Auditing Exam 3

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

Unpaid bills

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

Which of the following is not a test primarily used to test property, plant and equipment accounts for overstatement?

Vouching retirements of plant and equipment

Which of the following circumstances requires the auditor to include an other-matter paragraph in the audit report?

When the financial statements are accompanied by required supplementary information.

A material departure from generally accepted accounting principles will result in auditor consideration of:

Whether to issue an adverse opinion rather than a qualified opinion.

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.

(T/F) Better evidence of continuing ownership of property is provided by examination of the deed.

false

(T/F) Dual-dating of an audit report occurs when the auditors are not able to complete an audit engagement as of a particular date and should return to complete the audit work on a later date.

false

(T/F) The auditors' approach to the audit of property, plant, and equipment largely results from the fact that many transactions occur.

false

(T/F) The auditors' principal objective in analyzing depreciation expense is to discover items that should have been capitalized.

false

(T/F) The representations letter from management should be dated and signed on the balance sheet date.

false

(T/F) When the scope of the audit is restricted by the client, the auditors should issue an adverse opinion.

false

(T/F) Auditors may discover unrecorded liabilities by reconciling vendors' statements with the accounts payable trial balance.

True

(T/F) Auditors often confirm vendors' accounts with zero balances at year-end.

True

The auditors who wish to draw reader attention to a financial statement note disclosure on significant transactions with related parties should disclose this fact in:

An emphasis-of-matter paragraph to the auditors' report.

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.

Which of the following ordinarily involves the addition of an emphasis-of-matter paragraph to an audit report?

A consistency modification.

(T/F) In the audit of financial statements, the auditors are particularly concerned with possible understatement of liabilities and the possible overstatement of revenues.

True

Which of the following best describes the specific accounts payable that are selected for confirmation?

Accounts with a large amount of activity regardless of their balance.

Which of the following is not a type of auditors' opinion?

Advisory.

Most of the audit work on accounts payable is typically performed?

After the balance sheet date.

(T/F) Review of a client's cash payments subsequent to the balance sheet date is an important test of the completeness of recorded payables.

True

Assume that the opinion paragraph of an auditors' report begins as follows: "With the explanation given in Note 6, . . . the financial statements referred to above present fairly. . ." This is:

An improper type of reporting.

If, after issuing an audit report, the auditors find that they have failed to perform certain significant audit procedures they should first?

Attempt to determine whether their report is still being relied upon by third parties.

When the auditors discover that an audit client has committed an illegal act they will ordinarily report it to the:

Audit committee of the company being audited.

The auditors' report should be dated as of the date the:

Auditors have accumulated sufficient evidence.

An entity's internal control requires for every check request that there be an approved voucher, supported by a prenumbered purchase order, and a prenumbered receiving report. To determine whether checks are being issued for unauthorized expenditures, an auditor most likely would select for testing from the population of?

Canceled checks

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 assertion most directly addressed when performing the search for unrecorded liabilities is?

Completeness.

Which of the following is not a procedure normally performed while completing the audit of a public company?

Confirm directly with shareholders the total capital stock held by each

Which of the following is not a procedure that is designed to provide evidence about the existence of loss contingencies?

Confirming accounts payable.

When an auditor has concluded there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time beyond the current financial statement date (9/30/X1), the auditor's responsibility includes?

Considering the adequacy of disclosure about the entity's possible inability to continue as a going concern.

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

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

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 procedures would an auditor most likely perform while evaluating audit findings at the conclusion of an audit?

Develop an estimate of the total likely misstatement in the financial statements.

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.

Which of the following best describes the independent auditors' approach to obtaining satisfaction concerning depreciation expense in the income statement?

Establish the basis for depreciable assets and verify the depreciation expense.

Which of the following is not one of the auditors' objectives in auditing depreciation?

Establishing the reasonableness of the client's replacement policy.

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

Which of the following tests of controls most likely would help assure an auditor that goods shipped are properly billed?

Examine shipping documents for matching sales invoices

Which of the following audit procedures is aimed most directly at testing the completeness assertion for accounts payable?

Examining underlying documentation for cash disbursements in the period after year-end

(T/F) The audit procedure of confirmation by direct communication is just as important for accounts payable as it is for accounts receivable.

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.

Which of the following types of matters do not generally require disclosure in the financial statements?

General risk contingencies.

An audit report for a public client indicates that the financial statements were prepared in conformity with:

Generally accepted accounting principles (United States).

Identify the correct statement regarding analytical procedures used in a final review conducted at the conclusion of an audit.

If review analytical procedures suggest the presence of misstated account balances, the auditor may have to perform additional substantive tests of details to satisfactorily complete the audit.

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

When an auditor of financial statements has substantial doubt about an entity's ability to continue as a going concern, the auditor most likely would express a qualified opinion if?

Information about the entity's ability to continue as a going concern is not disclosed in the financial statements.

Which of the following procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern?

Inquiring of the entity's legal counsel about litigation, claims, and assessments.

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

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

A basis for a modification paragraph in the audit of the financial statements of a nonpublic company?

Is only included with qualified, adverse, or disclaimers of opinion

When an auditor does not confirm material accounts receivable, but is satisfied by the application of alternative auditing procedures, she normally should?

Issue an unmodified opinion with no reference to this omission

The aggregated misstatement in the financial statements is made up of:

Known Misstatements: Yes Projected Misstatements: Yes Other Misstatement: Yes

Specific misstatement in one of a client's accounts receivable is referred to as a(n)?

Known misstatement

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

Loss contingency.

Which of the following subsequent events might require an adjustment to the client's financial statements?

Loss on the sale of a closely-held investment.

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

Auditors may choose not to confirm accounts payable because?

Other reliable external evidence to support the balances is likely to be available

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.

An auditor has identified numerous debits to accumulated depreciation of equipment. Which of the following is most likely?

Plant assets were retired during the year.

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.

A refusal by a lawyer to furnish information related to litigation included in the letter of inquiry is likely to result in?

Qualification of the audit report.

What type or types of audit opinion are appropriate when financial statements are materially and pervasively misstated?

Qualified: No Adverse: Yes

When the matter is properly disclosed in the financial statements, the likely result of substantial doubt about the ability of the client to continue as a going concern is the issuance of which of the following audit opinions?

Qualified: No Unmodified with Emphasis of Matter: Yes

A change in accounting principles that the auditors believe is not justified is likely to result in which of the following types of audit opinions?

Qualified: Yes Unmodified with Emphasis of Matter: No

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

An audit report for a public client indicates that the audit was performed in accordance with:

Standards of the Public Company Accounting Oversight Board (United States).

The form typically used to confirm accounts payable?

Requires the vendor to indicate the amount of the payable

Which of the following is not a control that should be established for purchases of equipment?

Requiring that the department in need of the equipment order the equipment.

Which of the following is not a procedure that auditors typically perform to search for significant events during the period after year-end but prior to the audit report date?

Review changes in internal control during the period subsequent to the balance sheet date.

Which of the following audit procedures is best for identifying unrecorded trade accounts payable?

Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payable applies to the prior period.

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

Which of the following best describes the auditors' approach to the audit of accrued liabilities?

Test computations.

When there are numerous property and equipment transactions during the year, an auditor who plans to assess control risk at a low level usually performs?

Tests of controls and limited tests of current year property and equipment transactions.

Which of the following is not explicitly included in a standard report for a nonpublic company?

That internal control of the client was satisfactory.

Auditors must communicate internal control "significant deficiencies" to?

The audit committee

Which of the following modifications of the auditors' report does not include an additional paragraph?

The audit report indicates a division of responsibility between two CPA firms

Which of the following circumstances generally results in the issuance of a report that includes an opinion that is other than unmodified?

The auditor is unable to obtain sufficient appropriate audit evidence.

Communicating which of the following to the audit committee is not typically required of an auditor?

The auditor's judgment of management integrity.

Management's written representations should be in the form of a letter addressed to:

The auditor.

Which of the following best describes the auditors' typical observation of plant and equipment?

The auditors observe major additions to plant and equipment made during the year.

If audited financial statements include a balance sheet and an income statement, but do not include a statement of cash flows?

The auditors should issue a qualified report for the departure from generally accepted accounting principles.

Under which of the following circumstances would a disclaimer of opinion be appropriate?

The chief executive officer is unwilling to sign the management representation letter.

An adverse opinion is most likely to be included in an audit report when:

The financial statements depart from GAAP.

Which of the following is not included in an integrated audit report on the financial statements of a public company?

The report states that the audit was performed in accordance with AICPA standards

Which of the following would most likely be an appropriate addressee for an audit report?

The shareholders of the corporation whose financial statements were examined

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

Which statement is correct with respect to accounts payable confirmations?

They are more frequently used in situations in which some vendors don't send monthly statements

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

(T/F) A company's receiving department should be independent of its purchasing department.

True

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

authorization and approval of major fixed-asset additions.

(T/F) Amounts included in the statement of cash flows are audited in conjunction with the audit of balance sheet and income statement accounts.

true

(T/F) An important control for plant and equipment is the plant and equipment budget.

true

(T/F) In the audit of depletion the auditors must often rely on the work of specialists.

true

(T/F) Material purchases of assets from an affiliated company should be disclosed in the financial statements.

true

(T/F) The auditors perform an analysis of professional fees in part to determine that they have considered obtaining a lawyer's letter from all attorneys that are handling litigation for the client.

true

(T/F) The auditors typically vouch major additions to plant and equipment recorded during the period under audit.

true

(T/F) When a second partner review of an audit engagement is to be performed, it should occur prior to issuance of the audit report.

true