AUDIT TEST #3 Connect HW (CH 13,14,16,17,2)

When property is tested at an interim date, audits must roll forward procedures to the ______ date.

Year-end

A client has disposed of several pieces of manufacturing equipment at a significant gain. This raises questions as to which assertion in regard to property, plant, and equipment?

Valuation and allocation

Letter dated February 26, Year 2: K. Bowl v. XYZ Co.: This matter commenced in December Year 1. The plaintiff alleges discrimination relating to his termination on November 17, Year 1. The company intends to defend this case vigorously. At this time, we are unable to evaluate the likelihood of an unfavorable outcome or estimate the amount or range of potential loss."

(a) Disclosure in notes relating to nature of litigation, but no amount disclosed (b) Update report date.

Letter dated March 16, Year 2: J. Myers v. XYZ Co.: This matter commenced in March Year 2. The plaintiff alleges discrimination relating to his termination on November 17, Year 1. The company intends to defend this case vigorously. At this time, we are unable to evaluate the likelihood of an unfavorable outcome. The plaintiff is demanding $50,000."

(a) Disclosure in notes relating to nature of litigation, but no amount disclosed. (b) Update report date.

Letter dated January 20, Year 2: L. Peep v. XYZ Co.: This matter commenced in November Year 1. The plaintiff alleges discrimination relating to his termination on March 17, Year 1. The case was tentatively settled for $35,000."

(a) Potential litigation settlement accrued in financial statements. (b) Update legal response.

Letter dated January 10, Year 2: R. Brown v. XYZ Co.: This matter commenced in November Year 1. The plaintiff alleges discrimination relating to his termination on March 17, Year 1. The case was tentatively settled for $35,000, which will be covered by XYZ's insurance carrier."

(a) Potential litigation settlement not accrued in financial statements, amount disclosed in notes. (b) Update legal response.

Letter dated February 21, Year 2: "I advise you that at and since December 31, Year 1, I have not been engaged to give substantive attention to, or represent, XYZ Co. in connection with any pending or threatened litigation, claims, or assessments; nor am I aware of any loss contingencies. Outstanding fees of $3,675 were due to this office for services provided at December 31, Year 1."

(a) Verify amount due legal counsel is recorded in financial statements. (b) Update legal response.

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

An auditor observes new equipment while walking around a client's factory and vouches the new equipment to schedules of property, plant, and equipment that support the information in the financial statements. Which assertion is supported by the evidence obtained?

Completeness

Ordinarily, the most significant assertion relating to accounts payable is

Completeness

When auditing an entity's reported amount for property, plant, and equipment, which assertion will be supported with evidence obtained by the auditor during an examination of the repairs and maintenance expense account?

Completeness

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

Date of the auditors' report.

An audit of the balance in the accounts payable account is ordinarily not designed to

Detect accounts payable that are substantially past due

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.

Which of the following is the best audit procedure for determining the existence of unrecorded liabilities

Examine selected cash disbursements in the period subsequent to year-end

In performing a test of controls, the auditors vouch a sample of entries in the purchases journal to the supporting documents. Which assertion would this test of controls most likely test?

Existence

In testing plant and equipment balances, an auditor may select recorded additions in the analysis of plant and equipment and inspect the actual asset(s) involved. Which management assertion is this procedure most directly related to?

Existence

Better evidence of continuing ownership of property is provided by examination of the deed.

False

The audit procedure of confirmation by direct communication is just as important for accounts payable as it is for accounts receivable.

False

The auditors' approach to the audit of property, plant, and equipment largely results from the fact that many transactions occur.

False

The auditors' principal objective in analyzing depreciation expense is to discover items that should have been capitalized.

False

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. The auditor completed the audit on February 10, 20X9, and delivered the report on February 16, 20X9. The client's representation letter normally would be dated:

February 10, 20X9. The representation letter should be dated as of the date the audit was completed.

To determine that each voucher is submitted and paid only once, when a payment is approved, supporting documents should be canceled by the

Individual who signs the checks

To strengthen internal control over the custody of heavy mobile equipment, the client would most likely institute a policy requiring a periodic

Inspection of equipment and reconciliation with accounting records.

The aggregated misstatement in the financial statements is made up of: (Yes or No) Known Misstatements Projected Misstatements Other Misstatements

Known Misstatements Yes Projected Misstatements Yes Other Misstatements Yes

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

Loss Contingency

A strike subsequent to year-end due to employee complaints about working conditions which originated two years ago.

Type 2 subsequent event

Which of the following is the best evidence of real estate ownership at the balance sheet date?

Paid real estate tax bills.

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

Perform analytical procedures.

Which of the following explanations most likely would satisfy an auditor who questions management about significant debits to the accumulated depreciation accounts?

Plant assets were retired during the year.

For effective internal control, the accounts payable department should compare the information on each vendor's invoice with the

Receiving report and the purchase order.

A client erroneously recorded a large purchase twice. Which of the following internal control measures would be most likely to detect this error in a timely and efficient manner?

Reconciling vendors' monthly statements with subsidiary payable ledger accounts.

Which of the following accounts should be reviewed by the auditors to gain reasonable assurance that additions to property, plant, and equipment are not understated?

Repairs and Maintenance

The form typically used to confirm accounts payable:

Requires the vendor to indicate the amount of the payable.

Introduction of a new line of products after year-end for which major research had been completed prior to year-end.

Type 2 subsequent event

Which of the following procedures is least likely to be completed before the balance sheet date

Search for unrecorded liabilities.

An effective procedure for identifying unrecorded retirements of equipment is to:

Select items of equipment in the accounting records and then locate them in the plant.

When confirming accounts payable, the approach is most likely to be one of

Selecting the accounts of companies with whom the client has previously done the most business, plus a sample of other accounts.

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

The auditors' search for unrecorded liabilities is completed:

Subsequent to the balance sheet date.

Unrecorded liabilities are most likely to be found during the review of which of the following documents?

Unpaid Bills

Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because

There is likely to be other reliable external evidence available to support the balances

For the audit of a continuing nonpublic client, the emphasis of the testing for property accounts is on:

Transactions that occurred during the year.

Operating control over check signing normally should be the responsibility of the:

Treasurer

A company's receiving department should be independent of its purchasing department.

True

An important control for plant and equipment is the plant and equipment budget

True

Auditors may discover unrecorded liabilities by reconciling vendors' statements with the accounts payable trial balance.

True

Auditors often confirm vendors' accounts with zero balances at year-end.

True

In the audit of depletion the auditors must often rely on the work of specialists.

True

In the audit of financial statements, the auditors are particularly concerned with possible understatement of liabilities and the possible overstatement of revenues

True

Material purchases of assets from an affiliated company should be disclosed in the financial statements.

True

Review of a client's cash payments subsequent to the balance sheet date is an important test of the completeness of recorded payables.

True

The auditors typically vouch major additions to plant and equipment recorded during the period under audit.

True

Customer checks deposited prior to year-end, but determined to be uncollectible after year-end.

Type 1 subsequent event

A business combination completed after year-end, but for which negotiations began prior to year-end.

Type 2 subsequent event

Letter dated February 14, Year 2: "I advise you that at and since December 31, Year 1, I have not been engaged to give substantive attention to, or represent, XYZ Co. in connection with any pending or threatened litigation, claims, or assessments; nor am I aware of any loss contingencies. No amount was due to this office for services provided at December 31, Year 1."

a) No effect on financial statements or notes. (b) Legal response is appropriately dated.

To achieve effective internal control over fixed-asset additions, a company should establish procedures that require:

authorization and approval of major fixed-asset additions.

Most of the work on property can be done _______the balance sheet date.

before

In a first year audit, auditors must get comfortable with the _____balances in property.

beginning

While testing property at an interim date, _____can be tested in coordination with property.

depreciation

A normal audit procedure is to analyze the current year repairs and maintenance accounts to provide evidence in support of the audit proposition that:

expenditures for fixed assets have been capitalized.

_________ assets can be audited at an interim date.

intangible