ACCT 401 - Chapter 5 Homework

An auditor is performing an analytical procedure that involves comparing a client's account balances over time. This technique is referred to as: A. Comparison analysis. B. Cross-sectional analysis. C. Vertical analysis. D. Horizontal analysis.

D. Horizontal analysis.

A schedule set up to combine similar general ledger accounts, the total of which appears on the working trial balance as a single amount, is referred to as a: A. Supporting schedule. B. Reconciling schedule. C. Corroborating schedule. D. Lead schedule.

D. Lead schedule.

Auditors consider financial statement assertions to identify appropriate audit procedures. For items a through f, match each assertion with the statement that most closely approximates its meaning. a. Completeness b. Cutoff c. Existence and occurrence d. Presentation and disclosure e. Rights and obligations f. Valuation Word Bank: 1. All assets have been recorded 2. Assets are properly classified 3. Assets are recorded at proper amounts 4. The company legally owns the assets 5. There is such an asset 6. Transactions are recorded in the correct accounting period

a. Completeness - All assets have been recorded b. Cutoff - Transactions are recorded in the correct accounting period c. Existence and occurrence - There is such an asset d. Presentation and disclosure - Assets are properly classified e. Rights and obligations - The company legally owns the assets f. Valuation - Assets are recorded at the proper amount

Auditors perform audit procedures to obtain audit evidence that will allow them to draw reasonable conclusions as to whether the client's financial statements follow generally accepted accounting principles. Match each audit procedure with its type. Each type of audit procedure is used; one is used twice. Procedures: a. Prepare flowchart of internal controls over sales b. Calculate the ratio of bad debt expense to credit sales c. Determine whether disbursements are properly approved d. Confirm accounts receivable e. Compare current financial information with comparable prior years Type of Procedure: 1. Analytical procedures 2. Analytical procedures 3. Risk assessment procedures (other than analytical procedures 4. Tests of controls 5. Tests of details of account balances, transactions, or disclosures

a. Prepare flowchart of internal controls over sales - Risk assessment procedures b. Calculate the ratio of bad debt expense to credit sales - Analytical procedures c. Determine whether disbursements are properly approved - Tests of controls d. Confirm accounts receivable - Tests of details of accounts balances, transactions or disclosures e. Compare current financial information with comparable prior years - Analytical procedures

Select the following audit terms with their definitions. Terms: 1. Inspection of records 2. Inspection of tangible assets 3. External confirmation 4. Reperformance 5. Recalculation 6. Tracing 7. Vouching Definitions: a. An independent execution of procedures or controls that were originally performed by the client. b. Establishing the validity of a transaction by examining supporting documents. c. Examining a document or record. d. Following a transaction from a source document to recorded entries. e. Obtaining a written response about a particular item from a third party. f. Physically examining an asset. g. Testing the mathematical accuracy of documents or records.

1. Inspection of records - Examining a document or record. 2. Inspection of tangible assets - Physically examining an asset. 3. External confirmation - Obtaining a written response about a particular item from a third party. 4. Reperformance - An independent execution of procedures or controls that were originally performed by the client. 5. Recalculation - Testing the mathematical accuracy of documents or records. 6. Tracing - Following a transaction from a source document to recorded entries. 7. Vouching - Establishing the validity of a transaction by examining supporting documents.

Select the necessary words from the list of possibilities to complete the following statements. 1. The term __________ relates to the quantity of evidence that the auditors should obtain. 2. The amount of evidence that is considered sufficient varies __________ with the reliability of the evidence. 3. The risk of material misstatement is composed of two risks that the auditor assesses, those risks are inherent risk and __________ risk. 4. Tests of controls and __________ are referred to as "further audit procedures." 5. The audit approach of evaluating financial statement information by a study of relationships among financial and nonfinancial data is __________. 6. A __________ is a type of documentary evidence transmitted directly to the auditors by a third party (e.g., a customer or a vender). 7. In relying upon the work of a specialist, the auditors must ascertain the __________ and reputation of the specialist. 8. A letter signed by officers of the client company at the auditors' request which sets forth certain assertions about the company's financial position and operations is known as a __________. 9. Without regard to the effect of controls, __________ have a reasonable possibility of containing a misstatement that could cause the financial statements to be materially misstated. 10. The __________ is a schedule listing the balances of accounts in the client's general ledger. 11. Separate __________ are used to combine similar general ledger accounts into the total that appears on the working trial balance. 12. Working papers of audit interest over an extended period of time should be filed in the __________. 13. The auditors develop __________ to recommend to management to correct the effects of errors or fraud in the client's accounting records. 14. The purpose of an analysis of an account is to illustrate __________ in the account for the period under audit. 15. The examination of large data sets to uncover hidden patterns, unknown correlations and other useful information is referred to as _________.

1. Sufficient 2. Inversely 3. Control 4. Substantive procedures 5. Analytical procedures 6. Confirmation reply 7. Professional qualifications 8. Representation letter 9. Relevant assertions 10. Working trial balance 11. Lead schedules 12. Permanent file 13. Adjusting entries 14. Changes 15. Data analytics

Which of the following is not an assertion relating to classes of transactions? A. Adequacy. B. Cutoff. C. Accuracy. D. Classification.

A. Adequacy

Which procedure is not a typical analytical procedure? A. Comparison of recorded amounts of major disbursements with appropriate invoices. B. Comparison of the financial information with similar information regarding the industry in which the entity operates. C. Study of relationships of the financial information with relevant nonfinancial information. D. Comparison of the financial information with budgeted amounts.

A. Comparison of recorded amounts of major disbursements with appropriate invoices.

An analytical procedure example is the comparison of: A. Financial ratios of the current year to previous years. B. EDP generated data with similar data generated by a manual accounting system. C. Results of a statistical sample with the expected characteristics of the actual population. D. Recorded amounts of major disbursements with appropriate invoices.

A. Financial ratios of the current year to previous years.

Assertions with high inherent risk are least likely to involve: A. Routine transactions. B. Difficult accounting issues. C. Complex calculations. D. Significant judgment by management.

A. Routine transactions.

A CPA wishes to use a representation letter as a substitute for performing other audit procedures. Doing so: A. Violates professional standards. B. Is acceptable and desirable under all conditions. C. Is acceptable, but should only be done when cost justified. D. Is acceptable, but only for non-public clients.

A. Violates professional standards.

The inspection of a vendor's invoice by the auditors is: A. Physical evidence about occurrence of a transaction. B. Documentary evidence about occurrence of a transaction. C. Part of the client's accounting system. D. Direct evidence about occurrence of a transaction.

B. Documentary evidence about occurrence of a transaction.

Which of the following is not a basic procedure used in an audit? A. Substantive procedures. B. Tests of direct evidence. C. Tests of controls. D. Risk assessment procedures.

B. Tests of direct evidence.

The permanent file section of the working papers that is retained for each audit client most likely contains: A. Review notes pertaining to questions and comments regarding the audit work performed. B. Correspondence with the client's legal counsel concerning pending litigation. C. Narrative descriptions of the client's accounting procedures and controls. D. A schedule of time spent on the engagement by each individual auditor.

C. Narrative descriptions of the client's accounting procedures and controls.

What ultimately determines the specific audit procedures necessary to provide independent auditors with a reasonable basis for the expression of an opinion? A. Generally accepted accounting quality standards. B. The auditors' working papers. C. The auditors' judgment. D. The audit time budget.

C. The auditors' judgment.

To be effective, analytical procedures performed near the end of the audit should be performed by A. The CPA firm's quality control manager. B. A beginning staff accountant who has had no other work related to the engagement. C. The partner performing the quality review of the audit. D. A manager or partner who has a comprehensive knowledge of the client's business and industry.

D. A manager or partner who has a comprehensive knowledge of the client's business and industry.