Audit final

S-I review

Procedures carried out by auditors at the client company's facilities on or as close as practicable to the effective date of a registration statement filed under the Securities Act of 1933.

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 would not be effective for obtaining evidence of the accuracy of the amount recorded as interest expense?

Reviewing note receivable confirmations.

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

Search for unrecorded liabilities.

The ______ of the corporation normally require that borrowing be approved by the board of directors.

bylaws

Bond transactions are typically confirmed directly with the _____.

trustee

When all of a company's products are sold with warranties, the balance in the accrual account should move ____ the balance in sales.

directly with

3 categories of misstatements

factual, judgmental, and projected

Property tax payments are typically _____ in number.

few

If violation of a debt provision makes a debt payable on demand, the debt must be classified as a current asset unless a ____ is obtained from the trustee or the financial institution.

waiver of compliance

In comparison to the confirmation of accounts receivable, the confirmation of accounts payable is performed _________ frequently.

less

Income taxes withheld from employees but not yet submitted to the government are considered to be a(n) ________.

liability

When auditors find unrecorded liabilities, before adjusting they must consider ______.

materiality

Waivers must extend for a period of _____.

one year

Debits to a mortgage payable account typically are _____ on the account.

payments

A copy of debt agreements is typically housed in the _____ file.

permanent

With respect to auditing product warranty accruals, auditors should be alert to changes in the client's _____ sold.

products

Consignment

A transfer of goods from the owner to another person who acts as the sales agent of the owner.

To gain overall assurance as to the reasonableness of accounts payable, the auditor may consider _____.

ratios

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.

Covenants are typically calculated as of _____.

year-end

Identified misstatements

Misstatements found by the auditors during their audit. These misstatements may or may not be corrected by management. Misstatements may be categorized as factual misstatements, judgmental misstatements and projected misstatements—see the definitions of each.

An auditor traces a recorded long-term debt to its debt covenant documentation, and discovers that the company is in violation of the debt covenant. Which management assertion regarding the debt is most likely affected by the violation?

Presentation and disclosure

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.

Subsequent period

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

Stock certificate book

A book of serially numbered certificates with attached stubs. Each stub shows the corresponding certificate number and provides space for entering the number of shares represented by the certificate, the name of the shareholder, and the serial number of the certificate surrendered in exchange for the new one. Surrendered certificates are canceled and replaced in the certificate book.

Commitment

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

Voucher

A document authorizing a cash disbursement. A voucher usually provides space for the initials of employees performing various approval functions. This term may also be applied to the group of supporting documents used as a basis for recording liabilities or for making cash disbursements.

Loss contingency

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

Which of the following statements is not typical of property, plant, and equipment as compared to most current asset accounts?

A property, plant, and equipment cutoff error near year-end has a more significant effect on net income.

Direct registration system

A system that allows electronic registration and transfer of securities in an investor's name.

Audit of which of the following accounts is most likely to reveal evidence relating to recorded retirements of equipment?

Accumulated depreciation.

Iron curtain approach

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

General risk contingency

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

Subsequent event

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

Capital expenditure

An expenditure for property, plant, and equipment that is properly charged to an asset account.

Revenue expenditure

An expenditure for property, plant, and equipment that is properly charged to an expense account.

Stock registrar

An institution charged with responsibility for avoiding over issuance of a corporation's stock. Every new certificate must be presented to the registrar for examination and registration before it is issued to a stockholder.

Which of the following questions would an auditor most likely include on an internal control questionnaire for notes payable?

Are direct borrowings on notes payable authorized by the board of directors?

In a situation where there is a justified departure from a promulgated accounting principle that is adequately disclosed, how will the auditor modify the standard report?

By adding an emphasis-of-matter paragraph after the opinion paragraph.

Sinking fund

Cash or other assets set aside for the retirement of a debt.

An auditor is recalculating depreciation on real property acquired during the year. Which of the following documents will provide the most relevant information regarding a property's depreciable base?

Closing statement

Choose the correct statement(s) regarding the auditing of debt obligations.

Common analytical procedures performed while auditing debt obligations include analyzing ratios between related accounts such as interest expense and notes payable.

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

Completeness

Waivers must be dated the same date as the ____.

balance sheet

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

Date of the auditors' report.

Which of the following account balances reported on Hermida Co.'s balance sheet dated December 31, year 1 is most likely to rely on management estimates?

Deferred income taxes of $30,000.

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

Detect accounts payable that are substantially past due.

Which of the following is most likely to be an audit objective in the audit of owners' equity?

Determine that the presentation and disclosure of owners' equity are appropriate.

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.

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 organization and transmitted directly to the auditors.

Choose the correct statement(s) regarding an auditor's final assessment, near the end of an audit, of significant accounting estimates made by management:

Estimates are reconsidered in relation to the financial statements as a whole.

Analytical procedures

Evaluations of financial information made by a study of plausible relationships between financial and nonfinancial information.

The auditors' plan for the examination of long-term debt should include steps that require the:

Examination of copies of debt agreements.

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.

The auditors may conclude that depreciation charges are insufficient by noting:

Excessive recurring losses on assets retired.

An auditor performs a procedure in which the volume produced by a manufacturing entity is compared to the capacity of the entity's manufacturing equipment to determine if the entity is operating within its relevant range. This procedure will provide evidence about which assertion?

Existence

The auditors are most likely to seek information from the plant manager with respect to the:

Existence of obsolete machinery.

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 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.

The audit procedure of confirmation is least appropriate with respect to:

Holders of common stock.

Identify the correct statement regarding analytical procedures used in a final review conducted at the conclusion of an audit.

If review analytical procedures suggest the presence of misstated account balances, the auditor may have to perform additional substantive tests of details to satisfactorily complete the audit.

______ transactions are examined for all large debt agreements.

Individual

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 waiver needs to be received from the _____.

bank/lender

Supplementary information

Information presented outside the basic financial statements, excluding required supplementary information, that is not considered necessary for the financial statements to be fairly presented in accordance with the applicable financial reporting framework. Such information may be presented in a document containing the audited financial statements or separate from the financial statements.

Required supplementary information

Information that a designated accounting standards setter requires to accompany an entity's basic financial statements. Differs from other types of information outside the basic financial statements because a designated accounting standards setter considers the information an essential part of the financial reporting of certain entities and because authoritative guidelines for the measurement and presentation of the information have been established.

To strengthen internal control over the custody of heavy mobile equipment, the client would most likely institute a policy requiring a periodic:

Inspection of equipment and reconciliation with accounting records.

The auditors would be most likely to find unrecorded long-term liabilities by analyzing:

Interest payments.

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

Loss contingency.

An auditor usually obtains evidence of stockholders' equity transactions by reviewing the entity's:

Minutes of board of directors meetings.

An auditor was satisfied that the carrying value of factory equipment was fairly stated as of the beginning of the period. During the period, the entity had several transactions involving the purchase and disposal of equipment. Which of the following would be the most effective in providing evidence that all equipment reported in the financial statements actually exists?

Select items from the accounting records and observe them in the entity's factory.

An effective procedure for identifying unrecorded retirements of equipment is to:

Select items of equipment in the accounting records and then locate them in the plant.

A transfer agent and a registrar are most likely to provide the auditor with evidence on:

Shares issued and outstanding.

Projected misstatements

The auditors' best estimate of the misstatement in populations involving the projection of misstatements identified in audit samples to entire populations from which the samples were drawn; for example, a difference in the total accounts receivable based on a projection of sample results to the entire population of accounts receivable. These misstatements are sometimes referred to as known likely misstatements.

Date of the financial statements

The date of the end of the latest period covered by the financial statements (e.g., date of the balance sheet).

Report release date

The date the auditors grant the client permission to use the audit report in connection with the financial statements. This is sometimes referred to as the date of issuance of the audit 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.

For the audit of a continuing nonpublic client, the emphasis of the testing for property accounts is on:

Transactions that occurred during the year.

To assure accountability for fixed-asset retirements, management should implement an internal control that includes:

Utilization of serially numbered retirement work orders.

A client has disposed of several pieces of manufacturing equipment at a significant gain. This raises questions as to which assertion in regard to property, plant, and equipment?

Valuation and allocation

Which of the following circumstances requires the auditor to include an other-matter paragraph in the audit report?

When the financial statements are accompanied by required supplementary information.

In the auditors' first examination of a new client that has changed auditors, the beginning balance of PPE accounts may be substantiated by referring to the predecessor auditors' _______

Working papers

Most ________ represent obligations payable sometime during the succeeding period for services of a continuing nature received before the balance sheet date.

accrued liabilities

When searching for unrecorded liabilities, the auditors consider transactions recorded ________ year-end.

after

Confirmations should include a request that the bank confirm ____ borrowings.

all

Notes payable to financial institutions are often confirmed together with the ____ accounts.

cash

When testing other accrued liabilities, auditors may independently calculate the amount and ______ it to management's estimate.

compare

Accounts payable ______ can be mailed to vendors from whom substantial purchases have been made.

confirmations

Auditors need to determine whether debt _____ have been met.

covenants

As repairs on warranty items take place, the accrual amount is ______.

debited

In the audit of interest-bearing debt, the auditors confirm balances and terms and examine the ____.

debt agreements

When observing the taking of a physical inventory at year-end, the auditors will record the serial number of the last ______ issued to verify the accuracy of the cutoff of accounts payable.

receiving report

Federal and state governments do not specify the exact _____ to be maintained, but do specify the amounts to be withheld.

records

The primary responsibility of the independent stock ______ is to avoid any over-issuance of stock of the corporation.

registrar

Proper balance sheet presentation of accounts payable requires that any material amounts payable to ______ such as directors and officers, be disclosed separately from other accounts payable.

related parties

The auditors' principal objective in analyzing ______ expense accounts is to discover property items that should have been capitalized.

repairs and maintenance

Auditors often obtain written _______ from management regarding the existence of unrecorded payables.

representations

To provide assurance that the accounting department is notified of property retirements, a system of serially numbered _____ should be used by the company.

retirement work orders

Auditors need to compare the percentage of claims accrued to current year _____.

sales

Auditors need to consider ______ terms for determining ownership and whether a liability should be recorded.

shipping

A company should maintain a ______ for plant and equipment, consisting of a separate record for each unit of property.

subsidiary ledger

Minutes

A formal record of the issues discussed and actions taken in meetings of stockholders and the board of directors.

Voucher register

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

Letter of inquiry of the client's lawyer

A letter sent by auditors to a client's legal counsel requesting a description and evaluation of pending or threatened litigation, unasserted claims, and other loss contingencies. The returned letter from the lawyer is referred to as the lawyer's letter.

Disclosure checklist

A list of specific disclosures required by the FASB, the GASB, the FASAC, and the SEC that is used to evaluate the adequacy of the disclosures in a set of financial statements.

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:

Current liabilities.

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.

An auditor discovers several immaterial errors that the auditor determines do not, individually or in the aggregate, cause the financial statements to be materially misstated. The auditor proposes adjusting entries to the client, who refuses to correct the errors. Which of the following best summarizes the steps the auditor should take?

Document the errors and the conclusion that the financial statements are free from material misstatement.

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.

An auditor determines that, due to accounting errors, both a company's expenses and revenues are materially understated, each by approximately the same amount. What is the auditor's most likely course of action in response to these findings?

Suggest adjusting entries to correct both the understated expenses and understated revenues.

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.

Tax guidelines do not allow the _____ of the accrual for warranty claims.

deduction

Covenant violations should still be disclosed in the _____.

financial statements

The intangible asset known as _______ arises in accounting for a business combination, and should be amortized as its value becomes impaired over the years.

goodwill

Confirmations should be drafted on client _____.

letterhead

Contingent liability

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

Stockholders ledger

A record showing the number of shares owned by each stockholder. This is the basic record used for preparing dividend payments and other communications with shareholders.

Work order

A serially numbered accounting document authorizing the acquisition of plant assets. A separate series of retirement work orders may be used to authorize the retirement or disposal of plant assets, and a third variety consists of documents authorizing repair or maintenance of plant assets.

Judgmental Misstatements

Differences arising from the judgments of management concerning accounting estimates that the auditor considers unreasonable or the selection or application of accounting policies that the auditor considers inappropriate. For example, a difference related to the appropriate amount in the allowance for doubtful accounts.

Misstatements

Differences between the amount, classification. presentation or disclosure of reported financial statement items and the amount, classification, presentation, or disclosure that is required for the items to be presented fairly in accordance with the applicable financial reporting framework. Can arise from fraud or error.

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.

Treasury stock

Shares of its own stock acquired by a corporation for the purpose of being reissued at a later date.

Accrued liabilities (accrued expenses)

Short-term obligations for services of a continuing nature that accumulate over time. Examples include interest, taxes, rent, salaries, and pensions. They generally are not evidenced by invoices or statements.

Known misstatements

The auditing literature now refers to these as factual misstatements (see that term).

Communicating which of the following to the audit committee is not typically required of an auditor?

The auditor's judgment of management integrity.

Direct registration system

A system that allows electronic direct registration of securities in an investor's name on the books of the transfer agent or the company itself ("the issuer"), and allows shares to be transferred between a transfer agent and a stockbroker electronically.

Which of the following is an internal control weakness related to factory equipment?

All purchases of factory equipment are required to be made by the department in need of the equipment.

Conservatism

An accounting doctrine for asset valuation in which the lower of two alternative acceptable asset valuations is chosen.

Rollover approach

An approach to making materiality judgments that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting misstatements (including projecting misstatements where appropriate) only during the current year. For example, if expenses were understated by $20,000 in the previous year, and $45,000 during the current year, the rollover method would quantify the misstatement as $45,000, ignoring the previous year misstatement

Stock registrar

An institution charged with responsibility for avoiding overissuance of a corporation's stock.

Stock transfer agent

An institution responsible for maintaining detailed records of shareholders and handling transfers of stock ownership.

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?

Repairs

Other information

Financial and nonfinancial information (other than the financial statements and the auditors' report thereon) that is included in a document containing audited financial statements and the auditors' report thereon but is not required by a designated accounting standards setter.

Factual misstatements

Misstatements about which there is no doubt; for example, failure to record a purchase during the period. Previously, the auditing literature referred to factual misstatements as known misstatements.

Uncorrected misstatements

Misstatements that have not been reflected in the financial statements. Ordinarily these are misstatements the auditors have identified and for which proposed adjusting entries have not been recorded.

In the continuing audit of a manufacturing company of medium size, which of the following areas would you expect to require the least amount of audit time?

Owners' equity.

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

Performing analytical procedures.

An auditor most likely would inspect loan agreements under which an entity's inventories are pledged to support management's financial statement assertion of:

Presentation and disclosure.

A notes payable analysis shows the beginning balance, additional notes, and the ending balance of each individual ____

note

Actual signed copies of the notes are often put in the auditors' _____ file.

permanent

Vendor's statement

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

Emphasis-of-matter paragraph

A paragraph included in the auditors' 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 auditors' judgment, is of such importance that it is fundamental to users' understanding of the financial statements (e.g., a lack of consistent application of GAAP, substantial doubt about an entity's ability to continue as a going concern).

Other-matter paragraph

A paragraph included in the auditors' report that refers to a matter other than those presented or disclosed in the financial statements that, in the auditors' judgment, is relevant to users' understanding of the audit, the auditors' responsibilities, or the auditors' report.

Unasserted claim

A possible legal claim of which no potential claimant has exhibited an awareness.

Debenture bond

An unsecured bond, dependent upon the general credit of the issuer.

When testing customer deposits, auditors typically review a(n) ______of the individual deposits.

list

The formal document creating bonded indebtedness is called the ____.

trust indenture

An auditor observes new equipment while walking around a client's factory and vouches the new equipment to schedules of property, plant, and equipment that support the information in the financial statements. Which assertion is supported by the evidence obtained?

Completeness

When auditing an entity's reported amount for property, plant, and equipment, which assertion will be supported with evidence obtained by the auditor during an examination of the repairs and maintenance expense account?

Completeness

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.

A client has recently granted stock options to its employees and the auditor is developing an audit program for their examination. Which of the following procedures will the auditor likely perform?

Review minutes of board of director meetings to verify authorization of the grant.

Trust indenture

The formal agreement between bondholders and the issuer as to the terms

Trust indenture

The formal agreement between bondholders and the issuer as to the terms of the debt.

Cruising

The inspection of a tract of forestland for the purpose of estimating the total lumber yield.

The auditor wishes to obtain evidence to support management's assertion as to the completeness of long-term debt. Which of the following procedures would likely be most effective?

Review minutes of board of director meetings.