Auditing Chapter 16

Loss contingency

a possible loss, stemming from past events that will be resolved as to existence and amount by some future event

Conservatism

when two or more reasonable alternative values are indicated, the accountant will choose the lower amount, or the higher amount for liabilities

What substantive procedures are performed during the audit of payroll?

1. Perform analytical procedures 2. Investigate fluctuations in salaries, wages, and commissions 3. Obtain a summary of amounts of officers' compensation and trace to authorization 4. Test the period end accrual of payroll expenses 5. Test computations of compensation under profit-sharing or bonus plans 7. Test commission earnings 8. Test pension obligations

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.

Subsequent events

events occurring after the balance sheet but prior to the date of the auditors' report; there are two types: 1. Those providing additional evidence as to conditions that existed at the date of the financial statements; financial statement amounts must be adjusted to reflect changes 2. Those involving conditions that arose after the financial statements; financial statements amounts do not have to be changed

Identify items often misclassified as miscellaneous revenue.

1. Collections on previously written-off accounts or notes receivable 2. Write-offs of old outstanding checks or unclaimed wages 3. Proceeds from sales of scrap 4. Rebates or refunds of insurance premiums 5. Proceeds from sales of plant assets

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

General risk contingency

a loss that might occur in the future, such as possible price increases in essential raw materials, or a natural catastrophe

What substantive procedures are performed during the audit of selling, general and administrative expenses?

1. Perform analytical procedures a. Develop an expectation of the account balance b. Determine the amount of difference from the expectation that can be accepted without investigation c. Compare the company's account balance with the expected account balance d. Investigate significant deviations from the expected account balance 2. Obtain or prepare analyses of selected expense accounts 3. Obtain or prepare analyses of critical expenses in income tax return

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.

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.

Which of the following is the best way for the auditors to determine that every name on a company's payroll is that of a bona fide employee presently on the job?

Make a surprise observation of the company's regular distribution of paychecks on a test basis.

Which of the following is least likely to be considered a substantive test relating to payrolls?

Test whether employee time reports are approved by supervisors.

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

The date of the auditors' report