Audit Chapter 16 HW

On January 28, 20X4, a famous analyst who followed the industry provided a negative report on his expectations concerning the short and intermediate term for the industry. Adjustment or consider disclosure

Consider disclosure

An element of the business environment that involves some risk of a future loss. Examples include the risk of accident, strike, price fluctuations, or natural catastrophe. General risk contingencies should not be disclosed in financial statements.

General risk contingency

The aggregated misstatement in the financial statements is made up of: Factual Misstatements Projected Misstatements Judgmental Misstatements (1) Yes Yes Yes (2) Yes Yes No (3) No Yes No (4) No Yes Yes

Option 1

On January 25, 20X4, the company agreed to purchase for cash the outstanding stock of Porter Electrical Co. The business combination is likely to double the sales volume of Flowmeter, Inc. Adjustment or consider disclosure

Consider disclosure

January 7, 20X4: The mineral content of a shipment of ore en route to Hollis Mfg. Corporation on December 31, 20X3, was determined to be 72 percent. The shipment was recorded at year-end at an estimated content of 50 percent by a debit to Raw Materials Inventory and a credit to Accounts Payable in the amount of $82,400. The final liability to the vendor is based on the actual mineral content of the shipment. Adjustment or consider disclosure

Adjustment

On January 3, 20X4, Flowmeter, Inc., received a shipment of raw materials from Canada. The materials had been ordered in October 20X3 and shipped FOB shipping point in December 20X3. Adjustment or consider disclosure

Adjustment

January 15, 20X4: Following a series of personal disagreements between Ray Hollis, the president, and his brother-in-law, the treasurer, the latter resigned, effective immediately, under an agreement whereby the corporation would purchase his 10 percent stock ownership at book value as of December 31, 20X3. Payment is to be made in two equal amounts in cash on April 1 and October 1, 20X4. In December, the treasurer had obtained a divorce from his wife, who is Ray Hollis's sister. Adjustment or consider disclosure

Consider disclsure

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: Multiple Choice Notify the board of directors that the auditor's report must no longer be associated with the financial statements. Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information. Request that management disclose the effects of the newly discovered information by adding a footnote to subsequently issued financial statements. Issue revised pro forma financial statements taking into consideration the newly discovered information.

likely to rely on the financial statements who would attach importance to the information.

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

Loss contingency

On February 5, 20X4, Flowmeter, Inc., issued to an underwriting syndicate $2 million in convertible bonds. Adjustment or consider disclosure

Consider disclosure

A possible liability, stemming from past events, that will be resolved as to existence and amount by some future event.

Contingent liability

A possible loss, stemming from past events that will be resolved as to existence and amounts, is referred to as a(n): Multiple Choice Analytical process. Loss contingency. Probable loss. Unasserted claim.

Loss contingency.

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? Multiple Choice Examine human resources records for accuracy and completeness. Examine employees' names listed on payroll tax returns for agreement with payroll accounting records. Make a surprise observation of the company's regular distribution of paychecks on a test basis. Visit the working areas and verify that employees exist by examining their badge or identification numbers.

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

An approach to making materiality judgments that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting misstatements (including projecting misstatements where appropriate) only during the current year.

Rollover approach

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: Multiple Choice Express an opinion that is qualified due to the inability of the client company to continue as a going concern. Evaluate management's performance in causing this decline. Require note disclosure. Consider the possibility of a misstatement in the financial statements.

Consider the possibility of a misstatement in the financial statements.

Depending upon the details of the circumstances involved, some of the events may result in neither adjustment nor note disclosure. Select the two events least likely to be reflected (resulting in adjustment or disclosure) in the financial statements.

15 and 17

On January 15, 20X4, the company settled and paid a personal injury claim of a former employee as the result of an accident that had occurred in March 20X3. The company had not previously recorded a liability for the claim. Adjustment or consider disclosure

Adjustment

On January 18, 20X4, a major customer filed for bankruptcy. The customer's financial condition had been degenerating over recent years. Adjustment or consider disclosure

Adjustment

When auditing the statement of cash flows, which of the following would an auditor not expect to be a source of receipts and payments? Multiple Choice Capitalization. Financing. Investing. Operations.

Capitalization

A contractual obligation to carry out a transaction at specified terms in the future. Material commitments should be disclosed in the financial statements.

Commitment

January 16, 20X4: As a result of reduced sales, production was curtailed in mid-January and some workers were laid off. Adjustment or consider disclosure

Consider disclosure

On February 1, 20X4, a plant owned by Flowmeter, Inc., was damaged by a flood, resulting in an uninsured loss of inventory. Adjustment or consider disclosure

Consider disclosure

Which of the following is most likely to be considered a Type 1 subsequent event? Multiple Choice A business combination completed after year-end, but for which negotiations began prior to year-end. A strike subsequent to year-end due to employee complaints about working conditions that originated two years ago. 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.

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

The search for unrecorded liabilities for a public company includes procedures usually performed through the: Multiple Choice Day the audit report is issued. End of the client's year. Date of the auditors' report. Date the report is filed with the SEC.

Date of the auditors' report.

Misstatements about which there is no doubt as to amount.

Factual misstatements

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: Multiple Choice December 31, 20X8. January 17, 20X9. February 10, 20X9. February 16, 20X9.

February 10, 20X9.

An approach to making materiality judgments that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting all misstatements (including projecting misstatements where appropriate) existing in the balance sheet at the end of the current year, irrespective of whether the misstatements occurred in the current year or previous years.

Iron curtain approach

Which of the following procedures is most likely to be included near completion of an audit? Multiple Choice Obtaining an understanding of internal control. Confirmation of receivables. Observation of inventory. Performing analytical procedures.

Performing analytical procedures.

Misstatements identified by the auditors during the course of the audit that are due to extrapolation of sample results to the entire population.

Projected misstatements

Which of the following events occurring on January 5, 20X2, is most likely to result in an adjusting entry to the 20X1 financial statements? Multiple Choice A business combination. Early retirement of bonds payable. Settlement of litigation. Plant closure due to a strike.

Settlement of litigation.

Which of the following is least likely to be considered a substantive procedure relating to payroll? Investigate fluctuations in salaries, wages, and commissions. Test computations of compensation under profit sharing for bonus plans. Test commission earnings. Test whether employee time reports are approved by supervisors.

Test whether employee time reports are approved by supervisors.