Audit 3222 Ch 12

in addition to tracing bank transfers, kiting may be detected by: -obtaining and using a ______, because the kited check clearing in January will not appear on the list of outstanding checks for December. -performing a _____, because the last check issued in december will not be recorded in the check register.

-bank cutoff statement -cash cutoff test

in a manufacturing company it must also be determined that entries are recorded in the proper period for the transfer of costs for goods moved between 3 places:

-between stores and production departments -between one production department and another. -between production departments and finished goods.

cash and cash equivalents include 3 things:

-cash in the bank -imprest bank accounts -cash equivalents, such as short term time deposits

an auditors program to examine long term debt most likely would include steps that require: a. correlating interest expense recorded for the period with outstanding debt. b. comparing the carrying amount of the debt to its year end market value. c. verifying the existence of the holders of the debt by direct confirmation. d. inspecting the accounts payable subsidiary ledger for unrecorded long term debt.

a. correlating interest expense recorded for the period with outstanding debt.

which of the following would represent the best evidence for testing the net realizable value of inventory? a. investigates sales prices on the sale of inventory made after year end. b. vouch inventory prices to vendor invoices at an interim date. c. vouch inventory prices to the perpetual inventory. d. investigate all prices that have decreased by more than 5% during the year.

a. investigates sales prices on the sale of inventory made after year end.

the board of directors usually authorizes financing transactions based on the entitys strategic plans and investing activities.

authorizing bonds and capital stock

an auditor analyzes repairs and maintenance primarily to obtain evidence in support of the assertion that all: a. noncapitalizable expenditures have been recorded. b. expenditures for property and equipment have not been charged to expense. c. noncapitalizable expenditures for repairs and maintenance have been recorded in the proper period. d. expenditures for property and equipment have been recorded in the proper period.

b. expenditures for property and equipment have not been charged to expense.

a bank statement for the period subsequent to the date of the balance sheet that the client requests the bank to send directly to the auditor.

bank cutoff statement

top performers in an industry, which generate significant free cash flow are more likely to have significant balances of ___ and _____

cash cash equivalents

the clients documentation behind the value of inventory in the general ledger. this shows the quantity of each item in inventory and the values assigned to each item in inventory.

compilation of inventory values

as part of regular cycle counts, the client will also begin by counting items in inventory and comparing them with the perpetual inventory records. any discrepancies between the physical count and the perpetual records are investigated and corrected.

completeness of inventory

____ is when inventory is sent by its owner (consignor) to an agent (consignee) who undertakes to sell the goods. title passes form the consignor to the consignee when the goods are sold by the consignee.

consignment inventory

a bank overdraft is normally reported as a ____

current liability

the client will frequently identify a small portion of items in the perpetual inventory, count actual inventory, and investigate discrepancies. the client will usually vouch items in the perpetual records to the actual inventory on hand, and also count inventory on hand for other items and then trace results to the perpetual records.

cycle counts

when auditing a fixed asset account such as land, buildings and equipment, the auditor will normally: a. place the greatest emphasis on tests of transactions during the year. b. place the greatest emphasis on test of balances at year end. c. gain assurance that the beginning balance agrees to the prior audit. d. a combination of a and c above.

d. a combination of a and c above.

for which of the following companies would the auditor have the least concern about the existence of inventory: a. a retail grocer b. a computer manufacturer c. an oil and gas field equipment manufacturer d. a hotel

d. a hotel

when a client does not maintain its own stock records, the auditor should obtain a written confirmation from the transfer agent and register concerning: a. restrictions on the payment of dividends b. guarantees on preferred stock liquidation value c. the number of shares subject to agreements to repurchase. d. the number of shares issued and outstanding.

d. the number of shares issued and outstanding.

with substantive tests of shareholders equity auditor relies primarily on: -____ with outside independent sources -review of ____ to obtain sufficient appropriate evidential matter about the assertions pertaining to shareholders equity.

direct communication documentation

with substantive tests of long term debt the auditor relies primarily on: -____ with outside independent sources -review of ____ -____ in obtaining sufficient appropriate evidential matter about the assertions pertaining to long term debt balances.

direct communication documentation recomputations

the client conducts regular cycle counts. the client will frequently identify a small portion of items in the perpetual inventory and go to the inventory location and count the inventory, and investigate and correct any discrepancies that they find.

existence of inventory

____ include transactions and events whereby cash is obtained from or repaid to creditors or owners. this would include acquiring debt, capital leases, issuing bonds, or issuing preferred or common stock.

financing activities

scanning or testing a bank reconciliation establishes the correct cash in bank balance at the balance sheet date. when the acceptable level of detection risk is ___, the auditor may scan the client prepared bank reconciliation and verify the mathematical accuracy of the reconciliation.

high

____ include the purchase and sale of land, buildings, equipment and other long term assets not generally held for resale. this includes the purchase and sale of financial instruments not intended for trading purposes.

investing activities

kiting is possible when weaknesses in internal controls allow one individual to ____, or there is ____ between individuals who are responsible for the two functions.

issue and record checks collusion

intentionally recording a bank transfer as a deposit in the receiving bank while failing to show a deduction from the bank account on which the transfer check is drawn is a form of fraud known as ____. this may be used to conceal a cash shortage and overstate cash in bank at the statement date.

kiting

inherent risk for PPE is not straight forward. on one hand inherent risk for the existence assertion is often ___ because fixed assets are not vulnerable to theft. on the other hand, the completeness assertions may be ____ if it is difficult to determine if the economic substance of a lease is an operation lease or a capital lease.

low high risk

the auditor obtains evidence of general condition or obsolescence by: -____ the clients inventory taking -____ perpetual inventory records for slow moving items or items where the client has sufficient quantity that cannot sell the inventory during the period of normal inventory turnover. -____ quality control production reports.

observing scanning reviewing

during test of details of _____ and ____ cash should be correctly identifies and classified in the balance sheet. the auditor determines the appropriateness of the statement presentation from a review of the draft of the clients statements and the evidence obtained from the foregoing substantive tests. in addition, the auditor should review the minutes of board of director meetings and make inquiry of management for evidence of restrictions on the use of cash balances.

presentation and disclosure

examples of vouching recorded entries in inventory accounts include the vouching of: -____ of merchandise or raw materials inventories to vendor invoices, receiving reports, and purchase orders. -____ in work in process or finished goods inventories to manufacturing cost records and production reports. -____ in raw materials and work in process inventories to manufacturing cost records and production reports. -____ of merchandise and finished goods inventories to sales documents and records.

purchases increases decreases sales

transactions are correctly recorded as to amount, classification, and accounting period based on supporting authorizations and documentation. the duties of executing and recording financing transactions are usually segregated. periodic independent checks are made by agreement of subsidiary ledgers to control accounts.

recording financing transactions

transactions are executed in accordance with board of directors authorizations, treasury stock certificates are physically safeguarded.

redeeming and reacquiring bonds and capital stock

the following procedures may also be useful to the auditor in determining whether all retirements have been recorded: -analyze the miscellaneous ___ accounts for proceeds from sales of plant assets. -investigate the disposition of facilities associated with discontinued ____ and ____ -review insurance policies for ___ or ____ of coverage -make ___ of management as to retirements.

revenue product lines operations termination reductions inquiry

the evidence obtained form examine consignment agreements and contracts test relates to the ___ and ____ assertion

rights obligations

the test of confirm inventories at locations outside the entity provides evidence about the ____ and ____ assertions

rights obligations

in observing inventories, the auditor should: -____ the care with which client employees are following the inventory plan. -____ see that all merchandise is _____ -determine that the electronic ____, ____, or _____ are properly controlled. -make some _____ and ____ to final count -be alert for ____ and ____ that may exist when goods are stacked in solid formations. -identify the last receiving and shipping documents used and determine that goods received during the count are properly ____. - watch for ____ and ____ inventory items and evaluate the general condition of the inventory. -____ of employees about the existence of slow moving inventory items.

scrutinize counted once count media prenumbered inventory tags compilation sheets test counts trace quantities empty containers hallow squares segregated damaged obsolete inquire

the most common equity transactions that may occur on a regular basis are: -issuing shares when ____ are exercised -the repurchase of ____ -the payment of ____

stock options common stock dividends

on receipt of the cutoff statement, with enclosed canceled checks and bank memoranda, the auditor should: -____ a sample of all checks dated in the prior year to the outstanding checks listed on the bank reconciliation. -____ a sample of of deposits in transit on the bank reconciliation to deposits on the cutoff statement. -_____ the cutoff statement and enclosed data for unusual items.

trace vouch scan

when ____ beginning inventory balances to prior year working papers, the auditor should make certain that any audit adjustments agreed upon in the prior year did in fact get recorded.

tracing

the starting point for verifying cash balances in ___ the current periods beginning balances to the ending audited balances in the prior years working papers. next, the current periods activity in the general ledger cash accounts should be reviewed for any significant entries that are unusual in nature, or amount that require ____. in addition, any schedules prepared by the client showing summaries of ____ at different locations or summaries of ____ should be obtained. the mathematical ____ of any such schedule should be determined and their agreement with related cash balances in the general ledger checked. this test provides evidence about the ____ assertion.

tracing special investigation undeposited cash receipts bank balances accuracy valuation

a trust company,bank or similar financial institution assigned by a corporation to maintain records of investors and account balances. they record transactions, cancels or issues stock certificates and processes investor mailings.

transfer agent

issues are made in accordance with board of directors authorizations and legal requirements, and proceeds are promptly deposited intact. often bond and stock transactions are handled by a bond trustee or transfer agent.

issuing bonds and capital stock

if the bank deposit is recorded in one period, and the cash disbursement is recorded in the subsequent period, cash will be ____. it is essential that the disbursement and the deposit be recorded in the ____

overstated same period

payments are made to proper payees in accordance with board of directors or management authorizations.

paying bond interest and cash dividends

the timing of an inventory observation depends on the effectiveness of the clients internal controls over inventory. in a ____ inventory system, quantities are determined by a physical count and all counts are made as of a specific date. the date should be at or near the balance sheet date.

periodic

the client regularly conducts a review of obsolete inventory. this usually involves evaluating the amount of inventory on hand, investing slow moving items and comparing inventory cost with sales prices.

valuation of inventory at net realizable value

when detection risk is low the auditor is likely to: a. prepare the bank reconciliation using bank data in the clients possession or audit the bank reconciliation using a bank cutoff statement obtained from the bank. b. scan bank reconciliations and test items on bank reconciliations on a sample basis. c. test the clients internal controls over the preparation of bank reconciliations d. confirm bank balances with the FDIC.

a. prepare the bank reconciliation using bank data in the clients possession or audit the bank reconciliation using a bank cutoff statement obtained from the bank.

3 types of substantive tests of transactions of PPE are:

additions disposals repair and maintenance

the primary objective of a CPA's observation of a clients 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 to obtain assurance that inventory quantities are reasonably accurate.

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

____ is usually a commercial bank or a trust company that is given fiduciary powers by a bond issuer to enforce the terms of a bond indenture. they see that bond interest payments are made as scheduled and protects the interests of the bondholders if the issuer defaults.

bond trustee

the taking of a physical inventory count by a client is usually done according to a plan or a list of instructions. the clients instructions should include such matters as the: -____ of employees responsible for supervising the inventory taking -____ of the counts -____ to be counted -____ on how the counts are to be made -____ and ____ of electronic count media, prenumbered inventory tags, or summary count sheets. -provisions for handling the ___,____, and ___ of goods during the counts if such activity is unavoidable. -____ or ____ or goods not owned.

names date locations detailed instructions use and control receipt shipment movement segregation identification

determination of the reasonableness of depreciation provisions involves a consideration of such 2 factors as:

-the clients past history in estimating useful lives. -the remaining useful lives of existing assets.

from year one to year two the ratio of sales to fixed assets declined significantly. this is a possible indication that: a. the client is over depreciating fixed assets b. the client is capitalizing costs that should be expensed. c. the client has used debt to finance acquisitions of fixed assets. d. the client has treated capital leases as operating leases.

b. the client is capitalizing costs that should be expensed.

if detection risk is moderate or high when scanning or testing a bank reconciliation, the auditor may test more items on the clients bank reconciliation which includes: -comparing the ending bank balance with the balance confirmed on the ____ form. -verifying the ____ of deposits in transit and outstanding checks. -establishing the mathematical ____ of the reconciliation. -___ reconciling items such as bank charges, bank credits, or errors to supporting documentation. -investigating old items such as _____ for a long period of time and unusual items.

bank confirmation validity accuracy vouching checks outstanding

in the audit of inventory, selecting inventory items from a perpetual master file, going to the locations, and obtaining test counts is intended to produce evidence for which audit assertion? a. completeness b. rights and obligations c. existence d. valuation and allocation

c. existence

a client maintains perpetual inventory records in both quantities and dollars. if the assessed level of control risk is low, an auditor would probably: a. insist that the client perform physical counts of inventory items several times during the year. b. apply a gross profit test to ascertain the reasonableness of physical counts. c. increase the extent of tests of controls over inventory d. request the client to schedule the physical inventory count at the end of the year.

c. increase the extent of tests of controls over inventory

which of the following is one of the better auditing techniques that might be used by an auditor to detect kiting? a. review authenticated deposit slips b. review subsequent bank statements and cancelled checks received directly from the bank. c. prepare a schedule of bank transfers from the clients books. d. prepare year end bank reconciliation

c. prepare a schedule of bank transfers from the clients books.

if an auditor performs analytical procedures on rent expense and finds that rent expense has increased 50%, he or she is most likely to perform which of the following additional procedures? a. test rent cutoff to ascertain if all rent has been recorded. b. vouch rent payments to underlying documents to ascertain that all vouchers have receiving reports. c. vouch larger items in rent expense in a search for unrecorded capital leases. d. perform tests of controls to ensure that all rent transactions are authorized.

c. vouch larger items in rent expense in a search for unrecorded capital leases.

on conclusion of the observation procedure, a designated member of the audit team should prepare an overall summary. the summary should include a description of such matters as: -____ from the clients inventory taking plan -the extent of test counts and any ___ resulting therefrom. -conclusion on the ____ of the counts. -conclusions regarding ____ or ____ inventory noted while at the clients location.

departures material discrepancies accuracy slow moving obsolete

with a manufacturer, wholesaler, or retailer, however, inherent risk for inventory may be assessed at or near the maximum for the following reasons: -the volume of purchases, manufacturing and sales transactions that affects these accounts is generally ___, increasing the opportunities for misstatements to occur. -there are often contentious issues surrounding the ____, ____, and ____ of inventoriable costs. -the wide diversity of inventory items sometimes requires the use of ____ to determine inventory quantities. - inventories are often stored at multiple sites, adding to the difficulties associated with maintaining ____ over theft and damages, and properly accounting for goods in transit between sites. -the wide variety of inventory items may present special problems in determining their ____ and ____. -inventories are vulnerable to spoilage, obsolescence, and other factors such as general economic conditions that may affect ___ and ____ and thus the proper valuation of the inventories.

high identification measurement allocation special procedures physical controls quality market value demand salability

____ are bank accounts that will have a specific balance such as zero or 10,000

imprest bank accounts

if internal controls over cash are weak, in a small business, local governmental entity, or not for profit organization, the auditor must also consider that fraud risk is significantly ___, and modify the nature, timing, and extent of audit procedures accordingly.

increased

the standard bank confirmation normally confirms the following information: -the clients ____ for the bank to respond to the auditor. -requests for all _____ including details of any accounts closed during the year. -requests of details of ____ -requests of details of any loans or lending facilities or ____, together with the limits and if applicable dates of repayments and any collateral pledged as security for the loan. -requests of details of any assets held by the bank on the _____. -requests for details of any ____ of which the bank may be aware. this info assists the auditor in testing the existence, completeness, accuracy, and disclosure assertions.

permission bank balances interest charges bank overdrafts customers behalf contingent liability

in a ____ inventory system with effective internal controls, physical counts may be taken and compared with inventory records at interim dates.

perpetual

in performing test of details of balances, the clients ____ auditing procedure, the client has responsibility for the counting of inventory.

physical inventory count

the auditor will use hindsight and review the sale of inventory after year end to determine the reasonableness of costs compared to subsequent sales prices. for example, the auditor will usually: -compare the cost of inventory items with the entitys current ___ and ____ -review ____ after year end -consider whether a change in ____ is an indicator of changing market conditions. -make inquiries of the client about ____ and ____ inventory and the realizable value of inventory through sales.

sales catalog sales reports inventory turnover replacement costs slow moving obsolete

the following tests of details of balances focus primarily on two major tests:

sending a bank confirmation testing the clients bank reconciliation

the first step in auditing investing activities involves ____the assets that are needed to support the entity's operations and the ____ a company expects to achieve from its underlying asset base. the second step in auditing investing activities involves determining what assets were ____ during the period.

understanding rate of return acquired

in the compilation of inventory values, if the ending inventory is overstated, cost of goods sold will be ____, and gross margins will be ____.

understated overstated

the client regularly compares costs with recent purchases when using FIFO. the client also regularly compares accumulated manufacturing costs with standards costs and investigates variances.

valuation of inventory at historical cost

when internal controls are ___ auditors will perform their own cutoff tests at year end. for cash receipts the auditor will determine the ____ made before year end, and the amount of any ____ at year end. the auditor can then compare this info with the _____ recorded in the cash receipts journal. likewise, the auditor will determine the ____ written at year end and compare this info with the cash disbursements journal to determine that transactions are recorded in the proper accounting period.

weak last deposits cash on hand last transactions last check