Audit Evidence 1
Which of the following procedures would yield the most appropriate evidence? A scanning of trial balances. An inquiry of client personnel. A comparison of beginning and ending retained earnings. A recalculation of bad debt expense.
A recalculation of bad debt expense. Appropriate evidence is both relevant and reliable. The reliability of audit evidence is highly dependent upon the circumstances under which it is obtained. The auditor's direct personal knowledge obtained through physical examination, observation, recalculation, reperformance, inspection is more persuasive than information obtained indirectly.
If the objective of a test of details is to detect overstatements of sales, the auditor should trace transactions from the Cash receipts journal to the sales journal. Source documents to the accounting records. Accounting records to the source documents. Sales journal to the cash receipts journal.
Accounting records to the source documents. The objective is to test whether recorded sales are valid (not overstated). The auditor is answering the question, "Is this recorded sale a valid transaction?" In order to answer that question, the auditor would start with the recorded sales and look for documentation corroborating its validity.
Maricela just got hired by a Big Four accounting firm and is currently in "audit boot camp." Her first lesson is on analytical procedures. Maricela studied financial ratios in her university classes, so she felt confident going into her boot camp training. However, she was surprised to find that only one of following statements about analytical procedures is true. Which is the true statement? Results of analytical procedures do not constitute substantive evidence during an audit Analytical procedures are required to be performed during the final audit review to verify the appropriateness of the auditor's conclusions Analytical procedures and financial ratios are equivalent, as analytical procedures only involve financial data While a useful tool, analytical procedures are not required during audit planning
Analytical procedures are required to be performed during the final audit review to verify the appropriateness of the auditor's conclusions According to AU 329, analytical procedures are required during final audit review. The other statements are false. Analytical procedures are also required during audit planning. Moreover, results of analytical procedures can constitute substantive evidence during an audit and involve studying relationships among both financial and nonfinancial data.
Which of the following is not a primary function of audit working papers? Assist management in proving that the financial statements are in accordance with generally accepted accounting principles. Assist the audit team members responsible for supervision in reviewing the work of the audit staff. Assist auditors in planning engagements from one year to the next. Provides the auditor with support for the opinion that was rendered on the financial statements.
Assist management in proving that the financial statements are in accordance with generally accepted accounting principles. All audit documentation (working papers) is the property of the independent auditor and is not attended to assist the company's management. This documentation does serve to provide the principal support for the auditor's report and opinion and to aid the auditor in both the planning and the supervision of the audit. Additionally, audit working papers can assist the audit team in proving that the audit was conducted in accordance with generally accepted auditing standards.
Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle? The failure to prepare shipping documents may cause an overstatement of inventory balances. Fictitious transactions may be recorded that cause an understatement of the revenue and an overstatement of receivables. Claims received from customers for goods returned may be intentionally recorded in other customer's accounts. Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash.
Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash. One of the most effective ways of detecting or preventing fraud is the segregation of duties involving, custody, and record keeping. Authorization of credit memos by personnel who receive cash is not segregation of duties.
Which of the following types of audit evidence is the most persuasive? Prenumbered sales invoices. Client work sheets supporting cost allocations. Bank statements obtained from the client. Management representation letter.
Bank statements obtained from the client. Despite being handled by the client, bank statement originated outside the client and therefore are the most persuasive of the choices given.
An entity's internal control requires for every check request that there be an approved voucher, supported by a prenumbered purchase order, and a prenumbered receiving report. To determine whether checks are being issued for unauthorized expenditures, an auditor most likely would select for testing from the population of: Purchase orders. Canceled checks. Receiving reports. Approved vouchers.
Canceled checks. The requirement is to identify the type of evidence the auditor would use to determine if checks are being issued for unauthorized expenditures. The auditor would select high quality of evidence when examining accounts related to the cash transaction cycle, since canceled checks are generated externally, they provide greater reliability than the internal source documents; thus, canceled checks would be the type of evidence used by the auditor.
Appropriateness of audit evidence is a measure of the: Competency of the evidence. Sufficiency of the evidence. Meaning of the evidence. Quantity of the evidence.
Competency of the evidence. The requirement is to identify the appropriateness of audit evidence. In order for evidence to be appropriate it must be competent, that is, it must be both relevant and reliable.
An independent auditor is examining the financial statements for the Jeter Corporation. The company's sales have gone up significantly this year and the auditor is afraid that some of the sales are fictitious, simply recorded to make the company look better. The auditor is considering taking each of the following actions during the audit. Which one is most likely to provide evidence of extra sales being added that never actually took place? Investigate complaints by vendors. Credits to accounts receivable in the period after the end of the year are analyzed. A search is made for unrecorded liabilities as of the end of the year. The sales department is questioned about the validity of the final sales figure.
Credits to accounts receivable in the period after the end of the year are analyzed. Companies that inflate revenues often do so by recording credit sales near the end of the year and then removing the accounts receivable in the subsequent period as a bad account, a discount, or as a sales return. They put the receivable and revenue on and then subsequently remove the receivable. In that way, no sales invoices are sent out to non-existent customers. Vendors tend to complain about lack of payment so that particular test is done in connection with either inventory or accounts payable and not revenues. Unrecorded liabilities are a potential problem but they have nothing to do with false sales. Finally, asking the sales department only provides information from inside the company which is rarely considered strong evidence. Plus, it may well have been the sales department that instigated the fraud and, thus, is most likely to cover it up.
The permanent file of an auditor's audit documents most likely would include copies of the Lead schedules. Attorney's letters. Bank statements. Debt agreements.
Debt agreements. Permanent files contain items of continuing interest, such as debt agreements, internal control flowcharts, and articles of incorporation. The other item would be in the current files.
An auditor would most likely apply analytical procedures in the overall review stage of an audit to Enhance the auditor's understanding of subsequent events. Identify auditing procedures omitted by the staff accountants. Determine whether additional audit evidence is needed. Evaluate the effectiveness of internal control activities.
Determine whether additional audit evidence is needed. Analytics are used in the overall review stage to assist the auditor in assessing conclusions reached and in evaluating the overall financial statement presentation. The results of the review may indicate that additional evidence may be needed.
During an audit engagement, the auditor should document all findings or issues that are judged to be significant. Which of the following is least likely to be viewed as a significant audit finding or issue? Evidence of the validity of internal control procedures developed and followed by the company to ensure that nonfinancial tasks are performed in an effective manner Audit adjustments Selection of accounting principles Lack of original company documentation when investigating the accounting for a major transaction
Evidence of the validity of internal control procedures developed and followed by the company to ensure that nonfinancial tasks are performed in an effective manner The auditor views audit adjustments made to a company's financial statements and the selection of accounting principles as significant events that must be documented. The lack of the original documents to provide supporting evidence about the handling of a major transaction is a troubling discovery which should also be noted. Many internal control procedures are of interest to the auditor but the ones that pertain to nonfinancial matters often have no relevance to the production of financial statements and, thus, do not necessarily fall under the boundaries of an audit engagement.
An auditor's program to examine long-term debt should include steps that require Inspecting the accounts payable subsidiary ledger. Investigating credits to the bond interest income account. Verifying the existence of the bondholders. Examining bond trust indentures.
Examining bond trust indentures. When auditing notes payable and long-term debt, the auditor should obtain copies of agreements and determine if provisions are being adhered to. If the debt is in the form of bonds, the agreement is the bond trust indenture.
A company starts Year Four with inventory of $200,000. During the year, purchases of $700,000 are made and the ending inventory is $300,000. During Year Five another $700,000 in inventory is bought and the ending inventory is $500,000. Based on calculating the inventory turnover, which of the following is most likely to be true for Year Five? Inventory on hand is more likely to be older and therefore subject to age problems The profit margin has decreased during the year. The profit margin has increased during the year. Inventory on hand is more likely to be younger and therefore less likely to be damaged.
Inventory on hand is more likely to be older and therefore subject to age problems Inventory turnover can be computed in a couple of ways but is most likely to be cost of goods sold divided by the average inventory. In Year Four, cost of goods sold is $200,000 + $700,000 - $300,000 or $600,000. Average inventory is ($200,000 + $300,000)/2 or $250,000. Inventory turnover is $600,000/$250,000 or 2.4 times during the year. That is a measure of how quickly inventory is sold. In Year Five, cost of goods sold is $300,000 + $700,000 - $500,000 or $500,000. Average inventory is ($300,000 + $500,000)/2 or $400,000. Inventory turnover is $500,000/$400,000 or 1.25 times during the year. Inventory is selling at a much slower pace in Year Five which indicates to the auditor that problems might be caused by the age of the inventory on hand. It is more likely to be broken or unsalable. None of the information given here talks about sales so profit margin cannot be determined.
To which of the following matters would materiality limits not apply when obtaining written client representations? Losses from sales commitments. Irregularities involving management. Noncompliance with contractual agreements. Unasserted claims and assessments.
Irregularities involving management. Irregularities are intentional misstatements or omissions of amounts or disclosures in financial statements. A typical client representation letter states that there have been no irregularities involving management or employees who have significant roles in the internal control structure.
An auditor looks at an audit client's interest expense balance and it seems significantly higher than had been expected. What type of problem is the auditor most likely to be concerned might exist? The company has issued a bond at a discount and is only recording the cash interest payments as interest expense. No year-end adjusting entry was recorded to recognize interest owed by the company on that date. Long-term debt is outstanding but has not been recorded by the company. Interest expense was accidentally recorded as a reduction in interest revenue.
Long-term debt is outstanding but has not been recorded by the company. A, B, and D are all potential problems but they would each cause the Interest Expense account to be low. In A, yearly amortization of the discount was not included in interest expense. In B, the interest owed at the end of the year was not included in interest expense. In D, interest expense was recorded but not in the Interest Expense account. However, with C, because the debt was not recorded, it looks like the company should have a low amount of interest expense. If the company then pays interest on this unrecorded debt, the interest expense will be higher than expected. That is what the auditor is seeing.
The Ace Corporation has prepared financial statements for December 31, Year One and the year then ended. The statements are scheduled to be issued to the public on February 19, Year Two. The statements are being audited by Mantle and Maris CPAs. Which of the following is the audit firm most likely to do during February of Year Two? Test important internal control procedures to ensure they are working efficiently. Perform analytical review procedures Mail out positive confirmations for large accounts receivable balances. Make an assessment of the inherent risk involved with the larger balance sheet accounts.
Perform analytical review procedures Internal control testing and assessment of inherent risk are both typically performed early in an audit because they help the auditors to judge how much substantive testing must be performed to reduce overall audit risk to an acceptably low level. Confirmations are also mailed out early in the audit because the responses and any needed follow up can take a long time. Analytical procedures are carried out early in an audit as part of the inherent risk assessment. However, they are also performed near the very end of the audit to help make sure that nothing has changed in the company records that might indicate a possible misstatement that has popped up at the end of the audit. In this way, the auditor does one last overview to highlight any account, balance, or ratio that no longer appears to be an acceptable amount.
Which of the following controls would be most effective in assuring that recorded purchases are free of material errors? Purchases orders, receiving orders, and vendors' invoices are independently matched in preparing vouchers. Receiving reports require the signature of the individual who authorized the purchase. Vendors' invoices are compared with the purchase orders by an employee who is independent of the receiving department. The receiving department compares the quantity ordered on the purchase order with the quantity received on the receiving reports.
Purchases orders, receiving orders, and vendors' invoices are independently matched in preparing vouchers. The most effective control over recorded purchases occur when supporting forms, such as, purchase orders, receiving reports, and vendor invoices are compared independently for agreement. Note, for good control, the receiving department should not know the quantity ordered.
Which of the following procedures would an auditor most likely perform in auditing the statement of cash flows? Vouch all bank transfers for the last week of the year and first week of the subsequent year. Compare the amounts included in the statement of cash flows to similar amounts in the prior year's statement of cash flows. Reconcile the cutoff bank statements to verify the accuracy of the year-end bank balances. Reconcile the amounts included in the statement of cash flows to the other financial statements' balances and amounts.
Reconcile the amounts included in the statement of cash flows to the other financial statements' balances and amounts. The statement of cash flows presents amounts for financing and investing activities, which come from changes in balance sheet accounts, and operating activities, which come from income statement accounts. Therefore, the auditor, in auditing the statement of cash flows, would reconcile the amounts shown in that statement to the other financial statements.
The CPA firm of Wilcox and Crowder is doing the current year audit of Abraham and Sons, a local clothing store. The audit had previously been performed for a number of years by another CPA firm. The new auditors need to establish that no material misstatements are present in the opening balances for the reporting entity's assets and liabilities. The firm requests and reviews the audit work papers from the previous year prepared by the predecessor auditors. Which of the following is true? The new CPA firm should not have been allowed to review the previous audit work papers. Review of the previous audit work papers is allowed but that cannot be the only procedure carried out to establish the opening balances. If the predecessor auditor has a good professional reputation, review of the previous work papers is sufficient to establish the opening balances. If the previous year's financial statements were given an unmodified audit opinion, no work needs to be done in connection with the current year opening balances.
Review of the previous audit work papers is allowed but that cannot be the only procedure carried out to establish the opening balances. The current auditor must have sufficient audit evidence on which to form an opinion. Review of the work papers can be helpful but that work was done by other parties and is not sufficient as a basis for the current year opinion. Other testing must be performed.
A CPA firm is auditing the financial statements prepared by the Lion Corporation for the year ending December 31, Year One. The auditors are concerned that a number of accounts payable were not included in the year-end liabilities. Which of the following audit procedures would help the auditors make certain that the accounts payable balance is not understated? Confirm a sample of the year-end accounts payable balances. Review the cause for the cash disbursements made in the first month or two of Year Two. Compare the balances in accounts payable to receiving reports created by the company. Check the math and extensions on the accounts payable balances recorded during the last month of Year One.
Review the cause for the cash disbursements made in the first month or two of Year Two. A, C, and D involve the examination of balances that were already recorded prior to the end of Year One. However, that is not the problem that is suspected by the auditors. The auditors are concerned about payable balances that were omitted in Year One. Only answer B looks at transactions that might not have been recorded appropriately in Year One. The auditors will look at cash disbursements in Year Two and determine when the liability was created and whether it was recorded in the correct time period.
Williams, CPA, is auditing the financial statements of a small retail store in Idaho. The receivable balances represent amounts owed from customers living in the area. The internal control structure that exists in this company is weak. In gathering evidence to substantiate the balances reported for accounts receivable, which of the following is the auditor most likely to do? Inspect the internal records such as copies of the tax invoices that were mailed to the customers. Examine evidence of subsequent cash receipts. Send negative confirmation requests to a sample of the customers. Send positive confirmation requests to a sample of the customers.
Send positive confirmation requests to a sample of the customers. Confirmation of receivables is a generally accepted auditing procedure. The use of positive confirmation requests is preferable when individual account balances are relatively large or when there is reason to believe that there may be a substantial number of accounts in dispute or with inaccuracies or irregularities. The negative form is useful when internal control surrounding accounts receivable is considered to be effective. In this case, although the individual accounts may not be relatively large, the internal control structure is weak. Although more costly, positive confirmations provide a better quality of audit evidence and should be used here because internal control is weak.
Tracing shipping documents to prenumbered sales invoices provides evidence that All prenumbered sales invoices were accounted for. All goods ordered by customers were shipped. No duplicate shipments or billings occurred. Shipments to customers were properly invoiced.
Shipments to customers were properly invoiced. By tracing shipping documents to sales invoices, the auditor will obtain evidence that all shipments have been invoiced; that is, that each shipment resulted in a sales invoice being prepared.
Sissy Sloan was recently promoted to audit senior at CostfireshackTroopers, a large public accounting firm. Sissy's new position requires her to take the lead in auditing certain fair value measurements of Monstrous Corporation, one of her firm's primary audit clients. Which of the following is NOT correct regarding Sissy's responsibilities in assessing the fair value measurements of Monstrous Corporation? Sissy must engage an actuary or other such specialist when fair value measurements are material to the financial statements Sissy must obtain an understanding of internal controls relevant to the fair value measurements under audit procedures. Sissy must determine whether methods of obtaining fair value measurements are in accordance with Generally Accepted Accounting Principles and undertaken consistently None of the above
Sissy must engage an actuary or other such specialist when fair value measurements are material to the financial statements Auditors are not required to engage the services of an actuary or other specialist when auditing fair value measurements. An auditor shall engage a specialist in the case that the auditor does not possess the necessary skill and knowledge to plan and perform the needed audit procedures.
Which of the following nonfinancial information would an auditor most likely consider in performing analytical procedures during the planning phase of an audit? Square footage of the selling space. Turnover of the personnel in the accounting department. Commitment of the audit committee members. Management's plans to restructure debt.
Square footage of the selling space. Analytical procedures are concerned with plausible relationships. The square footage of selling space might be used to compare retail revenues and expenses to industry figures and prior year performance.
An independent auditor is currently attempting to gain evidence about a reporting company's accounts receivable. According to the records, the company is owed $760 by Arnold Alexander Wilson. Which of the following is true? Confirmation is primarily an evidence gathering technique to substantiate the valuation assertion made by management. Confirmations tend to be done late in the fiscal year so that the balance being confirmed is close to the balance sheet date. If internal control is weak, negative confirmations are more likely to be used than positive confirmations. Subsequent payment of the account after the end of the year can be used as evidence that the balance is properly stated at the balance sheet date.
Subsequent payment of the account after the end of the year can be used as evidence that the balance is properly stated at the balance sheet date. The most important purpose in an audit of confirmation is to prove that the balance actually does exist. Many frauds have been created by recording false receivables to boost reported revenues (and net income). Confirmation attempts to gain evidence that the balance (and the debtor) do exist. Because confirmation generally takes a considerable period of time, it is usually performed early in an audit unless serious problems are expected. Positive confirmations ask for a response in all cases and is viewed as a better testing technique than negative confirmations which only ask for communication if a problem is found. Thus, positive confirmations are more likely to be used when additional risk is involved such as when internal control risk is assessed as high. Finally, the collection of a balance does help to indicate that the balance did exist and is collectible. Auditors often spend considerable time in the period right after the end of the year reviewing cash collections for that reason.
The Harvard Corporation buys and sells investments during the year and maintains physical control over all stock certificates. The auditor comes in and finds the serial numbers listed on the purchase orders for these investments and then compares those to the actual serial numbers listed on the stock certificates held by the company. What is the auditor worried about when doing such testing? That the stock certificates are counterfeit. That the stock values have been permanently impaired and need to be written down in value. That the stocks were sold by company employees and then replaced. That the initial cost of the stocks was miscalculated.
That the stocks were sold by company employees and then replaced. If stock certificates are held by a company, one concern is that an employee is able to "borrow" the certificate, sell the stock, make use of the money for a period of time, and then buy a replacement certificate so that the absence is not noticed. In effect, the money received from the sale serves as an interest free loan for the employee. Therefore, if the serial numbers on the certificates do not match with the numbers indicated for the original purchase, the auditor knows that it is likely that the stocks were stolen and then replaced as a way of covering up the crime.
The Cosby CPA firm is auditing the financial statements of Hamster, Inc. for the latest year. Hamster manufactures widgets in its factory located in Gaffney, South Carolina. The auditors are currently analyzing each of the entries made to the repair expense account. What is one of the purposes for doing this testing? The auditors hope to gain evidence that the company's liabilities are not overstated. The auditors hope to gain evidence that the company's net income is not understated. The auditors hope to gain evidence that the company's current assets are not overstated. The auditors hope to gain evidence that the company's current assets are not understated.
The auditors hope to gain evidence that the company's net income is not understated. The auditors are looking for the possibility of material misstatements. The repair expense account is studied to determine whether any costs that should have been added to an asset account were incorrectly added to this expense account. If that has taken place, the expense balance will be overstated and, as a result, reported net income will be understated. If that has occurred, the machinery and equipment balances will also be understated but they are not current assets.
Jones and Winehouse CPAs are doing an audit and are currently carrying out analytical procedures. The age of accounts receivable is computed and compared to the prior year. The age has increased by a large amount. Which of the following is the independent auditor least likely to find as a result of uncovering this information. The client may have loosened up its credit terms so that a larger bad debt expense is needed than in the past. The client may have started selling its accounts receivable to a bank so that a loss should be recognized. Economic times might have gotten worse so we need to look more closely to make sure all bad accounts have been written off. Someone inside of the company might have begun lapping as a way of stealing money.
The client may have started selling its accounts receivable to a bank so that a loss should be recognized. When receivables are sold before they are collected (they certainly would not be sold after they were collected), the age should get shorter. The company is getting its money faster as a result of the sale. Thus, sale of A/R to a bank is a possible answer if the average age had gotten shorter. However, if the age gets higher, it could be that the credit terms have been loosened so that customers with less money are able to buy on credit. They typically take longer to pay with more risk of becoming uncollectible. When economic times are bad, people also tend to pay more slowly and the number of bad accounts goes up. And, in lapping, money from a customer is stolen. Several days later, to keep the customer from finding out that the money was never recorded by the company, money from a second customer is diverted into the account of the first customer. The period in between makes the age of the accounts longer.
The auditor is examining the financial statements for Zeller Corporation and discovers that the inventory turnover for the current year was much higher than that of the previous year. Which of the following is a potential reason for this change that would not concern the auditor as to whether a material misstatement might have occurred? The company placed a large order for inventory near the end of the year but the delivery got delayed until the following year because of a strike by truck drivers. Inventory sales were made near the end of the year and recorded as FOB shipping point when they were really FOB destination. Near the end of the year, the company started capitalizing inventory costs that had previously been expensed. Goods were shipped out on consignment but recorded as sales.
The company placed a large order for inventory near the end of the year but the delivery got delayed until the following year because of a strike by truck drivers. Inventory turnover is the cost of goods sold for the year divided by the average (or ending) inventory. An increase in inventory turnover is caused by cost of goods sold increasing or inventory decreasing. If an expected order was not received by the end of the year, inventory levels would be below the normal level. And, since there is a legitimate reason for this drop, it meets the criteria here. An incorrect FOB point is a mistake that would need to be investigated. Capitalizing a cost causes the inventory balance to increase rather than decrease. Recording consignment shipments as sales would cause the noted problem here (high cost of goods sold and low inventory) but that is mistake that would be investigated by the auditor.
A CPA firm is auditing a client that sells merchandise on credit to a wide variety of customers. Last year, the accounts receivable turnover ratio was 5.9 but this year it has fallen to 4.1. The auditor is concerned by the significance of that change and hopes to find a logical explanation. Which of the following is most likely to explain the cause of that change? The company has dropped its sales prices but shortened the length of time a customer is given to pay before a late charge is assessed. The company accountant has fraudulently tried to boost reported net income by debiting inventory and crediting sales when no transaction took place. The company is making a higher percentage of its sales for cash. The company started making sales on consignment this year and recording those transactions as credit sales at the time of shipment to the consignee although no cash has yet been collected.
The company started making sales on consignment this year and recording those transactions as credit sales at the time of shipment to the consignee although no cash has yet been collected. The accounts receivable turnover ratio is found by taking sales and dividing it by accounts receivable. For example, sales of $590,000 and accounts receivable of $100,000 lead to a 5.9 ratio. In D, both the sales and accounts receivable figures are incorrectly inflated because a consignment sale does not occur at the time of shipment but only when the goods are actually sold by the consignee. For example, if those sales were recorded at $60,000 and no sale to a third party has yet occurred, sales would be $650,000 ($60,000 too high) and accounts receivable would be $160,000. The accounts receivable turnover ratio would drop to 650,000/160,000 or 4.1. In A, the customers will pay quicker and the turnover ratio will increase rather than decrease. In B, the sales figure is increased but not accounts receivable and that will also cause the turnover ratio to rise. In C, sales stays the same but accounts receivable goes down which, once again, makes the turnover ratio larger rather than smaller.
hich of the following factors would least likely affect the quantity and content of an auditor's audit documentation? The condition of the client's records. The content of the representation letter. The assessment of the level of risk. The nature of the auditor's report.
The content of the representation letter. The requirement is to identify the factor which would least likely affect the quantity and content of an auditor's audit documentation. The content of the representation letter is the correct answer because written representations are considered complementary evidence in support of various assertions but not substitutes for other auditing procedures.
The Washington Company holds a large number of accounts receivable from several different segments of its business. The auditing firm of Alexander Burr and Associates has recently mailed out confirmations to many of the company's customers. A positive confirmation was sent to James Monroe and a negative confirmation was sent to Andrew Jackson. Which of the following is most likely not to be true? The firm believes that James Monroe will pay close attention to the confirmation but Andrew Jackson will not. The firm believes that the quality control surrounding the accounting system that maintains the record of James Monroe's receivable is weaker than the one that maintains the record of Andrew Jackson's receivable. The receivable balance owed by James Monroe is significantly larger than the receivable balance owed by Andrew Jackson. The receivable balance owed by James Monroe is significantly older than the receivable balance owed by Andrew Jackson.
The firm believes that James Monroe will pay close attention to the confirmation but Andrew Jackson will not. Positive confirmations are viewed by auditors as more effective but they are also more costly. Therefore, positive confirmations are more likely to be utilized whenever more risk is present. A larger receivable, an older receivable, or a receivable generated by a poorer accounting system all pose greater risk of a material misstatement; thus, a positive confirmation is more appropriate. If James Monroe is expected to pay more attention to the confirmation than Andrew Jackson, this factor creates less risk for the confirmation. It would cause the auditor to be more likely to make use of a negative confirmation.
Many auditors perform extensive analytical procedures on audits because of which of the following? They pinpoint errors in the accounts. They indicate areas of potential risk and misstatement. They provide evidence that account balances are complete. They help the auditor to establish the strength of the company's internal control
They indicate areas of potential risk and misstatement. Analytics are concerned with plausible relationships. The objective of the procedures is to identify such things as the existence of unusual transactions and events, and amounts, ratios, and trends that might indicate matters that have financial statement and audit planning ramifications.
The auditing firm of House and Staunton is currently performing an independent audit of the financial statements produced by the South Central Corporation. The audit team is currently testing the accounts receivable balance for any evidence that might indicate a material misstatement. One member of the audit team is looking through the subsidiary ledger for amounts due from officers of the company. What of the following is the most likely objective of this work? To determine that South Central actually owns or controls all of the reported accounts receivable reported at the balance sheet date. To determine that all accounts receivable are properly presented in the financial statements. To determine that the reported accounts receivable balance represents all of the amounts owed to South Central as of the balance sheet date with no accounts omitted. To determine that the accounts receivable balance is properly reduced to the net realizable value on the balance sheet date.
To determine that the reported accounts receivable balance represents all of the amounts owed to South Central as of the balance sheet date with no accounts omitted. A company's officers are viewed as related parties and, thus, any receivables owed to the company by these individuals need to be disclosed as part of proper presentation. The staff auditor is looking for evidence that any such receivables exist but have not been separately disclosed on the balance sheet by the reporting company.
An auditor's analytical procedures are most likely to be facilitated if the entity Segregated obsolete inventory before the physical inventory count. Uses a standard cost system that produces variance reports. Develops its data from sources solely within the entity. Corrects material weaknesses in internal control before the beginning of the audit.
Uses a standard cost system that produces variance reports. The use of a standard cost system that produces variance reports allows the auditor the opportunity to compare the output from the standard cost system with the financial information presented by management. Note, the objective of utilizing analytical procedures is to identify such things as the existence of unusual transactions and events, amounts, ratios and trend in the financial data.
The Othello Corporation buys and sells widgets. In Year One, the average number of days that it took to sell a widget was 18. In Year Two, because of the downturn in the economy, the average number of days that it took to sell a widget rose to 27. Which of management's assertions about the balance being reported as inventory on the company's balance sheet would be of most concern to the independent auditor? Presentation Valuation Existence Completeness
Valuation As inventory gets older, the chance that its value will fall below cost goes up. As goods get older, they tend to get damaged or show other signs of age that may require them to be sold at a reduced amount. Inventory is reported at the lower of cost or market. The increase in age might be a cause for the market value to decline so that a reduction in the reported balance will be necessary.
