accountant's report and issue a(n): (1) Qualified opinion. (2) Unqualified opinion with a separate explanatory paragraph. (3) Disclaimer of opinion. (4) Adverse opinion.
(4) The attestation standards relating to financial forecasts require that when several significant assumptions are not listed that an adverse opinion be issued.
To gather evidence regarding the balance per bank in a bank reconciliation, the auditors would examine any of the following except: (1) Cutoff bank statement. (2) Year-end bank statement. (3) Bank confirmation. (4) General ledger.
(4) The general ledger will not have information on the balance per bank. The cutoff bank statement, year-end bank statement, and bank confirmation will all include information on the balance per bank at the balance sheet date.
While performing your audit of Williams Paper Company, you discover evidence that indicates that Williams may not have the ability to continue as a going concern. a. Discuss types of information that may indicate substantial doubt about a client's ability to remain a going concern. b. Explain the auditors' obligation in such situations.
(a) Information contrary to an assumption that a client will remain a going concern usually relates to the company's ability to meet its financial obligations. Conditions that indicate such a problem include recurring operating losses, working capital deficiencies, adverse financial ratios, defaults on loans, and arrearages in dividends. Other conditions such as work stoppages, legal matters, legislation, and loss of principal customers may also indicate a question as to a client's ability to remain a going concern. (b) After discovering conditions and events that might indicate substantial doubt as to whether a firm can continue as a going concern, the auditors must obtain and evaluate management's plans for dealing with the conditions and events. After reviewing the feasibility of management's plans, if the auditors still believe that there is substantial doubt as to ability to continue as a going concern, they should determine that the matters are properly disclosed in the financial statements and also should modify the audit report to reflect that conclusion. If the auditors are satisfied that management's plans are feasible, management must disclose the matter in the financial statements, but the auditors will not modify the audit report.
Hale Nelson, CPA, is engaged to audit the financial statements of Hollis Manufacturing, Inc. Hollis engages in very complex sales agreements that create issues with respect to revenue recognition. As a result, Nelson has identified revenue recognition as an audit area of significant risk that requires special audit consideration. Required: a. Describe the implications of Nelson's identification of revenue recognition as an area of significant risk. b. Describe how Nelson might decide to react to the significant risk related to revenue recognition.
(a) When the auditors identify a risk as being significant and requiring special audit consideration, they must: (1) Evaluate the design of the related controls and determine that they have been implemented; (2) Not rely solely on analytical procedures to address the risk; and (3) Not rely on evidence obtained from prior audits regarding the operating effectiveness of the related internal controls. (b) Examples of ways that Nelson may react to this particular risk include: (1) Confirm the terms of sales contracts with selected customers. (2) Examine a larger sample of sales contracts. (3) Make expanded inquiries of sales personnel regarding the terms of contracts.
Gruen Corporation is a large diversified company with a large amount of property, plant, and equipment and intangible assets, including goodwill. In the past year the company has experienced a significant decline in a number of its lines of business. Required: a. What risk of material misstatement is indicated from the information provided? b. Describe how the auditors would generally obtain evidence about the value of goodwill.
13-24 (a) A significant decline in a number of lines of business may indicate that the recorded amounts of certain property, plant and equipment and intangible assets may be impaired. Therefore, there is a risk of material misstatement related to the overstatement of the values of these assets. (b) Companies are required to do a test of impairment of the value of goodwill annually, or more often if certain events and circumstances indicate that the asset may be impaired
Which of the following would provide the most assurance concerning the valuation of accounts receivable? (1) Trace amounts in the accounts receivable subsidiary ledger to details on shipping documents. (2) Compare receivable turnover ratios to industry statistics for reasonableness. (3) Inquire about receivables pledged under loan agreements. (4) Assess the allowance for uncollectible accounts for reasonableness.
4) Answer (4) is correct because receivables are valued at net realizable value, and assessing the allowance for uncollectible accounts for reasonableness will help the auditor determine the proper amount. Answer (1) is incorrect because the limited information in the accounts receivable ledger will not make possible tracing details to the shipping documents—also, the shipping documents may not even capture the total sales price that is included in the accounts receivable ledger. Answer (2) is incorrect because while comparing turnover ratios may provide some information on the collectibility of receivables, it is very imprecise. Answer (3) is incorrect because it relates to presentation and disclosure more directly than valuation.
What type of opinion is necessary: During the audit of Eagle Company, the CPA firm has encountered a significant scope limitation relating to inventory record availability and is unable to obtain sufficient appropriate audit evidence in that area.
A scope restriction results in either a qualified opinion or a disclaimer of opinion. Because we have no information on whether a possible misstatement could pervasively misstatement the financial statements, either type of opinion is possibly appropriate.
What type of opinion is necessary: Bowles Company is engaged in a hazardous trade and has obtained insurance coverage related to the hazard. Although the likelihood is remote, a material portion of the company's assets could be destroyed by a serious accident.
An unmodified (standard report) should be issued
Which of the following is a technique used by auditors to detect 'kiting' FFR to O/S cash? Inspecting deposit slips Testing the client's year-end bank reconciliations Inspecting cutoff bank statements Analyzing interbank transfers
Analyzing interbank transfers - Kiting (FFR) is executed via interbank transfers. So, the auditor analyzes the timing of transfers recorded in the accounting records. Kiting involves actual cash transactions that will be captured in the bank statements. It is the timing of recording those transactions in the accounting records that is manipulated.
A report on an attestation engagement should: (1) State the nature of the client's control system. (2) State the practitioner's conclusion about the subject matter or assertion. (3) Include a reasonable limitations section pertaining to data inputs. (4) Refer to the auditor's assertion concerning the subject matter.
Attestation engagements include a report that states the practitioner's conclusion about the subject matter, or an assertion about the subject matter, based on the criteria against which the subject matter was measured.
What type of opinion is necessary: London Company has material investments in stocks of subsidiary companies. Stocks of the subsidiary companies are not actively traded in the market, and the CPA firm's engagement does not extend to any subsidiary company. The CPA firm is able to determine that all investments are carried at original cost but has no real idea of market value. Although the difference between cost and market could be material, it could not have a pervasive effect on the overall financial statements.
Because the misstatements could be material, but could not pervasively misstate the financial statements, a qualified opinion is appropriate
Walter Conn, CPA, is engaged to audit the financial statements of Bingo Wholesaling for the year ended December 31, 20X0. Conn obtained and documented an understanding of the client and its environment, including internal control over the business processes relating to accounts receivable. He assessed the risks of material misstatement for all of the assertions about accounts receivable at a moderate level. Conn requested and obtained from Bingo an aged accounts receivable schedule listing the total amount owed by each customer as of December 31, 20X0. Required: What additional substantive audit procedures should Conn consider applying in auditing the accounts receivable?
Conn should consider applying the following additional audit procedures: (1) Evaluate results from the sample of accounts chosen for confirmation. (2) Reconcile and investigate exceptions reported on the confirmations. (3) Send second requests for all unanswered positive confirmation requests. (4) Perform alternative auditing procedures for unanswered second confirmation requests (i.e., examine subsequent collections or the documents supporting the original transaction - contracts, sales invoices, etc.) (5) Test the accuracy of the accounts receivable aging. (6) Perform collectiblity analyses (i.e., test the allowance for doubtful accounts). (7) Perform analytical procedures for accounts receivable (e.g., accounts receivable turnover, beginning allowance for doubtful accounts to write offs, bad debt expense to write offs, etc.). (8) Test the cutoff of sales, cash receipts, and sales returns and allowances. (9) Review activity after the balance sheet date for unusual transactions. (10) Determine that the presentation and disclosure of accounts receivable is in conformity with generally accepted accounting principles, consistently applied.
Which of the following should be included as a part of inventory costs of a manufacturing company?
Direct labor, raw materials, and factor overhead are all included in inventory costs of a manufacturing company
What type of opinion is necessary: Draves Company owns substantial properties that have appreciated significantly in value since the date of purchase. The properties were appraised and are reported in the balance sheet at the appraised values (which materially exceed costs) with related disclosures. The CPAs believe that the appraised values reported in the balance sheet reasonably estimate the assets' current values.
Either a qualified or an adverse opinion is required. Valuation of properties at appraised values is not in accordance with generally accepted accounting principles. Since the difference between appraised value and cost is significant, an unqualified opinion would not be appropriate.
Which procedure is an auditor most likely to use to detect a check outstanding at year-end that was not recorded as outstanding on the year-end bank account reconciliation? Analyze interbank transfers Evaluate a cutoff bank statement Confirm the year-end cash balance with the bank Review the client's bank reconciliation
Evaluate a cutoff bank statement - Cutoff statements are requested from banks for the purpose of testing the reconciling items on the bank reconciliation (including deposits in transit and outstanding checks). Cutoff statements are used by auditors to obtain evidence regarding outstanding checks.
Cash in bank generally has extensive disclosure requirements since GAAP requires that each individual cash account and its recorded balance be included in the financial statement footnotes.
FALSE
Which of the following statements is true regarding the use of remittance advices? Remittance advices are used to record sales. If remittance advices are not used, the balance of accounts receivable could be misstated. If remittance advices are not used, the allowance for doubtful accounts could be misstated. Remittance advices are provided for customers' own records only.
If remittance advices are not used, the allowance for doubtful accounts could be misstated.
Under what circumstances is observation of physical inventory impossible?
Observation of physical inventory generally is impossible when the independent auditors were not appointed by the client until after the physical inventory had been taken. There may also be conditions where weather conditions, terrains, or some other circumstances make it impossible for the independent auditors to be present at the site of the client's inventory-taking; but such circumstances should be rare.
Why is the observation of physical inventory a mandatory auditing procedure?
Observation of physical inventory is generally mandatory because it provides strong evidence as to existence and quality of the client's inventories.
Which of the following manipulations of cash transactions would overstate the cash balance in the financial statements? Overstating outstanding checks Understating deposits in transit Overstating deposits in transit Overstating bank services charges
Overstating deposits in transit - Deposits in transit are an additive item in the reconciliation between cash per bank and cash per books. Thus, if the deposits in transit are overstated, the balance per books will be overstated as well.
Analytical procedures are not used as substantive tests when auditing cash in bank because cash transactions are not predictable.
TRUE
Auditors should obtain written representations regarding management's ability and intent with respect to certain financial investments.
TRUE
In addition to Valuation, given the nature of financial investments, Presentation & Disclosure could be considered a high-risk assertion as well.
TRUE
In the audit of a client with a fiscal year ending December 31, the CPAs obtain a January 10 bank statement directly from the bank. Explain how this cutoff bank statement will be used a. In the review of the December 31 bank reconciliation. b. To obtain other audit information.
The auditors will use the July 10th cutoff bank statement to test the June 30th bank reconciliation (which ties directly to the balance of cash in the client's accounting records) primarily to determine whether: (1) Deposits in transit were credited to the client's account in July. (2) Outstanding checks cleared the client's account in July. (3) Checks identified as clearing the client's account in July and written prior to June 30th are included in outstanding checks. (3) The beginning balance on the July cutoff bank statement agrees with the "balance per bank" on the June 30th bank reconciliation. However the cash confirmation will provide the primary evidence regarding the balance per bank at the balance sheet date. (b) The auditors may obtain other information from the cutoff bank statement by investigating unusual items that might reveal: (1) Re-deposits of NSF (non-sufficient funds) checks from the client's customers. These 'bounced' checks may signal issues with respect to A/R collectibility. (2) Checks written by the client that bounced in the subsequent period. The amounts of these checks will need to be classified as accounts payable. Additionally, bouncing checks can signal financial difficulties.
Why is the auditors' review of the client's control of inventory tags important during the observation of physical inventory?
The auditors' review of the client's control for inventory tags is important because of the danger that fictitious inventory tags might be created by dishonest client personnel after the auditors have completed their observation of the physical inventory.
When a primary risk related to an audit is possible overstated inventory, the assertion most directly related is: (1) Existence. (2) Completeness. (3) Clarity. (4) Presentation.
existence is most directly related to overstated inventory because inclusion of inventory items that do not exist in inventory totals results in an overstated inventory
Purpose of bank transfer schedule:
to trace bank transfers to identify overstated cash balances resulting from kiting. Kiting refers to manipulations to conceal cash shortages. O
