Auditing final exam

If a CPA recklessly departs from the standards of due care when conducting an audit, the CPA will be liable to third parties who are unknown to the CPA based on: A. criminal deceit B. strict liability C. ordinary negligence D. gross negligence

Gross negligence

Form of Attestation - Examination

Level of assurance- high risk of material misstatement- low nature of assurance in report- "in our opinion..." procedures- select from all available procedures any combination that can limit attestation risk to a low level

subsequent event - a lawsuit that was begun a year ago is settled

financial statement impact - adjust the financial statements

subsequent event - a major customer of the company is lost

financial statement impact - none

subsequent event - an employee strike is called

financial statement impact - none

subsequent event - a plant of the company is destroyed by fire

financial statement impact - the event should be disclosed

subsequent event - a significant decline in the value of inventories occurs

financial statement impact - the event should be disclosed

subsequent event - a new subsidiary is purchased

financial statement report - the event should be disclosed

Forms of Attestation

- Examination - Review - Agreed upon procedures

Perpetual inventory system

-a method of accounting for inventories in which controlling accounts and subsidiary ledgers are maintained to record receipts and issuance of goods, both in quantities and in dollar amount. -the accuracy of perpetual inventory records is tested PERIODICALLY by physical inventories. -basically this system records transactions as they happen to keep up with inventory and periodically it is tested. -a well kept perpetual inventory system, along with strong internal control, allows auditors/clients to complete inventory before the balance sheet date.

Auditors may be restricted from holding an investment in a client. This violates which ethical rule? A. independence B. objectivity C. noncompliance with GAAP D. form of organization

A. Independance

which of the following best describes the reason why independent auditors report on financial statements? A. an audit provides credibility to the financial statements. B. a management fraud may exist and it is more likely to be detected by independent auditors C. a misstatement of account balances may exist and is generally corrected as the result of the Independent auditors work.

A. an audit provides credibility to the financial statements.

From which of the following evidence gathering audit procedures would an auditor obtain most assurance concerning the existence of inventories? A. observation of physical inventory counts B. written inventory representations from management C. confirmation of inventories held in a company warehouse in a foreign country. D. auditors recomputation of inventory extensions

A. observation of physical inventory counts.

a client's physical count of inventories was lower than the inventory quantities shown in its perpetual records. this decision could be the result of the failure to record: A. sales B. sales returns C. purchases D. purchase discounts

A. sales

Cooper, CPA, is auditing the financial statements of a small rural municipality. the receivable balances represent residents delinquent real estate taxes. internal control at the municipality is weak. to determine the existence of the accounts receivable balances at the balance sheet date, cooper would most likely: A. send positive confirmation requests B. send negative confirmation requests C. examine evidence of subsequent cash receipts.

A. send positive confirmation requests.

Instead of taking a physical inventory count on the balance-sheet date, the client may take physical counts prior to the year-end if internal control is adequate and: A. well-kept records of perpetual inventory are maintained B. inventory is slow-moving C. computer error reports are generated for missing pre numbered inventory tickets. D. obsolete inventory items are segregated and excluded

A. well-kept records of perpetual inventory are maintained

CPAs should not be liable to any party if they perform their services with: A. good diligence B. due professional care

B. due professional care

The physical objective of a CPAs observation of a client's physical inventory count is to: A. discover whether a client has counted a particular inventory item or group of items B. obtain direct knowledge that the inventory exists and has been properly counted. C. provide an appraisal of the quality of the merchandise on hand on the day of the physical count. D. allow the auditor to supervise the conduct of the count in order to obtain assurance that inventory quantities are reasonably accurate.

B. obtain direct knowledge that the inventory exists and has been properly counted.

Subsequent Events

events occurring between the date of the financial statements and the date of the auditor's report

Form of Attestation - Review

level of assurance provided- moderate risk of material misstatement- moderate nature of assurance in report- "we are not aware of any material modifications that should be made..." procedures- generally limited to inquiry and analytical procedures

form of attestation- agreed-upon procedures

level of assurance provided- summary of findings risk of material misstatement- varies by specific engagement nature of assurance in report- includes a summary of procedures followed and findings. procedures- procedures agreed upon with the specified user or users

What's the assertion you satisfy when you do a physical inventory observation?

physical inventory observation: -observation is the technique of viewing a client activity to obtain evidence of performance. -observation should be planned so that employees are not aware of the exact nature all items that are test counted by the auditors or all locations that will be audited. -observation of inventory confirms existence of assets and provides some assurance as to the completeness. -auditor should make test counts