Auditing exam 3 chapters 12,14,16,17

Unmodified opinion on group financial statements.

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

Valuation, allocation, accuracy

all transactions, assets, liabilities, and equity interests are included in the financial statements at proper amounts

Cutoff

transaction and events have been recorded in the correct accounting period - Management asserts that all inventory owned by the company is included in the balance and that all transactions are reported in the proper period.

Scope limitation

a restriction that prevents the auditors from being able to apply all of the audit procedures that they consider necessary in the circumstances. Scope limitations may be client imposed or may be imposed by other circumstances

Objective questions flash-card cite- chpt 12

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communication of internal control deficiencies

AICPA AU-C 250 requires that auditors communicate any significant deficiencies in internal control ( previously known as reportable conditions)

In examining liabilities of a company, what is the auditors' primary concern? a. Completeness. b. Presentation. c. Rights. d. Existence.

a. Completeness.

Which of the following audit procedures is aimed at determining whether every name on the company payroll is an employee actually on the job? a. Comparison of payee names on canceled payroll checks with the payroll register. b. A test of payroll extensions. c. A surprise observation of a paycheck distribution. d. Analytical comparisons of budgeted to actual payroll expense.

c. A surprise observation of a paycheck distribution.

A "bill and hold" scheme is most likely to include: a. Selling items at substantial discounts near year-end. b. Shipment of items to a customer beyond what the customer has ordered. c. Recording as sales items that the company retains as of year-end. d. Billing of items that are held by customers for future revenue production purposes.

c. Recording as sales items that the company retains as of year-end.

Which of the following procedures is not a procedure that is completed near the end of the engagement? a. Review to identify subsequent events. b. Obtain the lawyer's letter. c. Test internal controls over cash. d. Obtain the letter of representations.

c. Test internal controls over cash.

Which of the following is not a reason for the special significance attached by the auditors to the verification of inventories? a. Special valuation problems often exist for inventories. b. Inventories are often the largest current asset of an enterprise. c. The existence of inventories is inherently difficult to substantiate. d. The determination of inventory valuation directly affects net income.

c. The existence of inventories is inherently difficult to substantiate.

which of the following is not one of the independent auditor's objectives regarding the examination of inventories? a. Verifying that inventory counted is owned by the client. b. Ascertaining the physical quantities of inventory on hand. c. Verifying that the client has used proper inventory pricing. d. Verifying that all inventory owned by the client is on hand at the time of the count.

d. Verifying that all inventory owned by the client is on hand at the time of the count.

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 out side of the client organization and transmitted directly to the auditors

how to treat subsequent events...make adjustment to financial statements OR disclose in a note to the financial statements

in deciding whether a particular sub event should result in an adjustment to the financial statements or just a note disclosure the auditor should carefully consider *when the underlying conditions came into existence* - for example! assume shortly after the balance sheet date, a major customer of the audit client declares bankruptcy, with the result that a large receivable previously considered fully collectible now appears to be uncollectible. IF the customers bankruptcy resulted from a *steady deterioration in financial position* the subsequent event provides evidence that the receivable actually was uncollectable at year end and the *allowance for doubtful accounts should be increased* ( make adjustment). On the other hand if the customer's bankruptcy stemmed from a casualty such as a fire occurring after year end, the conditions making the receivable uncollectible *came into existence AFTER the balance sheet date* so in this case the subsequent event should be disclosed in a *note to the financial statements*

accounts payable

is used to describe short term obligations arising from the purchase of goods and services in the ordinary course of business, interest bearing obligations are not included in accounts payable, invoices and statements support accounts payable arising from the purchase of goods or services Example: acquisition on credit of merchandise, raw materials, plant assets, and office supplies

subsequent events-chpt 16

refers to an event occurring after the date of the balance sheet but prior to the date of the auditor's report. -FASB divides sub. events into 2 categories 1. those providing additionaL evidence about facts existing on or before the balance sheet date-" recognized subsequent events" 2. Those involving facts coming into existence subsequent to the balance sheet date "non-recognized subsequent events"

audit report date (dual date)

report release date: the date in 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

Assertions- in class

"One of the most important for assertions for assets was existence auditors should be most concerned with existence." " The most important assertions for liabilities is completeness, because people will understate liabilities if they are trying to commit fraud, the other side of understating liabilities is expenses( A/P etc.)

accrued liabilities

(expenses) represent obligations payable sometime during the succeeding period for services or privileges received before the balance sheet date, generally are not evidenced by invoices or statements such as accounts payable Example: interest payable, accrued property taxes, accrued payrolls and payroll taxes, income taxes payable, and amounts accrued under service guarantees

search for unrecorded liabilities/payables examples

Inquire of client about their procedures Scan open purchase order file Examine all UNMATCHED VENDOR STATEMENTS/INVOICES Examine all UNMATCHED RECEIVING REPORTS occurring near year-end Confirm A/P with NORMAL SUPPLIERS (even those with zero balances) Review CASH DISBURSEMENTS occurring after year-end Analytical procedures Test Purchase Cutoff

Types of audit reports with modified opinions

- A qualified opinion - An adverse opinion - A disclaimer of opinion

why is it important to audit inventory?

- Major component of current assets on the sheet - Significant effect on net income - Potential for management fraud - Valuation is usually very subjective Potential obsolescence Goods have not been sold, so marketability may be uncertain

4 review the year end cutoff pf purchases and sales transactions

- an accurate cutoff of purchases is one of the most important factors in verifying the existence and completeness of the year end inventory - Examine the purchase invoices and Receiving Reports and Vendor Sales Invoices occurring around year-end. - Examine bills of lading and sales invoices Agree to inclusion/exclusion from inventory

payroll Audit procedures/plan

1. Perform tests of controls over payroll transactions for selected pay periods, including the following specific procedures:--" understand how system works and make sure that everything is happening as it should" 2. perform analytical procedures to test the reasonableness of payroll expense: for examples, develop an expectation about the amount of payroll expense by multiplying the amount of one pay period by the number of pay periods in year 3. investigate any extraordinary fluctuations in salaries, wages, and commissions 4. obtain or prepare a summary of compensation of officers for the year and compare to contracts, minutes of director's meetings, or other authorization 5. test the period end accrual of payroll expense 6. test computations of compensation earned under profit sharing or bonus plans 7. test commission earnings by examination of contracts and detailed supporting records 8. test pension obligations by reference to authorized pension plans and supporting records.

related balance sheet and income statement accounts

Balance sheet: accounts receivable, notes receivable, securities and other investments, property plant and equipment, intangible assets Revenue/Income items: sales, interest, interest, dividends, gains on sales, share of investee's income, rent, gains on sale, royalties

$$$observation of physical inventory

Determine all items included Employees comply with instructions Be alert for inclusion of obsolete or damages merchandise Record numbers of final receiving and shipping documents issued before taking inventory Make test controls Tag control

Unmodified opinion—standard report

This report may be issued only when the auditors have obtained sufficient appropriate audit evidence to conclude the financial statements are not misstated and there is no need to alter the report by adding an emphasis-of-matter paragraph, an other-matter paragraph or to indicate a group audit situation

Analytical procedures are required as a part of the: a. Procedures performed near the end of the audit. b. Internal control assessment. c. Substantive testing. d. Detailed tests of balances.

a. Procedures performed near the end of the audit.

Perform analytical procedures related to the accounts - a. develop an expectation of the account balance

auditors develop an expectation of the account balance by considering factors such as budgeted amounts, the prior year audited balances, industry averages, relationships among financial data, and relevant non financial data. - effective budgeting reduces the risk of material misstatement, also helps auditors in the audit of expense accounts - comparison of yearly totals and industry data is a good way of bringing to light circumstances that require investigation. - auditors may also examine relationships between financial and non financial information such as between production records stated in gallons or pounds and the dollar amounts of the sale

Unrecorded liabilities are most likely to be found during the review of which of the following documents? a. Unmatched sales invoices. b. Shipping records. c. Unpaid bills. d. Bills of lading.

c. Unpaid bills.

working papers

prepared when observing inventory, they should indicate the extent of test counts, describe any deficiencies noted, and express a conclusion as to whether the physical inventory appear to have been properly taken in accordance with the clients instructions

Rights and Obligations

the company holds rights to the assets and liabilities are the obligation of the company - Management asserts that the company owns the inventory and that it has not pledged it as security

audit objective examples-chpt 12

1. identify inventory transactions involving related parties 2. determine that items counted are included in the inventory listing 3. determine that a proper cutoff of purchases has occurred at year end 4. determine that financial statements include proper disclosures relating to inventory 5. determine that recorded inventory is owned 6. establish the completeness of inventories 7. determine that the cost of inventories is proper

substantive procedures for accounts payable

1. obtain or prepare a trial balance of accounts payable as of the balance sheet date and reconcile with the general ledger 2. vouch balances payable to selected creditors by inspection of supporting documents 3. reconcile liabilities with monthly statements from creditors 4. confirm accounts payable by direct correspondence with vendors 5. perform analytical procedures for accounts payable and related accounts 6. search for unrecorded accounts payable 7. perform procedures to identify accounts payable to related parties 8. evaluate proper balance sheet presentation and disclosure of accounts payable

disclosures when using the dual approach( rollover and iron curtain approach)

Entities that elect to recognize the impact of applying the dual approach by recording a cumulative-effect adjustment would be required to disclose the following for each error being corrected: Nature and amount of each error When and how each error arose The fact that each error had been previously considered immaterial

emphasis-of-matter paragraph

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

Perform tests of controls over payroll transactions for selected pay periods, including the following specific procedures:

a. Compare names and wage or salary rates to records maintained by the human resources department. b. Compare time shown on payroll to time cards and time reports approved by supervisors. c. If payroll is based on piecework rates rather than hourly rates, reconcile earnings with production records. d. Determine basis of deductions from payroll and compare with records of deductions authorized by employees. e. Test extensions and footings of payroll. f. Compare total of payroll with total of payroll checks issued. g. Compare total of payroll with total of labor cost summary prepared by cost accounting department. h. If wages are paid in cash, compare receipts obtained from employees with payroll records. i. If wages are paid by check, compare paid checks with payroll and compare endorsements to signatures on withholding tax exemption certificates. j. If wages are paid by direct deposit, compare listing of employee payments with payroll and direct deposit authorizations. k. Observe the use of time clocks by employees reporting for work and investigate time cards not used.

GAAP departures

auditors sometimes do not agree with the accounting principles used in preparing the financial statements, that is they believe that the financial statements depart from GAAP - they should consider the materiality of the effects of any departure from GAAP to determine the appropriate type of audit report to issue. - when effects of the departures are *immaterial*, an unmodified opinion may be issued - when effects of the departures are *material* the auditors should issue either a qualified opinion or an adverse opinion base on whether the misstatement is considered pervasive -Departure from GAAP Immaterial - unmodified Material - qualified Material and pervasive—Adverse Misstatements become pervasive when any one of the following applies: Not confined to specific accounts. If confined, they represent a substantial proportion of the financial statements. In relation to disclosures, they are fundamental to users' understanding of the financial statements.

Which of the following is the best control procedure to prevent the payment of an invoice twice? a. Requiring dual signatures on checks. b. Review of supporting documentation by the person signing the check. c. Reconciliation of vendor statements to accounts payable. d. Use of a check protector.

b. Review of supporting documentation by the person signing the check.

When financial statements are affected by a material departure from generally accepted accounting principles, the auditors should: a. Withdraw from the engagement. b. Issue an unmodified opinion with a basis for modification paragraph. c. Issue an "except for" qualification or a disclaimer of opinion. d. Issue an "except for" qualification or an adverse opinion.

d. Issue an "except for" qualification or an adverse opinion.

The client's physical count of inventories is lower than the inventory quantities in the perpetual records. This could be the result of a failure to record: a. Purchase discounts. b. Sales discounts. c. Purchases. d. Sales.

d. Sales.

Perform analytical procedures related to the accounts - d. investigate significant deviations from the expected account balance

the starting point for investigating significant variations in expenses generally is inquiry of management. The auditors substantiate management's explanations for significant variations by various means, including analyses

5 obtain a copy of the completed physical inventory, test its clerical accuracy and trace test counts

- auditors should be alert for two sources of substantial errors 1 misplaced decimal points 2 the incorrect extension of count units by price units

approaches to quantify misstatements-rollover approach

- considers only the amount of the misstatement originating in the current year income statement -quantifies a misstatement based on the amount of the error originating in the current-year income statement (or the statement of activities, statement of changes in net assets, or statement of operations). -entities that apply this only consider the impact of errors originating in the current year income statement. Only applying this approach could result in the accumulation of errors in the balance sheet that may be immaterial to a particular income statement, but could misstate one or more balance sheet accounts or cause a material error in the income statement if the error(s) are adjusted in the current year.

approaches to quantify misstatements- Iron curtain approach

- considers the balance sheet effect of correcting the total misstatement existing at the end of the year regardless of when the misstatement originated - quantifies a misstatement based on the effects of correcting the misstatement or misstatements that have accumulated in the balance sheet at the end of the current year.

7 test the pricing of inventories

- determine whether FIFO,LIFO, or weighted average is being used when referencing purchase invoices - test to see if inventory valuation method used by the client has been properly applied - Lower of cost or market test:used to measure any loss of utility in the inventories, it involved comparing recorded cost of inventory items with their replacement cost within the ceiling( net realizable value) and the floor( net realizable minus normal profit.

Unmodified opinion—with an emphasis of matter paragraph.

- follows the opinion paragraph To emphasize a matter appropriately presented in the financial statements (e.g., a change in accounting principles). also may be included at the auditor's discretion ( an uncertainty related to future exceptional litigation, significant transactions with related parties or unusually important subsequent events) - A lack of consistent application of accounting principles results in an emphasis of matter paragraph

Unmodified opinion—with an other matter paragraph.

- follows the opinion paragraph or the emphasis of matter paragraph To emphasize a matter other than those presented or disclosed in the financial statements (e.g., other information in documents containing audited financial statements). - added when financial statements are prepared in accordance with special purpose frameworks - other matter paragraphs used to 1. report on comparative statements when there are predecessor auditors, and 2 alert readers about the intended use of an audit report when it is not for general use

PCAOB audit report... public?

- includes the words "registered in the title - references standars of the PCAOB rather than GAAS - includes less detailed discussions of management and auditor responsibilities - includes an additional paragraph indicating that the auditors have also issued a report on the client's internal control over financial reporting - does not include section headings

$$$3 observe the taking of physical inventory and make test counts

- it is the auditors responsibility to attend the physical inventory counting by the client -inspect the inventory to determine its EXISTENCE and to evaluate its condition and make test counts - observe compliance with managements instructions for the count - obtain audit evidence about the reliability of the count procedures. - dust/rust on inventory can indicate that it is obsolete and should be separated during the count - auditors record the serial number of the final receiving and shipping documents issued before taking of inventory so the accuracy of the cutoff can be later determined -tags protect from missing goods in a count, or double counting, if auditor discovers discrepancies the goods are recounted and the error is corrected - are all goods owned by the client or are some goods being held under consignment -working papers

8 perform analytical procedures

- material misstatements of inventory may be disclosed by analytical procedures designed to establish the general reasonableness of inventory figures.- example major increases /decreases in the amounts of different types of inventory compared to the prior year may be investigated - another useful test is the computation of rates of inventory turnover based on the relationship between the COGS for the year and the average inventory as shown on the monthly financial statements. - decreasing rate of turnover suggests the possibility of obsolescence or of unnecessarily large amounts of inventories - auditors should make a comparison of the volume of purchase transactions from period to period - using non financial information can be effective like observing the amount of inventory a client has stored in a number of warehouses.

10 evaluate financial statement presentation of inventories and COGS to the primary audit objectives

- the auditors will review the clients disclosures of such matters to determine whether they comply with GAAP

ASB nonpublic client audit report

- title includes the word independent - its addressed to those for whom it is prepared - after the introductory paragraph the report is divided into sections with headings - managements responsibility for the financial statement - auditors responsibility -opinion

9 determine whether any inventories have been pledged and review purchase and sales commitments

- verification of inventories includes a determination by the auditors as to whether any goods have been pledged or subjected to a lien of any kind - pledging inventories to secure bank loans may be brought to light

2 types of subsequent events

---Type 1. The first type of subsequent event provides additional evidence as to conditions that existed *AT* the date of the financial statements. This type of subsequent event requires that financial statement amounts be adjusted to reflect the changes in estimates resulting from the additional evidence.examples of type one on page 645(= ---Type 2. The second type of subsequent event involves conditions that arose *AFTER* the date of the financial statements. These events do not require adjustment to the dollar amounts shown in the financial statements, but they should be disclosed in the financial statement notes if the statements otherwise would be misleading.examples on page 645

Financial Statement Assertions

-Existence and Occurrence -Rights and Obligations -Completeness -Cutoff -Valuation, allocation, accuracy -Presentation and disclosure

Audit objective #3 Assess the risks of material misstatement and design further audit procedures.(financial statement assertions!)

-Find existence of inventories and the occurrence of transactions affecting COGS -Establish the completeness of recorded inventories -Verify the cutoff of transactions affecting COGS -Determine that the client has rights to the recorded inventories -Establish the proper valuation of inventories and the accuracy of transactions affecting COGS -Determine that the presentation and disclosure of the classification of inventories, accounting methods used, and inventories pledged as collateral for debt

When are Subsequent Events Identified?-timing chapter 16

-Prior to audit completion date -Perform audit procedures and ensure proper disclosure -Following audit completion date but prior to audit report release date -Dual date audit report -Following audit report release date -"Subsequent discovery of facts"4

search for unrecorded liabilities/ accounts payable-*assertions and timing*

-audit steps: reconciliation, confirmation, and analytical procedures may disclose unrecorded liabilities. -examine selected cash disbursements in the period subsequent to year end Examples include unrecorded liabilities related to customers deposits recorded as credits to accounts receivable, obligation for securities purchased but not settled at the balance sheet date, un-billed contractor or architect fees for a building under construction at the audit date, and unpaid attorney or insurance broker fees - auditors will examine transactions that were *recorded following year end*. - a comparison of cash payments occurring after the balance sheet date with accounts payable trial balance is generally the most effective means of disclosing unrecorded accounts - assertions: Cutoff and Completion -examples on page 584

2 Evaluate the clients planning of physical inventory

-client should develop a plan which may include selecting the best dates, stopping production in certain departments, separating obsolete/defective goods,establish control over counting process, establish proper cutoff of sales and other transactions, make it easy for engineers and other specialists to determine the quantity and quality of goods. - after the plan is made it should be documented and communicated with written instructions to the personnel taking inventory and reviewed by the auditor - if the client plans to use a statistical sampling technique to estimate quantities of inventory then the auditor will evaluate the statistical validity of the sampling method and estimate the sampling risk. - when observing multiple inventory locations it is important that the auditor does not reveal which locations and inventories - auditors should rely on the advise of the specialists

loss contingency should be recorded in the accounting records when- according to FASB

1 information indicates that it is *probable* that a loss has been sustained before the balance sheet date 2. the amount of the loss can be *reasonably estimated* -Loss contingency should be disclosed in the notes to the financial statements when it is at least reasonable possible that a loss has been sustained, then it must be disclosed in the statements

$$$Substantive Tests/Procedures for inventories and cost of goods sold... 10

1 obtain listings of inventory and reconcile to ledgers 2 Evaluate the clients planning of physical inventory 3 observe the taking of physical inventory and make test counts 4 review the year end cutoff pf purchases and sales transactions 5 obtain a copy of the completed physical inventory, test its clerical accuacy and trace test counts 6 evaluate the bases and methods of inventory pricing 7 test the pricing of inventories 8 perform analytical procedures 9 determine whether any inventories have been pledged and review purchase and sales commitments 10 evaluate financial statement presentation of inventories and COGS to the primary audit objectives

Audit Objectives

1. Use the understanding of the client and its environment to consider inherent risks, including fraud risks, related to inventories and cost of goods sold. 2. Obtain an understanding of internal control over inventories and cost of goods sold. 3. Assess the risks of material misstatement and design further audit procedures.(financial statement assertions!)

when dealing with loss contingencies auditors should

1. determine the existence of the loss contingencies. Because of the uncertainty factor, most loss contingencies don't appear in the accounting records, and a systematic search is required if the auditors are to have reasonable assurance that no important loss contingencies have been overlooked 2. auditors should appraise the probability that a loss has been incurred and its amount

Types of Reports with Modified Opinions A disclaimer of opinion

A disclaimer of opinion means that due to a significant scope limitation, the auditors were unable to form an opinion or did not form an opinion on the financial statements.

Types of Reports with Modified Opinions A qualified opinion

A qualified opinion states that the financial statements are presented fairly in conformity with generally accepted accounting principles "except for" the effects of some matter. - Qualified opinions are issued when the financial statements are materially misstated or when the auditors are unable to obtain sufficient appropriate audit evidence on which to base the opinion

review of the working papers

AICPA AU-C 300 states that the work performed by each assistant should be reviewed to determine whether it was adequately performed and documented and to evaluate the results, relative to the conclusions to be presented in the auditors report- this review of the work of the audit staff is primarily accomplished through a review of the audit working papers -seniors on audit engagements typically perform their review of the audit workings papers as the papers are completed. - while audit partners and managers will generally communicate with seniors an other staff members throughout the audit, their review of the working papers generally is not completed until near or after completion of field work.

Types of Reports with Modified Opinions . An adverse opinion.

An adverse opinion states that the financial statements are not presented fairly in conformity with generally accepted accounting principles. has a material misstatement and is also pervasive

primary concern in auditing the income statement https://quizlet.com/111251891/auditing-chapter-16-flash-cards/

Overstatement of Revenues and Net Income, and understatement of Expenses

Analytical procedures related to the accounts chpt 16

Perform analytical procedures related to the accounts - a. develop an expectation of the account balance - b. determine the amount of difference from the expectation that can be accepted without investigation - c. compare the company's account balance with the expected account balance - d. investigate significant deviations from the expected account balance

Going concern

Requirements - Auditor not required to perform procedures specifically designed to test going-concern assumption but must evaluate the assumption - Conditions - Negative cash flows from operations - Defaults on loan agreements - Adverse financial ratios - Work stoppages - Legal proceedings

The Dual Approach The dual approach requires entities to apply both of the following approaches as a basis for evaluating the materiality of misstatements in current-year financial statements:

Rollover approach—quantifies a misstatement based on the amount of the error originating in the current-year income statement (or the statement of activities, statement of changes in net assets, or statement of operations). Iron curtain approach—quantifies a misstatement based on the effects of correcting the misstatement or misstatements that have accumulated in the balance sheet at the end of the current year.

evaluating materiality- approaches to quantify misstatements

Rollover method considers the current period income effect(s) of misstatements Iron curtain method considers the aggregate effect of the adjustments on the entity's balance sheet SAB 108 requires adjustments to be proposed if material under either approach

letter of inquiry

a letter sent by the auditors to a clients 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 lawyers letter. - letter should include a list of certain unasserted claims on which individuals or organizations have not yet taken legal action against the company - an asserted claim should be on the list if the legal councel has devoted substantive attention to it and if it is 1. *probable* that a claim will be asserted and 2. *reasonably possible* that a loss will result.

unasserted claim

a possible legal claim of which no potential claimant has exhibited an awareness -an asserted claim should be on the list if the legal councel has devoted substantive attention to it and if it is 1. *probable* that a claim will be asserted and 2. *reasonably possible* that a loss will result.

loss contingency

a possible loss, stemming from past events that will be resolved as to existence and amount by some future event, possible impairment of assets as well as the possible existence of liabilites - may also be called contingent liabilities

An audit client has refused to allow the auditors to perform a presumptively mandatory auditing procedure and there are no other effective alternate procedures available. The circumstance would normally result in the issuance of: a. A disclaimer of opinion. b. An unmodified report with an emphasis-of-matter paragraph. c. A standard unmodified opinion with a qualified scope paragraph. d. An adverse opinion.

a. A disclaimer of opinion.

Purchase cutoff procedures should be designed to test that merchandise is included in the inventory of the client company, if the company: a. Holds legal title to the merchandise. b. Holds the shipping documents for the merchandise issued in the company's name. c. Has physical possession of the merchandise. d. Has paid for the merchandise.

a. Holds legal title to the merchandise.

Which of the following best describes the auditors' approach to the audit of accrued liabilities? a. Test computations. b. Confirmation. c. A low planned assessed level of control risk. d. Observation.

a. Test computations.

A company oil tanker recently spilled a large amount of oil in a pristine fishing area. No lawsuits have yet been filed. What is the audit issue? a. Unasserted claim. b. Account payable. c. Valuation of oil & gas holdings. d. General risk contingency.

a. Unasserted claim.

An independent auditor has concluded that substantial doubt remains about a client's ability to continue as a going concern, but the client's financial statements have properly disclosed all of its solvency problems. The auditor would probably issue a(an): a. Unmodified opinion with an appropriate emphasis-of-matter paragraph. b. Standard unmodified opinion. c. "Except for" qualified opinion. d. Adverse opinion.

a. Unmodified opinion with an appropriate emphasis-of-matter paragraph.

substantive procedure examples-chpt 12

a. review minutes of board of directors meetings and contracts, and make inquiries of management b. test inventory transactions between a preliminary physical inventory date and the balance sheet date c. obtain confirmation of inventories pledged under loan agreement d. review perpetual inventory records, production records, and purchasing records for indication of current activity e. reconcile physical counts to perpetual records and general ledger balances and investigate significant fluctuation f. examine sales after year end and open purchase order commitments g. examine paid vendors invoices, consignment agreements, and contracts h. analytically review and compare the relationship of inventory balance to recent purchasing, production, and sales activity

According to the new PCAOB standard on auditor's reports, all of the following are changes to the auditor's report on public companies except a. the opinion paragraph is at the end of the report. b. auditor tenure must be stated on the report. c. a statement that the auditor is required to be independent must be included. d. communication of critical audit matters (CAMs) is required beginning in 2019 for large companies.

a. the opinion paragraph is at the end of the report.

Presentation and disclosure

accounts described and classified in accordance with GAAP and financial statement disclosures are complete, appropriate, and clearly expressed. audit objectives - Management asserts that inventory is properly reported using an appropriate method and at lower of cost or market.

Completeness

all assets, liabilities, equity interests, and transactions that should have been recorded have actually been recorded - Management asserts that amounts reported as inventory are properly classified and pertinent info is disclosed

Existence and Occurrence

assets, liabilities, equity interests exist and recorded transactions and events have occured - Management asserts that all inventory reported in the financial statements actually exists

Perform analytical procedures related to the accounts - b. determine the amount of difference from the expectation that can be accepted without investigation

auditors use their estimates of materiality to arrive at which differences are to be investigated and which might be expected to occur by chance. However, the extent of the assurance desired from the analytical procedure should also be considered

Perform analytical procedures related to the accounts - c. compare the company's account balance with the expected account balance

comparisons of the revenue and expense accounts with expected amounts may reveal significant differences that warrant investigation

Accounts payable confirmations-not a standard procedure

confirmation is the greatest risk in the audit or liabilities is the possibility of unrecorded amounts. while confirmation can provide evidence about completeness, it is a more effective procedure for establishing existence and valuation of an item. - auditors will often use a blank form that asks the vendor to fill in the amount of the liability rather than to confirm the amount recorded - A/P confirmation requests should be sent to vendors from whom substantial purchases have been made during the year,regardless the account balance at the balance sheet date - identify vendors/suppliers by referencing cash disbursement records, inquiry of purchasing, examination of the a/p subsidiary ledger

Which of the following is not a procedure normally performed while completing the audit of a public company? a. Perform an overall review using analytical procedures. b. Obtain a representations letter. c. Obtain a lawyer's letter. d. Confirm directly with shareholders the total capital stock held by each.

d. Confirm directly with shareholders the total capital stock held by each.

CPA Firm A has performed most of the audit of Consolidated Company's financial statements and qualifies as the group auditor. CPA Firm B did the remainder of the work. Firm A wishes to assume full responsibility for Firm B's work. Which of the following statements is correct? a. In such circumstances, when appropriate requirements have been met, Firm A should issue an unmodified opinion on the financial statements but should make appropriate reference to Firm B in the audit report. b. CPA firm A should normally qualify its audit report on the basis of the scope limitation involved when another CPA firm is involved. c. Such assumption of responsibility violates the profession's standards. d. In such circumstances, when appropriate requirements have been met, Firm A should issue a standard unmodified opinion on the financial statements.

d. In such circumstances, when appropriate requirements have been met, Firm A should issue a standard unmodified opinion on the financial statements.

Which of the following is an example of an accrued liability? a. Prepaid insurance. b. Notes payable. c. Accounts payable. d. Product warranty liability.

d. Product warranty liability.

1 obtain listings of inventory and reconcile to edgers

goal is to make sure the inventory records agree with what is recorded in the financial statements

https://quizlet.com/167158667/chapter-16-17-audit-flash-cards/

objective questions chapter 16 &17

GAAS departures- scope limitation ( unable to perform standard audit procedures)

two basic reporting alternatives 1. make reference to the component auditors: when auditors reference the work performed by the component auditors, they are in essence divided responsibility for the engagement among the group. this type is often called a *shared responsibility opinion* 2. make no reference to the component auditors: if there is no reference made by the group auditors, then they are assuming full responsibility for the entire audit, this approach is followed wen the component auditors are well known or when the group auditors hired the component auditors - group auditors are never forced to rely on the work of the component auditors they can insist upon personally auditing any aspect of the clients operations, if the client is unwilling to permit them to do so, the auditors may regard this as a scope limitation and depending on the materiality, issue a qualified report or a disclaimer opinion