Auditing Principles Unit 3 Study Guide
WHAT ARE THE ASSERTION FOR CONFIRMATIONS OF AR AND AP
AR = EXISTENCE AP = COMPLETENESS
The biggest concern for an auditor concerning AP is...
understating liabilities
Which of the following is most likely to be considered a Type 1 subsequent event? Ch 16 HW
Customer checks deposited prior to year-end, but determined to be uncollectible after year-end.
What is the Assertion? Vouch the cash disbursements to the vendor invoice to confirm the payable has been recorded within the proper period.
Cutoff
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: Ch 16 HW
February 10, 20X9
Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because: Ch 14 HW
There is likely to be other reliable external evidence available to support the balances
_________ assets can be audited at an interim date. Fill in the Blank Ch 13 HW
Intangible
When a second partner review of an audit engagement is to be performed, it should occur prior to issuance of the audit report. T or F Ch 16 HW
True
What is the Assertion? Recalculate depreciation expense using a straight line calculation for all items to ensure recognition is calculated properly.
Valuation
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? Ch 13 HW
Valuation and allocation
What is the Assertion? Obtain a copy of the P,P&E Rollforward and clerically test the rollforward for mathematical accuracy.
Accuracy
The auditors' approach to the audit of property, plant, and equipment largely results from the fact that many transactions occur. T or F Ch 13 HW
False
The auditors' principal objective in analyzing depreciation expense is to discover items that should have been capitalized. T or F Ch 13 HW
False
The representations letter from management should be dated and signed on the balance sheet date. T or F Ch 16 HW
False
Which of the following types of matters do not generally require disclosure in the financial statements? A.General risk contingencies. B.Commitments. C.Loss contingencies. D.Liabilities to related parties.
General risk contingencies.
Identify the correct statement regarding analytical procedures used in a final review conducted at the conclusion of an audit. Ch 16 HW
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.
Which of the following procedures is most likely to be included near completion of an audit? Ch 16 HW
Perform analytical procedures.
Which of the following circumstances generally results in the issuance of a report that includes an opinion that is other than unmodified? A.The auditor is unable to obtain sufficient appropriate audit evidence. B.The group auditors for the engagement are relying on the work of component auditors. C.The financial statements are affected by a change in accounting principle due to a new FASB pronouncement. D.The auditors have decided to emphasize the fact that the company has engaged in material amounts of related party transactions.
The auditor is unable to obtain sufficient appropriate audit evidence.
Communicating which of the following to the audit committee is not typically required of an auditor? Ch 16 HW
The auditor's judgment of management integrity.
Management's written representations should be in the form of a letter addressed to: Ch 16 HW
The auditor.
If audited financial statements include a balance sheet and an income statement, but do not include a statement of cash flows: A.The auditors may still issue an unmodified opinion. B.The auditors should issue a qualified report for the departure from generally accepted accounting principles. C.The auditors should issue a qualified report indicating a scope limitation in that no statement of cash flows is presented. D.The auditors should disclaim an opinion on the overall financial statements.
The auditors should issue a qualified report for the departure from generally accepted accounting principles.
Which of the following would most likely be an appropriate addressee for an audit report? A.The shareholders of the corporation whose financial statements were examined. B.A third party who requested that a copy of the audit report be sent to her. C.The president of the corporation whose financial statements were examined. D.The chief financial officer.
The shareholders of the corporation whose financial statements were examined.
Which statement is correct with respect to accounts payable confirmations? A. The negative form is used in most circumstances. B. Accounts with new suppliers are always confirmed. C. They are a required auditing procedure. D. They are more frequently used in situations in which some vendors don't send monthly statements.
They are more frequently used in situations in which some vendors don't send monthly statements.
For the audit of a continuing nonpublic client, the emphasis of the testing for property accounts is on: Ch 13 HW
Transactions that occurred during the year.
A company's receiving department should be independent of its purchasing department. T or F Ch 14 HW
True
Amounts included in the statement of cash flows are audited in conjunction with the audit of balance sheet and income statement accounts. T or F Ch 16 HW
True
An important control for plant and equipment is the plant and equipment budget T or F Ch 13 HW
True
Auditors may discover unrecorded liabilities by reconciling vendors' statements with the accounts payable trial balance. T or F Ch 14 HW
True
Auditors often confirm vendors' accounts with zero balances at year-end. T or F Ch 14 HW
True
In the audit of depletion the auditors must often rely on the work of specialists. T or F Ch 13 HW
True
In the audit of financial statements, the auditors are particularly concerned with possible understatement of liabilities and the possible overstatement of revenues. T or F Ch 14 HW
True
Material purchases of assets from an affiliated company should be disclosed in the financial statements. T or F Ch 13 HW
True
Review of a client's cash payments subsequent to the balance sheet date is an important test of the completeness of recorded parables. T or F Ch 14 HW
True
The auditors perform an analysis of professional fees in part to determine that they have considered obtaining a lawyer's letter from all attorneys that are handling litigation for the client. T or F Ch 16 HW
True
The auditors typically vouch major additions to plant and equipment recorded during the period under audit. T or F Ch 13 HW
True
Unrecorded liabilities are most likely to be found during the review of which of the following documents? Ch 14 HW
Unpaid Bills
Which of the following is not a test primarily used to test property, plant and equipment accounts for overstatement? A. Investigation of reductions in insurance coverage. B. Review of property tax bills. C. Examination of retirement work orders prepared during the year. D. Vouching retirements of plant and equipment.
Vouching retirements of plant and equipment.
When property is tested at an interim date, audits must roll forward procedures to the ______ date. Fill in the Blank Ch 13 HW
Year-end
Which of the following best describes the specific accounts payable that are selected for confirmation? A.Accounts with large balances. B.Accounts with zero balances. C.Accounts with a large amount of activity regardless of their balance. D.Accounts for which vendor statements are available.
Accounts with a large amount of activity regardless of their balance.
What is the Assertion? Clerically test the addition detail for mathematical accuracy.
Accuracy
What is the Assertion? Clerically test the depreciation schedule for mathematical accuracy.
Accuracy
What is the Assertion? Clerically test the detail for mathematical accuracy of the Cash Disbursements detail.
Accuracy
What is the Assertion? Clerically test the disposal detail for mathematical accuracy.
Accuracy
Most of the audit work on accounts payable is typically performed: A.Before the balance sheet date. B.At the balance sheet date in conjunction with inventory cutoff tests. C.After the balance sheet date. D.Simultaneously with the audit of accrued liabilities.
After the balance sheet date.
If, after issuing an audit report, the auditors find that they have failed to perform certain significant audit procedures they should first: A.Attempt to determine whether their report is still being relied upon by third parties. B.Notify regulatory agencies. C.Notify legal counsel. D.Wait until the beginning of the next year's audit to determine whether misstatements have occurred.
Attempt to determine whether their report is still being relied upon by third parties.
Most of the work on property can be done _______the balance sheet date. Fill in the Blank Ch 13 HW
Before
In a first year audit, auditors must get comfortable with the _____balances in property. Fill in the Blank Ch 13 HW
Beginning
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: A. Purchase orders. B. Canceled checks. C. Receiving reports. D. Approved vouchers.
Canceled checks.
When auditing the statement of cash flows, which of the following would an auditor not expect to be a source of receipts and payments? Ch 16 HW
Capitalization.
Ordinarily, the most significant assertion relating to accounts payable is: Ch 14 HW
Completeness
The assertion most directly addressed when performing the search for unrecorded liabilities is: A. Completeness. B. Existence. C. Presentation. D. Rights.
Completeness
What is the Assertion? Agree the total "Amount Due" balance on AP Ledger to the Trial Balance
Completeness
What is the Assertion? Agree the total "accumulated depreciation" balance on the disposal detail to the ending accumulated depreciation balance on the Rollforward
Completeness
The search for unrecorded liabilities for a public company includes procedures usually performed through the: Ch 16 HW
Date of the auditors' report.
While testing property at an interim date, ______ can be tested in coordination with property. Fill in the Blank Ch 13 HW
Depreciation
An audit of the balance in the accounts payable account is ordinarily not designed to: Ch 14 HW
Detect accounts payable that are substantially past due
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: Ch 16 HW
Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.
Which of the following procedures would an auditor most likely perform while evaluating audit findings at the conclusion of an audit? A.Obtain assurance from the entity's attorney that all material litigation has been disclosed in the financial statements. B.Verify the clerical accuracy of the entity's proof of cash and its bank cutoff statement. C.Determine whether reportable conditions have been corrected. D.Develop an estimate of the total likely misstatement in the financial statements.
Develop an estimate of the total likely misstatement in the financial statements.
Which of the following is not one of the auditors' objectives in auditing depreciation? A. Establishing the reasonableness of the client's replacement policy. B. Establishing that the methods used are appropriate. C. Establishing that the methods are consistently applied. D. Establishing the reasonableness of depreciation computations.
Establishing the reasonableness of the client's replacement policy.
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? Ch 14 HW
Existence
To strengthen internal control over the custody of heavy mobile equipment, the client would most likely institute a policy requiring a periodic: Ch 13 HW
Inspection of equipment and reconciliation with accounting records.
Which of the following explanations most likely would satisfy an auditor who questions management about significant debits to the accumulated depreciation accounts? Ch 13 HW
Plant assets were retired during the year.
Which of the following procedures is least likely to be completed before the balance sheet date? Ch 14 HW
Search for unrecorded liabilities
An effective procedure for identifying unrecorded retirements of equipment is to: Ch 13 HW
Select items of equipment in the accounting records and then locate them in the plant.
Which of the following events occurring on January 5, 20X2, is most likely to result in an adjusting entry to the 20X1 financial statements? Ch 16 HW
Settlement of litigation.
The auditors' search for unrecorded liabilities is completed: Ch 14 HW
Subsequent to the balance sheet date.
Which of the following best describes the auditors' approach to the audit of accrued liabilities? A.Test computations. B.Confirmation. C.Observation. D.A low planned assessed level of control risk.
Test computations.
Auditors must communicate internal control "significant deficiencies" to: A.The audit committee. B.The shareholders. C.The SEC. D.The Federal Trade Commission.
The audit committee.
Which of the following best describes the auditors' typical observation of plant and equipment? A. The auditors observe a physical inventory of plant and equipment, annually. B. The auditors observe all additions to plant and equipment made during the year. C. The auditors observe all major plant and equipment items in the clients' accounts each year. D. The auditors observe major additions to plant and equipment made during the year.
The auditors observe major additions to plant and equipment made during the year.
Operating control over check signing normally should be the responsibility of the: Ch 14 HW
Treasurer
To achieve effective internal control over fixed-asset additions, a company should establish procedures that require: Ch 13 HW
authorization and approval of major fixed asset additions
When auditing AP we want to make sure:
every account is complete all transaction are recorded
A normal audit procedure is to analyze the current year repairs and maintenance accounts to provide evidence in support of the audit proposition that: Ch 13 HW
expenditures for fixed assets have been capitalized
WHAT ARE THE DIFFERENCE IN COMFIRMATIONS FOR AP VS AR?
o AR DOCUMENTS ARE MADE INTERNALLY, SO WE VOUCH WITH 3RD PARTY (CUSTOMER) o AP DOCUMENTS (INVOICES) ARE MADE BY THE VENDOR (3RD PARTY)
ASSERTION: WAS EVERYTHING RECORDED
COMPLETENESS
WHAT IS THE ASSERTION? Vouching transactions from the sub-ledger to invoices and monthly statements
COMPLETENESS
WHAT ARE WE TESTING IN SEARCH FOR UNRECORDED LIABILITIES
COMPLETENESS AND CUTOFF
ASSERTION: WAS IT RECORDED IN THE RIGHT YEAR?
CUTOFF
What is the Assertion? Agree the total "depreciation expense" balance on the addition detail to the ending accumulated depreciation balance on the Rollforward
Completeness
What is the Assertion? Agree the total "depreciation expense" balance on the depreciation schedule to the ending "additions accumulated depreciation" balance on the Rollforward
Completeness
What is the Assertion? Agree the total "purchase price" balance on the addition detail to the ending addition balance on the PP&E Rollforward
Completeness
When confirming accounts payable, the approach is most likely to be one of: Ch 14 HW
selecting the accounts of companies with whom the client has previously done the most business plus a sample of other accounts.
What is the Assertion? Agree the total balance on the disposal detail to the ending disposal balance on the Rollforward
Completeness
What is the Assertion? Agree the total cost balance on the depreciation schedule to the ending additions balance on the Rollforward
Completeness
What is the Assertion? For each cash disbursement, verify that the balance is noted on the AP Listing by agreeing each balance to AP Ledger
Completeness
What is the Assertion? Obtain a copy of the P,P&E Rollforward and agree ending balances to the current year trial balance.
Completeness
What is the most important AP assertion?
Completeness
Which of the following is not a procedure that is designed to provide evidence about the existence of loss contingencies? A.Obtaining a lawyers' letter. B.Confirming accounts payable. C.Reviewing the minutes of board of directors' meetings. D.Review correspondence with banks.
Confirming accounts payable.
When an auditor has concluded there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time beyond the current financial statement date (9/30/X1), the auditor's responsibility includes: A.Preparing prospective financial information to verify whether management's plans can be effectively implemented. B.Projecting conditions and events from one year prior to this year's date (9/30/X0) to 9/30/X1. C.Issuing an adverse or negative assurance opinion, depending upon materiality, due to the possible effects on the financial statements. D.Considering the adequacy of disclosure about the entity's possible inability to continue as a going concern.
Considering the adequacy of disclosure about the entity's possible inability to continue as a going concern.
Which of the following is the best audit procedure for determining the existence of unrecorded liabilities? Ch 14 HW
Examine selected cash disbursements in the period subsequent to year-end.
What is the Assertion? For each disposal, vouch the disposal to the wire payment confirmation
Existence
What is the Assertion? Vouch the selected additions to the vendor invoice and payment (check register) to confirm proper existence and recording (use provided tick mark)
Existence
Which of the following is not a procedure normally performed while completing the audit of a public company? A.Obtain a lawyer's letter. B.Obtain a representations letter. C.Perform an overall review using analytical procedures. D.Confirm directly with shareholders the total capital stock held by each.
Confirm directly with shareholders the total capital stock held by each.
Which of the following best describes the independent auditors' approach to obtaining satisfaction concerning depreciation expense in the income statement? A. Verify the mathematical accuracy of the amounts charged to income as a result of depreciation expense. B. Determine the method for computing depreciation expense and ascertain that is in accordance with generally accepted accounting principles. C. Reconcile the amount of depreciation expense to those amounts credited to accumulated depreciation accounts. D. Establish the basis for depreciable assets and verify the depreciation expense.
Establish the basis for depreciable assets and verify the depreciation expense.
Which of the following tests of controls most likely would help assure an auditor that goods shipped are properly billed? A. Scan the sales journal for sequential and unusual entries. B. Examine shipping documents for matching sales invoices. C. Compare the accounts receivable ledger to daily sales summaries. D. Inspect unused sales invoices for consecutive prenumbering.
Examine shipping documents for matching sales invoices.
Which of the following modifications of the auditors' report does not include an additional paragraph? A.The report is qualified because the financial statements contain a material departure from generally accepted accounting principles. B.The report includes an emphasis of a matter. C.The audit report indicates a division of responsibility between two CPA firms. D.The report is qualified because the scope of the auditors' work was limited.
The audit report indicates a division of responsibility between two CPA firms.
Dual-dating of an audit report occurs when the auditors are not able to complete an audit engagement as of a particular date and should return to complete the audit work on a later date. T or F Ch 16 HW
False
The audit procedure of confirmation by direct communication is just as important for accounts payable as it is for accounts receivable. T or F Ch 14 HW
False
Which of the following audit procedures is aimed most directly at testing the completeness assertion for accounts payable? A.Footing the list of accounts payable. B.Examining underlying documentation for cash disbursements in the period after year-end. C.Tracing shipping reports issued on or before year-end to related customer purchase orders and invoices. D.Tracing shipping reports after year-end to related customer purchase orders and invoices.
Examining underlying documentation for cash disbursements in the period after year-end.
In testing plant and equipment balances, an auditor may select recorded additions in the analysis of plant and equipment and inspect the actual asset(s) involved. Which management assertion is this procedure most directly related to? Ch 13 HW
Existence.
WHAT ARE THE STEPS OF A SEARCH FOR UNRECORDED LIABILITIES?
FIRST THING IS TO ASK FOR A CASH DISBURSEMENT RECORD SELECT A SAMPLE FROM THE CASH FLOW COLLECT INVOICES AND DETERMINE WHAT THE CASH DISBURSEMENT WAS FOR WAS IS RECORDED IN THE RIGHT YEAR? WAS EVERYTHING RECORDED?
Better evidence of continuing ownership of property is provided by examination of the deed. T or F Ch 13 HW
False
To determine that each voucher is submitted and paid only once, when a payment is approved, supporting documents should be canceled by the: Ch 14 HW
Individual who signs the checks
When an auditor of financial statements has substantial doubt about an entity's ability to continue as a going concern, the auditor most likely would express a qualified opinion if: A.The effects of the adverse financial conditions are likely to be negative. B.Information about the entity's ability to continue as a going concern is not disclosed in the financial statements. C.Management has no plans to reduce or delay future expenditures. D.Negative trends and recurring operating losses appear to be irreversible.
Information about the entity's ability to continue as a going concern is not disclosed in the financial statements.
Which of the following procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern? A.Performing cutoff tests of sales transactions with customers with long-standing receivable balances. B.Evaluating the entity's procedures for identifying and recording related party transactions. C.Inspecting title documents to verify whether any real property is pledged as collateral. D.Inquiring of the entity's legal counsel about litigation, claims, and assessments.
Inquiring of the entity's legal counsel about litigation, claims, and assessments.
A basis for a modification paragraph in the audit of the financial statements of a nonpublic company: A.Is only included with qualified, adverse, or disclaimers of opinion. B.Is presented after the opinion paragraph. C.Has a section title: Emphasis-of-Matter. D.Must be included in all nonpublic company audit reports.
Is only included with qualified, adverse, or disclaimers of opinion.
When an auditor does not confirm material accounts receivable, but is satisfied by the application of alternative auditing procedures, she normally should: A.Issue an unmodified opinion, but disclose elsewhere in the report this departure from a customary procedure. B.Issue an unmodified opinion with no reference to this omission. C.Issue a qualified opinion or a disclaimer, depending on the materiality of the receivables. D.Issue an adverse opinion.
Issue an unmodified opinion, but disclose elsewhere in the report this departure from a customary procedure.
The aggregated misstatement in the financial statements is made up of: Ch 16 HW
Known Misstatements - Yes Projected Misstatements - Yes Other Misstatements - Yes
Specific misstatement in one of a client's accounts receivable is referred to as a(n): A.Extrapolation difference. B.Known misstatement. C.Likely misstatement. D.Projected misstatement.
Known misstatement.
A possible loss, stemming from past events that will be resolved as to existence and amounts, is referred to as a(n): Ch 16 HW
Loss contingency.
Which of the following subsequent events might require an adjustment to the client's financial statements? A.A business combination with another company. B.Loss on the sale of a closely-held investment. C.Loss of plant and equipment due to a fire. D.Retirement of bonds payable at a loss.
Loss on the sale of a closely-held investment.
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? Ch 13 HW
Maybe - Completeness X - Valuation and Allocation
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? Ch 13 HW
Maybe - Existence X - Valuation and Allocation
Auditors may choose not to confirm accounts payable because: A. Confirmation obtains evidence identical to that obtained by cutoff tests. B. Other reliable external evidence to support the balances is likely to be available. C. A reading of the corporate minutes reveals that confirmation is unnecessary. D. The balances due will have changed between the year-end and the date of confirmation.
Other reliable external evidence to support the balances is likely to be available.
Which of the following is the best evidence of real estate ownership at the balance sheet date? Ch 13 HW
Paid real estate tax bills
An auditor has identified numerous debits to accumulated depreciation of equipment. Which of the following is most likely? A. The estimated remaining useful lives of equipment were increased. B. Plant assets were retired during the year. C. The prior year's depreciation expense was erroneously understated. D. Overhead allocations were revised at year-end.
Plant assets were retired during the year.
A refusal by a lawyer to furnish information related to litigation included in the letter of inquiry is likely to result in: A. Confirmation of related lawsuits with the claimants. B. Qualification of the audit report. C. An assessment that loss of the litigation is probable. D. An adverse opinion.
Qualification of the audit report.
For effective internal control, the accounts payable department should compare the information on each vendor's invoice with the: Ch 14 HW
Receiving report and the purchase order.
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? Ch 14 HW
Reconciling vendors' monthly statement with subsidiary payable ledger accounts.
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? Ch 13 HW
Repairs and Maintenance
The form typically used to confirm accounts payable: Ch 14 HW
Requires the vendor to indicate the amount of the payable
Which of the following is not a control that should be established for purchases of equipment? A. Establishing a budget for capital acquisitions. B. Requiring that the department in need of the equipment order the equipment. C. Requiring that the receiving department receive the equipment. D. Establishing an accounting policy regarding the minimum dollar amount of purchase that will be considered for capitalization.
Requiring that the department in need of the equipment order the equipment.
Which of the following is not a procedure that auditors typically perform to search for significant events during the period after year-end but prior to the audit report date? A.Review minutes of board of directors' meeting. B.Review the latest available interim financial statements. C.Inquire about any unusual adjustments made subsequent to the balance sheet date. D.Review changes in internal control during the period subsequent to the balance sheet date.
Review changes in internal control during the period subsequent to the balance sheet date.
Which of the following audit procedures is best for identifying unrecorded trade accounts payable? A. Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payable applies to the prior period. B. Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports. C. Examining unusual relationships between monthly accounts payable balances and recorded cash payments. D. Reconciling vendors' statements to the file of receiving reports to identify items received just prior to the balance sheet date.
Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payable applies to the prior period.
When there are numerous property and equipment transactions during the year, an auditor who plans to assess control risk at a low level usually performs: A. Tests of controls and extensive tests of property and equipment balances at the end of the year. B. Analytical procedures for current year property and equipment transactions. C. Tests of controls and limited tests of current year property and equipment transactions. D. Analytical procedures for property and equipment balances at the end of the year.
Tests of controls and limited tests of current year property and equipment transactions.
