Auditing 4- HW

assertions about valuation and allocation deal with whether

assets, liabilities, and equity interest have been included in the financial statement at appropriate amounts.

the auditor relies on substantive tests to achieve

audit objectives related to particular assertions

the decision as to whether or not to use analytical procedures as substantive tests is based in part on the

availability, reliability, and precision of the data used to develop expectations

if the results of an analytical procedure disclose unexpected differences, the auditor should consider that the

financial statements may contain a material misstatement

inadequate recordkeeping with respect to assets provides an opportunity for

fraud or error to occur

when audit evidence can be obtained from independent source outside an entity, it provides

greater assurance of reliability for the purpose of an independent audit than does evidence secured solely within the entity.

shipping documents and receiving reports are

internally generated evidence, since they are created by the client rather than received from independent sources outside the enterprise

the auditor should discuss with management the controls adopted to identify, evaluate and account for

litigation

If analytical procedures suggest unexpected relationships, the auditor would

perform additional tests of details of the accounts involved

analytical procedures are required during an audits

planning and final review

a lawyers refusal to furnish the information requested in an inquiry letter would be a limitation on the scope of the audit sufficient to

preclude an unmodified opinion

in evaluating an entity's accounting estimates, one of an auditors objectives is to determine whether the estimates are

reasonable under the circumstances and in conformity with GAAP

the most likely method of auditing interest earned on bond investments is

recomputing the interest earned

the revenue cycle includes

sales, receivables, and cash receipts ( an auditor using a transaction cycle approach would be likely to test sales and receivables together)

analytical procedures are one type of

substantive procedure

the auditors overall responsibility with respect to fair values is to obtain

sufficient appropriate audit evidence to provide reasonable assurance that fair value measurements and disclosures are in conformity with GAAP

In identifying litigation, claims, and assessments, the auditor should review correspondence with

taxing authorities (this may indicate an existing tax liability)

the auditor should view related party transactions within the framework of existing pronouncements, placing primary emphasis on

the adequacy of disclosure

Recalculation of amortization and review of the amortization would test the ___ and ____ assertion

valuation and allocation

Large companies often use a registrar to provide registration services and maintain the stockholder list. The primary responsibility of the registrar is to

verify that stock is issued only with proper authorization

The function of cash receipts is part of the treasurers department and should be separate from the role of

writing off receivables. (failure to separate the recordkeeping form the custodial function allows an individual to misappropriate ash and then cover up the theft by writing off the related receivable balance)

All of the following procedures are good controls over the payroll system:

1. a voucher for the amount of the payroll is prepared in the general accounting department based on the payroll departments payroll summary 2. payroll checks are prepared by the payroll department and signed by the treasurer 3. the personnel department sends employees hire and termination notices to the payroll department

accounting estimates may:

1. measure the effects of past transactions that cannot be determined in a timely cost effective manner 2. measure the effects of the present status of an asset or liability 3. be used to approximate an account pending the outcome of a future event (uncollectible accounts receivable )

procedures that may be effective in an audit of contingent liabilities include:

1. reading the minutes of the board of directors 2. reviewing a bank confirmation letter 3. examining invoices for professional services 4. discussing long-term purchase commitments with the purchasing agent 5. reviewing long term leases 6. obtaining a client representation letter

in evaluating the reasonableness of an estimate, an auditor would normally concentrate on key factors and assumptions that are

1. significant to the accounting estimate 2. sensitive to variations 3. deviations from historical patterns 4. subjective and susceptible to misstatements and bias

The negative request form of account receivable confirmation is useful particularly when:

1. the assessed level of control risk relating to receivables is low 2. there are many small balances 3. consideration of the confirmation by the receipt is likely

the auditor should obtain bank cutoff statements that include transaction or 10 to 15 days after year end. this should agree with

The outstanding checks and deposits in transit at year end on the bank reconciliation should

a direct letter of inquiry to the entitys legal counsel is required, and a clients refusal to permit such inquiry generally will result in

a disclaimer of opinion

shipping documents provide evidence that

a sale occurred (therefore selecting from a population of shipping documents allows the auditor to test whether corresponding invoices exist for each sale)

the use of negative confirmations most likely would be justified when there are

a small number of accounts that may be in dispute and the accounts receivable balances arises from sales to many customers with small balances

an auditors analytical procedures are facilitated when an entity uses

a standard cost system with variance reports (the comparison of actual to budget will already have been performed. In addition, it is likely that management will already be aware of significant variations from budget and will be better able to address any questions the auditor may have)

a change in capital stock that is recorded after the year end is an example of

a subsequent event that might require disclosure in the footnotes to the financial statements

what is an effective control for assuring that the proper custody of assets in the investing cycle is maintained

an independent person comparing the contents of the safety deposit box with the recorded balances in he investment subsidiary ledger

in evaluating the reasonableness of an accounting estimate, the auditor should first obtain

an understanding of how management developed its estimate

involve comparison of recorded amounts or ratios developed from recorded amounts, to expectations developed by the auditor

analytical procedures

after identifying the occurrence of a related party transaction, the auditor should

apply the procedures considered necessary to obtain satisfaction concerning the purpose and nature of the transaction and its effect on the financial statements

liquidity ratios and coverage ratios focus on

balance sheet account balances

the primary evidence regarding year end cash balances in the financial statements is documented in the

bank reconciliation (this reconciles the balances per the bank to that per the financial statements )

Inventory turnover is a measure of how quickly inventory is sold, which can be used as an indicator of enterprise performance. In general, the higher the turnover, the

better the entitys performance

a letter of audit inquiry to the clients lawyer is the auditors primary means of obtaining

corroboration of the information furnished by management concerning litigation, claims, and assessments

an auditor would be most likely to identify a contingent liability by obtaining a standard bank confirmation which has an "exceptions and comments" box that specifically discloses

contingent liabilities as endorser of loans, for open letters of credit, etc

by stamping the voucher "Paid", the check signer

cancels the voucher so it cannot be resubmitted for payment

the standard AICPA bank confirmation form includes spaces for the bank to confirm both

cash balances on deposit at the bank and collateral pledged on loans originating from the bank

the auditor is able to detect liabilities not recorded at year end by

comparing cash payments made after the balance sheet date to the related receiving reports and vendor invoices. Any payments made on transactions date before year end reflect a liability that should have been recorded.

to ensure the completeness of the accounts receivable ledge

comparison of daily sales summaries to daily postings to accounts receivable ledge would be performed

tracing from a sample of shipping documents to matching sales invoices would provide support for the

completeness assertion for billing

An auditor testing long term investments would ordinarily use analytical review as the primary audit procedure to ascertain the reasonableness of the

completeness of recorded investment income

comparison of daily sales summaries to daily posting to the accounts receivable ledge would ensure the

completeness of the accounts receivable ledger

analytical procedures use in planning an audit should focus on

enhancing the auditors understanding of the clients business

when an analytical procedure is used as the principal substantive test of a significant financial statement assertion, the auditor is required to

document both the auditors expectation and the factors considered in developing that expectation

evidence obtained directly by the accountant provides more persuasive evidence than evidence obtained through inquiry, discussion, or analytical procedures, and therefore reduces

attestation risk

the auditor should trace corporate stock issuances and treasury stock transactions to the minutes of the board of directors to make sure they were

authorized

To satisfy the valuation assertion when auditing an investment accounted for by the equity method, an auditor most likely would

examine the audited financial statements of the investee company, including performing recalculations of prorate share of income/loss

reviewing purchase contracts and other legal documents might aid the auditor in

identifying omitted liabilities

______ accounts tend to be more predictable than _____ accounts

income statement balance sheet

occurs when a check drawn on one back is deposited in another bank and no record is made of the disbursement in the balance on the first bank.

kiting

frequent kiting may result in a high level of deposits coupled with a

low average balance

an auditor would be concerned about assumptions that are susceptible to bias because it is more likely that estimates based on such assumptions will be

misstated

to audit the statement of cash flow the auditor

reconciles the amounts of the statement to amounts on other financial statements

compensating balance arrangements may be maintained by or for

related parties

unusual nonrecurring transactions near year end are characteristic of

related party transactions. (since related party transactions are not at arms length, management may use such transactions to bolster sales or assets )

strong, effective internal control improve the

reliability of data

unrecorded trade accounts payable are best identified by

reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period

"the entity holds or controls the rights to assets" and "liabilities are obligations of the entity" are management assertions that relate to the

rights and obligation assertion about account balances at period end.

the function of cash receipts is part of the treasurers department and should be separate from the

role of posting credits to the AR ledger

the most likely analytical review procedure involving costs and expenses would be to compare

the current years payroll expense (average amount per employee) to the prior year, taking into consideration an average increase in wage rates.

when auditing related party transactions, the auditor MUST determine whether

they are adequately disclosed in accordance with GAAP

relationships among income statement accounts tend to be more predictable than balance sheet account because

they represent transactions over a period of time rather than at one point in time. (in addition, relationships involving transactions subject to management discretion are less predictable)

during the final review state of an audit, the auditor focuses on the overall presentation of the financial statements. A meaningful ratio to calculate during the final audit review is

total debt/total assets (this indicates the portion of assets financed by creditors)

to determine whether transactions have been recorded (completeness assertion), the auditor should

trace from the source documents to the accounting records

analytical procedures applied during the final review stage should be used to determine whether adequate evidence has been gathered in response to

unusual or unexpected balances identified during the audit