CH 16 Audit

Auditors should review the minutes of meetings of stockholders and directors, including meeting held through the date of the :

audit report.

The SEC Staff Accounting Bulletin No.138 requires that in considering the effects of prior year uncorrected misstatements the auditors must review the:

both the rollover and iron curtain for materiality.

The cost of goods sold account is often verified by the auditors in conjunction with the audit of:

inventories.

The Resource, Conservation, and Recovery Act, Superfund, and various clean air and water acts create potential _____ for companies.

liabilities

Auditors should obtain an understanding of ____ procedures to ensure that subsequent events are identified.

management's

Outsourcing the payroll function:

-is often cost beneficial -provides the expertise that some companies lack.

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.

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

Performing analytical procedures.

T/F: An effective budgeting program reduces the risk of material misstatements in expense accounts.

TRUE

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.

An example of a subsequent event requiring pro forma financial statements is:

a business combination

The distribution of pay through paychecks should be performed by:

a person with no other functions related to payroll.

The relationship between the ____ (known and likely) misstatements and materiality is often documented in a working paper.

aggregated

A subsequent event that provides additional evidence as to conditions that existed at the balance sheet date and affects the estimates inherent in the process of preparing financial statements requires:

an adjusting to the financial statement amounts.

Auditors should perform _____ procedures to test the reasonableness of payroll expense.

analytical

AICPA AU 20 requires auditors to evaluate whether ____ performed as substantive procedures or in the overall review stage indicate a previously unrecognized risk of risk of material misstatement due to fraud

analytical procedures.

A loss contingency that is reasonably possible and can be reasonably estimated should:

be disclosed in a note to the financial statements.

When auditing the statement of cash flows, which of the following would an auditor not expect to be a source of receipts and payments?

capitalization

After auditors determine which selling, general, and administrative account variances to further investigate, the ____ should furnish analyses of the accounts selected, together with related vouchers and other supporting documents.

client

If the has sold or assigned any receivables, the auditor must:

confirm by direct communication with the purchaser or assignee.

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.

Most loss contingencies may also appropriately be called _____

contingently liabilities

An auditor reviews the miscellaneous revenue account and determines that proceeds from sales of scrap were recorded to the account. The auditor should propose an adjusting journal entry to classify the amount to the ____ account

cost of goods sold,.

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.

The most important audit objective when auditing the statement of cash flows is:

determine the presentation and disclosure are appropriate.

A list of the specific disclosure required by the FASAB, the GASAB, the FASAC, and the SEC that is used to evaluate the adequacy of the disclosure in a set of financial is called a:

disclosure checklist

A subsequent event that involves conditions coming into existence after the balance sheet date requires:

disclosure in the financial statements

The aggregated misstatement in the financial statements is made up of:

factual misstatements projected misstatements judgemental misstatements

Conservatism in the valuation of liabilities means that when two or more reasonable alternative values are indicated, the accountant will choose the _____ amount

higher.

The auditors will use the understanding of the client and its environment to consider ____ risks, including fraud risks, related to revenues and expenses.

inherent

The starting point for investigating significant variances in expenses is generally:

inquiry of management

The royalties revenue account is often verified by the auditors in conjunction with the audit of:

intangible assets

Differences between management and the auditors concerning accounting estimates, or the selection or application of accounting policies the auditors consider inappropriate give rise to

judgemental misstatements.

Disputes between the taxpayer and the IRS may create contingent ___ not settled for several years.

liabilities

A possible loss, stemming from past events that will be resolved as to existence and amounts, is referred to as

loss contingency

The endorsement of notes is very seldom recorded in the accounts, but may be reflected in the:

minutes of directors' meetings.

General Risk Contingencies

need not be presented in the financial statements.

The prime purpose of the ____ letter is to have the client's principal officers knowledge that they are primarily responsible for the fairness of the financial statement.

representation

Should after year end a client's major customer declared bankruptcy. As a result, a large account receivable outstanding at year end is now uncollectible.

result in an adjustment to the financial statements if caused by a condition outstanding at year end.

For auditors to issue an unmodified opinion, the estimate of the total misstatements has to be _____ less than a material amount

significantly

The distribution of pay should be performed by:

someone who performs no other payroll activity.

For the auditors to issue an unmodified opinion:

they must conclude there is a low risk of material misstatement.

The first significant step in establishing strong internal control over payroll should be taken by the ____ department, when a new employee is hired.

human resources

The auditors should carefully review officer salaries, direct fees, travel and entertainment, contributions, and casualty loss accounts because these accounts will be scrutinized by the:

state or federal revenue agents

The review of the work of the audit staff is primarily accomplished through a review of the:

working paper.

Procedures at the end of the audit include:

-searching for unrecorded liabilities -obtaining the representation letter.

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

Date of the auditors' report

Throughout the course of the audit, the auditors accumulate and communicate to management all _____ _______ , other than those the auditors believe to be trivial.

identified misstatements

A common characteristic of commitments is the contractual obligation to enter into transactions:

in the future

A misstatement is likely to be material from a qualitative perspective if it:

involves concealment of an unlawful transaction.

AICPA AU 501 provides guidance in the area of actual or potential litigation, and requires that auditors design and perform audit procedures to identify litigation, claims, and assessments that may give rise to a risk of:

material misstatement

An auditor determines that proceeds from the sale of scrap were recorded to the miscellaneous revenue account. The auditor should propose an adjusting journal entry to classify the amount as

reduction to cost of goods sold.

An approach to making materiality judgements that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting misstatement only during the current year is called the ____ approach.

rollover.

Which of the following are required for a matter to be considered an unasserted claim?

-it is probable that a claim will be asserted. -Legal counsel has devoted substantial attention to it.

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 has 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.

Procedures carried out by auditor at the client company's facilities on or as close as practicable to the effective date of a register statement filed under the Securities Act of 1933 is called:

S-1 review

Which of the following events occuring on January 5, 20X2 is most likely to result in an adjusting entry to the 20X1 financial statements?

Settlement of litigation.

T/F: The CPA's opinion on the fairness of the financial statements may not be changed based on events after the balance sheet date.

FALSE

T/F: The payroll department should be responsible for printing direct deposit slips and distribution and distributing them to the employees, but not the timekeeping function.

FALSE

Audit procedures to detect and evaluate loss contingencies include obtaining a representation letter from the _____ indicating that all liabilities known to officers are recorded and disclosed.

client.

Closely related to contingent liabilities are obligations termed ____, which include agreements to purchase inventory or sell merchandise at specified prices.

commitments

A subsequent event requiring footnote disclosure occurs after the audit report release date. If the auditors only wanted to extend their responsibility for disclosures to the specific item being footnoted, they must ____ - ______ their report.

dual-date

A 20,00 overstatement of prepaid rent is an example of a known or ___ misstatement.

factual

If, after considering all of the misstatements, the auditors conclude the risk of material misstatement is too high, they should request management record adjustments need to correct all ____ misstatements.

factual

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 is known as ____ of ____.

letter of inquiry