Auditing Chap 16

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 Explanation: The three sections of a statement of cash flows relate to operations, financing, and investing. Capitalization is not one of the sections.

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. Explanation: The purpose of analytical procedures is to locate potential misstatements in the financial statements. The auditors should investigate this significant fluctuation to determine whether it results from a financial statement misstatement.

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

Date of the auditors' report. Explanation: The search for unrecorded liabilities should be completed as of the last day possible—ordinarily near the date of the audit 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. Explanation: When the auditor becomes aware of facts existing at the report date that would have affected the report, s/he should next determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information. If such persons are believed to exist, the next step is to determine the best manner in which to disclose 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. 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. Explanation: The representation letter should be dated as of the date the audit was completed.

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

Loss contingency. Explanation : A loss contingency is a possible loss stemming from past events that will be resolved in the future.

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

Performing analytical procedures. Explanation : The performance of analytical procedures is a required part near completion of the audit and is therefore most likely to be included in that stage of the audit.

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. Explanation: The settlement of litigation is most likely to result in an adjusting entry (i.e., be a "Type 1 subsequent event) because the cause of the litigation most likely occurred before 20X2.

Which of the following is least likely to be considered a substantive procedure relating to payroll?

Test commission earnings. Investigate fluctuations in salaries, wages, and commissions. Test computations of compensation under profit sharing for bonus plans. (Test whether employee time reports are approved by supervisors.) Explanation : Testing whether employee time reports are approved by supervisors is an example of a test of a control, not a substantive procedure.

Which of the following is most likely to be considered a Type 1 subsequent event?

A business combination completed after year-end, but for which negotiations began prior to year-end. (Customer checks deposited prior to year-end but determined to be uncollectible after year-end.) Introduction of a new line of products after year-end for which major research had been completed prior to year-end. A strike subsequent to year-end due to employee complaints about working conditions that originated two years ago. Explanation : A Type 1 subsequent event relates to a condition that came into effect before year-end; Type 1 subsequent events result in an adjusting journal entry. In this situation, the customer's check may be assumed to have been uncollectible at year-end, and therefore it would be considered to be a Type 1 subsequent event. The other three replies refer to events most ordinarily considered to be Type 2 events—the events came into existence after year-end.