ACCT 323 CH 16

A contractual obligation to carry out a transaction at specified terms in the future. Material commitments should be disclosed in the financial statements

Commitment

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

The audit of inventories may help in the auditor determination of ______

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

A _____ is a list of all specific disclosures required by financial accounting standards

Disclosure checklist

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

Factual, Projected, and judgmental misstatements

Type 2 subsequent event

come into existence after year-end

Projected misstatements

Arise from sample results projection to population

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

A possible liability, stemming from past events, that will be resolved as to existence and amount by some future event

Contingent liability

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

Date of the auditors' report

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:

Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information

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, and delivered the report on February 16, 20X9. The client's representation letter normally would be dated

February 10, 20X9

An element of the business environment that involves some risk of a future loss. Examples include the risk of accident, strike, price fluctuations, or natural catastrophe. General risk contingencies should not be disclosed in financial statements

General risk contingency

The _____ department of the company should authorize changes in employee pay rates

HR

An approach to making materiality judgements that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting all misstatements (including projecting misstatements where appropriate) existing in the balance sheet at the end of the current year, irrespective of whether the misstatements occurred in the current year or previous years

Iron curtain approach

Which of the following is the best way for 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

An approach to making materiality judgements that quantifies the total likely misstatement as of the current year end based on the effects of reflecting misstatements (including projecting misstatements where appropriate) only during the current year

Rollover approach

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

Settlement of litigation

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

Type 1 subsequent events require the financial statements to be _____ if needed

adjusted

Type 1 subsequent events require ______ of the financial statements

adjustment

Type 2 subsequent events come into existence _______ the balance sheet date

after

Type 1 subsequent events come into existence due to new ____ becoming available

evidence

Auditors consider the _____ expense when determining the correct allowance for doubtful accounts

bad debt

Revenue and expense accounts are audited in conjunction with related ______ accounts

balance sheet

Type 1 subsequent events involve events that existed _____ the balance sheet date

before

It is difficult to audit _____ without the consideration of the property account

depreciation

judgmental misstatements

differences arising from judgements of management that the auditor consider incorrect

Misstatements about which there is no doubt as to amount

factual misstatements

The CPA's opinion on the ____ of the financial statements may be changed by subsequent events

fairness

Representation letter

have client's principal officers acknowledge that they are primarily responsible for the fairness of financial statements and is dated the date of the audit report

Amortization relates to ____ assets like depreciation relates to property and equipment

intangible

Many subsequent events may involve the settling of ____

litigation

A possible loss, stemming from past events, that will be resolved as to existence and amount by some future event

loss contingency

a possible loss, stemming from past events that will be resolved as to existence and amounts, is referred to as a(n):

loss contingency

Type 2 subsequent events may need to be disclosed in the financial statements; otherwise, the financial statements would be

misleading

Material fluctuation revealed by analytical procedures should be investigated to determine whether they are indicative of material _____ in the financial statements

misstatements

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

performing analytical procedures

Type 2 subsequent events occur after the balance sheet date but _____ the completion of fieldwork

prior to

Financial statements that give effect to a subsequent event as though the event had occurred at the balance sheet date are known as ____ financial statements

pro forma

Misstatements identified by the auditors during the course of the audit that are due to extrapolation of sample results to the entire population

projected misstatements

Type 1 subsequent events

relate to a condition that came into effect before year-end, resulting in adjusting journal entries

factual misstatement

specific misstatement identified during the course of the audit for which there is no doubt

Financial statements that ______ the results almost never lead to legal action by financial statement users

understate