Audit Exam #3
Which of the following statements is most likely to be included in an attorney letter?
"Please furnish to our auditors such explanation, if any, that you consider necessary to supplement the foregoing information."
Ambrose is auditing the financial statements of Mays (dated December 31, 2017). The date of the auditor's report is February 17, 2018, and the audit report release date is February 20, 2018. For which of the following matters would Ambrose have the least responsibility?
A major loss due to a catastrophe that occurred and was known by Ambrose on March 1, 2018.
An auditor reviews job cost sheets to test which transaction assertion?
Accuracy.
From the auditors' point of view, inventory counts are more acceptable prior to the year-end when
Accurate perpetual inventory records are maintained.
When auditing inventories, an auditor would least likely verify that
All inventory owned by the client is on hand at the time of the count.
Which of the following management assertions for long-term liabilities is related to the ASB balance assertion of completeness?
All material long-term liabilities are recorded.
In connection with the audit of an issue of long-term bonds payable, the audit team should
Ascertain that the client has obtained the opinion of counsel on the legality of the issue.
Which of the following forms of communication ordinarily do not take place following completion of the audit examination?
Attorney letter.
Which of the following forms of communication serves as a critical part of auditors' examination of litigation, claims, and assessments?
Attorney letter.
To make a year-to-year comparison of inventory turnover most meaningful, the auditor performs the analysis
By product.
A related party is a person or entity that
Can exert significant influence over or be influenced by the company.
Which of the following is not an off-balance-sheet item?
Capitalized lease
An audit team's purpose in reviewing the documentation concerning the renewal of a note payable shortly after the balance-sheet date most likely is to obtain evidence concerning management's assertions about
Classification.
Which of these persons generally does not participate in writing the management letter?
Client's outside attorneys.
Which of the following substantive procedures should auditors ordinarily perform regarding subsequent events?
Compare the latest available interim financial statements with the financial statements being audited.
Which of the following audit procedures would not likely be performed for audits of shareholders' equity?
Compare valuation of stock to published market prices.
Which of the following would be considered an analytical procedure?
Comparing inventory balances to recent sales activities.
Jones was engaged to examine the financial statements of Gamma Corporation for the year ended June 30. Having completed an examination of the investment securities, which of the following is the best method of verifying the accuracy of recorded dividend income?
Comparing recorded dividends with a standard financial reporting service's record of dividends.
Which ASB balance assertion is of the most importance to auditors for long-term liabilities?
Completeness
An auditor selected items for test counts while observing a client's physical inventory. The auditor then traced the test counts to the client's inventory listing. This procedure most likely obtained evidence concerning management's balance assertion of
Completeness.
Which of the following would ordinarily not be performed in the auditors' examination of litigation, claims, and assessments?
Confirm litigation, claims, and assessments with parties bringing suit or action against the client.
A portion of a client's inventory is in public warehouses. Evidence of the existence of this merchandise can most efficiently be acquired through which of the following methods?
Confirmation.
When evaluating inventory controls, an auditor would be least likely to
Consider policy and procedure manuals.
The primary reason auditors request responses to attorney letters is to provide auditors
Corroboration of the information furnished by management about litigation, claims, and assessments.
When testing a company's cost accounting system, the auditor uses procedures that are primarily designed to determine that
Costs have been properly assigned to finished goods, work-in-process, and cost of goods sold.
A retailer's physical count of inventory was higher than that shown by the perpetual records. Which of the following could explain the difference?
Credit memos for several items returned by customers had not been recorded.
Mary Monitor, CPA, noted that ABC Co. received goods prior to year-end that were included in physical inventory but had not been recorded. In this case, which of the following adjustments should be made?
Debit inventory/credit accounts payable.
The primary reason for preparing a reconciliation between interest-bearing obligations outstanding during the year and interest expense in the financial statements is to
Detect unrecorded liabilities.
After the audit report release date, auditors determine that an important auditing procedure was omitted. Which of the following initial courses of action is most appropriate?
Determine whether the omitted procedure is important in supporting the auditors' opinion on the entity's financial statements.
Which of the following is the most important audit consideration when examining the stockholders' equity section of a client's balance sheet?
Entries in the capital stock account can be traced to resolutions in the minutes of meetings of the board of directors.
L. Martinez, CPA, was auditing a client, Marvelous Retail Company and selected a sample of inventory items from the perpetual records and vouched additions to receiving reports. This procedure was intended to satisfy which PCAOB assertion?
Existence or occurrence.
Which of the following is the assertion with the highest inherent risk in auditing inventory?
Existence.
An inventory roll back is required when inventory is counted prior to the end of the year.
False
Bank confirmation requests should only include balances for cash accounts.
False
For items included in the attorney letter, attorneys should always provide a dollar estimate of the amount of potential loss.
False
If an auditor was not present at a new client's inventory count the auditor has no obligation to test the inventory.
False
If the attorney's views differ from information provided in the attorney letter, the attorney is not expected to provide additional explanation to auditors.
False
Inventory observation must be observed if inventory is one of the major assets listed on the balance sheet.
False
Items held on consignment with another company should not be included in a company's inventory.
False
Standard costing of inventory is a generally accepted accounting principle.
False
Subsequently discovered facts are matters identified by auditors after the date of the financial statements but prior to the date of the auditors' report.
False
The attorney letter is ordinarily requested directly from the attorney by auditors.
False
The most significant inherent risk in the finance and investment cycle is the proper presentation of items on the balance sheet.
False
When inventory is counted on a date other than the balance sheet date no additional procedures would normally be required to satisfy generally accepted auditing standards.
False
While useful, analytical procedures are not required near the end of the audit as a final review of financial statements.
False
Written representations should be dated as of the date of the financial statements.
False
he engagement quality review of audit documentation by a different partner focuses on whether all appropriate steps in the audit were performed and whether the referencing among all audit documentation is clear.
False
Which cycle is not directly linked to the production cycle?
Finance and investment cycle.
Which of the following approaches is most suitable for auditing the finance and investment cycle?
Gain an understanding of internal controls and perform extensive substantive procedures.
Which of the following procedures would best prevent or detect the theft of valuable items from an inventory that consists of hundreds of different items selling for $1 to $10 and a few items selling for hundreds of dollars?
Have separate warehouse space for the more valuable items with frequent periodic physical counts and comparison to perpetual inventory records.
A major objective of written representations is to
Impress on management its ultimate responsibility for the financial statements and disclosures.
An auditor usually traces the details of the test counts made during the observation of physical inventory counts to a final inventory compilation. This audit procedure is undertaken to provide evidence that items physically present and observed by the auditor at the time of the physical inventory count are
Included in the final inventory schedule.
Which of the following auditing procedures probably would provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventories?
Inspect agreements to determine whether any inventory is pledged as collateral or subject to any liens.
Which of the following management assertions is an auditor most likely testing if the audit objective states that all inventory on hand is reflected in the ending inventory balance?
Inventory is complete.
Which of the following substantive procedures would auditors most likely perform to obtain evidence about the occurrence of subsequent events?
Investigate changes in shareholders' equity occurring after the date of the financial statements.
A. Griffin audited the financial statements of Dodger Magnificat Corporation for the year ended December 31, 2017. She completed gathering sufficient appropriate evidence on January 30 and later learned of a stock split voted by the board of directors on February 5. The financial statements were changed to reflect the split, and she now needs to dual date the report on the entity's financial statements. Which of the following is the proper form?
January 30, 2018, except as to Note X, which is dated February 5, 2018.
Assume that Krenzel Company is subject to a class action lawsuit from its customers resulting from the failure of one of its projects. The suit was filed on November 10, 2014 and properly disclosed in Krenzel's December 31, 2014 financial statements. Krenzel's auditors completed their engagement and their report (along with Krenzel's financial statements) were released on February 5, 2015. How would a settlement of this lawsuit on January 17, 2015 be properly reflected in Krenzel's financial statements?
Krenzel would adjust its disclosure of the lawsuit to reflect the effects of this settlement.
Which of the following is not required by generally accepted auditing standards?
Management letter.
Which of the following is not a subject that appears in written representations in the audit of both public and nonpublic entities?
Management's assessment of the effectiveness of its internal control over financial reporting.
Hall accepted an engagement to audit the year 1 financial statements of XYZ Company. XYZ completed the preparation of the year 1 financial statements on February 13, year 2, and its auditors began the fieldwork on February 17, year 2. Hall completed gathering sufficient appropriate evidence on March 24, year 2; Hall's report and XYZ's financial statements were released on March 28, year 2. The written representations normally would be dated
March 24, year 2.
The auditor tests the quantity of materials charged to work-in-process by vouching these quantities to
Material requisitions.
The scope of an audit is not restricted when an attorney letter limits the response to
Matters to which the attorney has given substantive attention in the form of legal representation.
Which of the following is not a substantive audit procedure for estimates of management?
Observing whether estimates are prepared by qualified personnel
Which of the following is ordinarily performed last in the audit examination?
Obtaining signed written representations.
To determine the client's planned amount and timing of production of a product, the auditor reviews the
Production plan
Which of the following internal control activities most likely addresses the completeness assertion for inventory?
Receiving reports are prenumbered, and the numbering sequence is checked periodically.
The purpose of tracing a sample of inventory tags to a client's computerized listing of inventory items is to determine whether the inventory items
Represented by tags were included on the listing.
Your client counts inventory three months before the end of the fiscal year because controls over inventory are excellent. Which procedure is not necessary for the roll-forward?
Request the client to recount inventory at the end of the year.
A client maintains perpetual inventory records in quantities and in dollars. If the assessed control risk is high, an auditor would probably
Request the client to schedule the physical inventory count at the end of the year.
Which of the following would not be a typical feature of management's control over the production of estimates?
Review by the independent auditor
Which of the following normally occurs earliest in the audit examination?
Review of audit documentation.
What is an auditor's primary method to corroborate information on litigation, claims, and assessments?
Reviewing the response from the client's lawyer to a letter of audit inquiry.
Which of these substantive procedures is not used to obtain evidence about contingencies?
Scanning expense accounts for credit entries.
Subsequent knowledge of which of the following would cause the entity to adjust its December 31 financial statements?
Settlement of litigation in February for $100,000 that had been estimated at $12,000 in the December 31 financial statements.
Which of the following methods for determining inventory cost is not allowed by GAAP?
Standard cost.
Auditors have a responsibility related to management's disclosure of new information related to subsequent events until
The audit report release date.
An auditor is examining a nonpublic company's inventory procurement system and has decided to perform tests of controls. Under which of the following conditions do GAAS require tests of controls be performed by an auditor?
The auditor believes that testing the controls could lead to a reduction in overall audit time and cost.
The auditing standards regarding subsequently discovered facts refers to knowledge obtained after
The date of the auditor's report.
Which of the following statements is not true with respect to written representations?
The failure of management to furnish them is a significant scope limitation, resulting in either an adverse opinion or a disclaimer of opinion.
Which of the following is an internal control weakness for a company whose inventory of supplies consists of a large number of individual items?
The warehouse manager is responsible for maintenance of perpetual inventory records.
Loan covenants are used for which of the following reasons?
To protect the lender from the borrower substantially weakening the borrower's financial position.
Loan covenants are used for which of the following reasons?
To protect the lender from the borrower's substantially weakening of the latter's financial position.
Which of the following best describes the role of analytical procedures near the end of the audit engagement?
To provide an overall review of the financial information and assessment of the adequacy of evidence gathered during the audit engagement.
An indenture is the written agreement between the bond issuer and the bondholder.
True
At the completion of the physical inventory, the auditors should inspect the inventory area to ensure that all inventory has been counted.
True
Auditors are not responsible for evaluating the accuracy of management's estimates, but the reasonableness of those estimates.
True
Auditors' communications with the individuals charged with governance of the client can be provided either during the audit or at the conclusion of the audit.
True
Based on the sales forecast, management develops a plan for the amount and timing of production.
True
Forecasts of the following year can be used in connection with valuing the inventory at lower‑of‑cost‑or-market, which influences the amount of cost of goods sold that is shown in the financial statements.
True
If a necessary audit procedure has been omitted, auditors should first identify whether individuals are currently relying on the client's financial statements and auditors' reports.
True
If inventory located is off the client's premise the auditor might confirm the amount with the custodian to satisfy evidence requirements.
True
In general, the auditors' best opportunity to detect inventory errors and frauds is during the physical observation of the inventory count
True
Interim testing is ordinarily done prior to the date of the financial statements.
True
It is ultimately the client's responsibility for adjusting the financial statements for matters identified during the audit.
True
Most businesses try to estimate sales levels and seasonal timing and then try to plan production schedules to meet customer demand.
True
One purpose of obtaining written representations is for management to acknowledge their responsibility for the fairness of the financial statements.
True
Production planning interacts with inventory planning to produce production orders.
True
Reviewing the latest interim financial statements is one method of identifying subsequent events.
True
The audit procedures for inventory and related cost of sales accounts frequently are typically extensive in the audit engagement.
True
The existence of "miscellaneous" revenue or expense accounts may signal the practice of earnings management.
True
When fixed assets are acquired during the year under audit, auditors should inspect the assets.
True
When inventory quantities are determined solely by means of a physical count it is necessary for the auditor to be present at the time of the count.
True
An auditor most likely would analyze inventory turnover rates to obtain evidence concerning management's balance assertions about
Valuation and allocation.
An auditor would vouch inventory on the inventory status report to the vendor's invoice to obtain evidence concerning management's balance assertions about
Valuation.
Appropriate audit inquiries regarding estimates include all of the following except:
Why are they prepared?
An auditor most likely would analyze inventory turnover rates to obtain evidence concerning management's balance assertions about
accuracy and valuation.
From the auditors' point of view, inventory counts are more acceptable prior to the year end when
accurate perpetual inventory records are maintained.
If it would be appropriate to confirm capital stock, the auditor would obtain the confirmation from:
an independent registrar.
An auditor selected an inventory item on the warehouse floor, test counted it, and traced the count to the final inventory compilation. The auditor most likely was testing the PCAOB assertion of
completeness.
A transfer agent:
handles the exchange of shares, canceling the shares surrendered by sellers and issuing new certificates.
An auditor will usually trace the details of the test counts made during the observation of physical inventory counts to a final inventory compilation. This audit procedure is undertaken to provide evidence that items physically present and observed by the auditor at the time of the physical inventory count are
included in the final inventory schedule.
Related party transactions:
must be disclosed in the financial statements.
Vouching a sample of items from the perpetual inventory records to the receiving reports achieves the specific ASB balance assertion of
occurrence.
he focus of controls in the finance and investment cycle is on:
proper authorizations and competent personnel.
A client's physical count of inventories was higher than the inventory quantities shown in the perpetual records. This situation could be the result of the failure to record
purchases.
A client maintains perpetual inventory records in quantities and in dollars. If the assessed control risk is high, an auditor would probably
request the client to schedule the physical inventory count at the end of the year.
Loan covenants:
require the borrower to maintain certain financial characteristics.
During an audit of an entity's stockholders' equity accounts, the auditor determines whether there are restrictions on retained earnings resulting from loans, agreements, or state law. This audit procedure most likely is intended to verify the ASB presentation and disclosure assertion of:
rights and obligations.
Derivative instruments include:
stock options.
Auditors record the last bill of lading used at the time of the inventory count to
test cutoff.
If the auditors discover that the carrying amount of a client's investments is overstated because of a loss in value that is other than a temporary decline in market value, they should insist that:
the loss in value be recognized in the financial statements.
Taking a "big bath" in the financial statements refers to:
understating income.
An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support management's financial statement (PCAOB) assertion of
valuation or allocation.
An auditor would vouch inventory on the inventory status report to the vendor's invoice to obtain evidence concerning management's balance assertions about
valuation.
In auditing intangible assets, an auditor most likely would review or recompute amortization and determine whether the amortization period is reasonable in support of the ASB balance assertion of:
valuation.
Selecting a sample of cost accounting reports for labor and vouching it to time records is a procedure designed to test the ASB transaction assertion of
valuation.