Audit Exam 1

Which of the following strategies most likely could improve the response rate of the confirmation of accounts receivable?

Including a list of items or invoices that constitute the account balance.

An auditor found a significant difference between the days' sales in receivables ratio for the current year compared with the ratio for the prior year. The auditor most likely applied which type of procedure?

Analytical.

According to the auditing standards, which of the following terms identifies a requirement for audit evidence?

Appropriate.

Which of the following statements is ordinarily true about the reliability of evidence?

The more effective internal control, the more assurance it provides about the reliability of the accounting data and financial statements.

Which of the following statements is an auditor most likely to add to the negative form of confirmation of accounts receivable to encourage timely consideration by the recipient?

"If you do not report any differences within 15 days, it will be assumed that this statement is correct."

An audit manager is reviewing a working paper of a staff member. Select from the option list provided whether the tickmark legend is sufficient and appropriate, not sufficient, or not appropriate for each of the tickmarks. Each choice may be used once, more than once, or not at all.

1. @ -- Footed the column, Sufficient and appropriate 2. # -- Traced to a related document, Not sufficient 3. & -- Vouched to supporting noted document, Sufficient and appropriate 4. ^ -- Did not perform a procedure, Not appropriate 5. + -- See a note to the financial statements, Not sufficient 6. % -- Taken from working paper C-5, Sufficient and appropriate 7. ^^ -- Does not cross foot, Not sufficient 8. ** -- Transferred to lead schedule C-1, Sufficient and appropriate

1. Receivables at the end of Year 2 are properly cutoff with respect to sales made in Year 2 2. The aggregate of net receivables in the balance sheet is fairly stated at estimated net realizable value. 3. Depreciation expense is fairly stated. 4. Fixed assets included in the balance sheet exist.

1. D (trace shipping), H (Identify the last number used in Year 2) 2. C (Test the aging), E (Analyze the historical) 3. J. (Recalculate the year's), K (Review the process) 4. M (Vouch additions), N (Make a physical inspection)

Select from the option list to indicate whether each of the statements about the deficiencies in the working paper is correct or incorrect. Assume that the accounts were selected for confirmation on the basis of a sample that was properly planned and documented on working paper B-3. Each choice may be used once, more than once, or not at all.

1. The working paper was not initialed and dated by the audit assistant. 2. Negative confirmations not returned can be considered to be accounts "confirmed without exception." Incorrect 3. All confirmations are accounted for. Incorrect 4. There is no documentation of alternate procedures, possible scope limitation, or other working paper reference for the six accounts selected for confirmation that the client asked the auditor not to confirm. Correct 5. The dollar amount and percent of the six accounts selected for confirmation that the client asked the auditor not to confirm are properly omitted from the "Dollars" columns for the "Total selected for testing." Incorrect 6. The "Dollars-Percent" for "Confirmation Requests-Negatives" is correctly calculated at 10%. Incorrect 7. There is no indication of follow-up or cross-referencing of the account confirmed-related party transaction. Correct 8. The tickmark "‡" is used but is not explained in the tickmark legend. Correct 9. There is no explanation of the 10 differences aggregating $12,000. Correct 10. The overall conclusion reached is appropriate. Incorrect 11. There is no notation that a projection from the sample to the population was made. Correct 12. There is no reference to second requests. Correct 13. Cross-referencing is incomplete for the 12 "Differences reported and resolved, no adjustment." Correct

What is the maximum number of days in which a nonissuer's auditor should complete the assembly of the final audit file following the report release date?

60 days.

In confirming accounts receivable, an auditor decided to confirm customers' account balances rather than individual invoices. Which of the following most likely will be included with the client's confirmation letter?

A client-prepared statement of account showing the details of the customer's account balance.

In the audit of a nonissuer, which of the following statements is correct regarding the use of external confirmations to obtain audit evidence?

A factor for an auditor to consider when designing confirmation requests is the assertion being tested.

In which of the following circumstances would the use of the negative form of accounts receivable confirmation most likely be justified?

A small number of accounts may be in dispute, and the accounts receivable balance arises from sales to many customers with small balances.

Two CPAs are debating the specific aspects of an external confirmation. Which section of the AICPA's generally accepted auditing standards provides the definition of an external confirmation? Enter your response in the answer fields below. Guidance on correctly structuring your response appears above and below the answer fields.

AU-C 505 06

During the confirmation of accounts receivable, an auditor receives a confirmation via the client's fax machine. Which of the following actions should an auditor take?

Accept the confirmation but verify the source and content through a telephone call to the respondent.

An auditor is testing a client's pension benefit obligation. Which of the following types of evidence would be most appropriate for determining that the financial statement balance is fairly stated?

An actuarial valuation obtained by an outside firm.

Which of the following presumptions is least likely to relate to the reliability of audit evidence?

An auditor's opinion is formed within a reasonable time to achieve a balance between benefit and cost.

Which of the following in a predecessor's audit documentation is the auditor least likely to be interested in reviewing?

Analysis of income statement accounts.

The most reliable forms of documentary evidence are those documents that are

Authorized by a responsible official.

Which of the following types of evidence generally is the most reliable?

Confirmation of account information from third parties.

The confirmation of customers' accounts receivable rarely provides reliable evidence about the completeness assertion because

Customers may not be inclined to report understatement errors in their accounts.

Audit documentation that records the procedures used by the auditor to gather evidence should be

Designed to meet the circumstances of the particular engagement.

The objective of tests of details of transactions performed as substantive procedures is to

Detect material misstatements at the relevant assertion level.

The auditor is required to retain audit documentation

For a period to satisfy applicable legal or regulatory requirements.

In creating lead schedules for an audit engagement, a CPA often uses automated audit documentation software. What client information is needed to begin this process?

General ledger information, such as account numbers, prior-year account balances, and current-year unadjusted information.

Which of the following disclaimers of liability included within a response to an auditor's confirmation request would allow the auditor to rely on the confirmation as appropriate audit evidence for an audit of a nonissuer?

Information is furnished as a matter of courtesy without a duty to do so and without responsibility, liability, or warranty, expressed or implied.

An auditor has identified the controller's review of the bank reconciliation as a control to test. In connection with this test, the auditor interviews the controller to understand the specific data reviewed on the reconciliation. In addition, the auditor verifies that the bank reconciliation is properly prepared by the accountant and reviewed by the controller as evidenced by their respective sign-offs. Which of the following types of audit procedures do these actions illustrate?

Inquiry and inspection of records.

Which of the following audit procedures would an auditor be least likely to perform using a generalized computer audit program?

Investigating inventory balances for possible obsolescence.

Computer technology makes it possible to perform paperless audits. For example, in an audit of computer-processed customer accounts receivable balances, an auditor might use a personal computer to access the accounts receivable files directly and copy selected customer records into the computer for audit analysis. Which of the following is an advantage of this type of paperless audit of accounts receivable balances?

It allows immediate processing of audit data on a spreadsheet working paper.

Observation is considered a reliable audit procedure but one that is limited in usefulness. However, it is used in a number of different audit situations. Which of the following statements is true regarding observation as an audit technique?

It is most persuasive about the performance of a process but is limited to the moment in time at which the observation takes place.

To test for unsupported entries in the ledger, the direction of audit testing should be from the

Ledger entries.

Specialized audit software

May be written in a procedure-oriented language.

The permanent file section of the audit documentation that is kept for each audit client most likely contains

Narrative descriptions of the client's accounting procedures and internal control.

Which of the following audit techniques most likely will provide an auditor with the most assurance about the effectiveness of the operation of a control?

Observation of client personnel.

In determining whether transactions have been recorded, the direction of the audit testing should begin from the

Original source documents.

A retailing entity uses the Internet to execute and record its purchase transactions. The entity's auditor recognizes that the documentation of details of transactions will be retained for only a short period of time. To compensate for this limitation, the auditor most likely would

Perform tests several times during the year, rather than only at year end.

Which of the following types of audit evidence provides the least assurance of reliability?

Prenumbered receiving reports completed by the client's employees.

An auditor ordinarily uses a working trial balance resembling the financial statements without notes, but containing columns for

Reclassifications and adjustments.

In gathering evidence in the performance of substantive procedures, the auditor most likely

Relies on persuasive rather than conclusive evidence in the majority of cases.

Austin, a staff auditor, independently develops an aging schedule for the auditee's accounts receivable. This audit procedure is an example of

Reperformance.

A client uses a suspense account for unresolved questions whose final accounting has not been determined. If a balance remains in the suspense account at year-end, the auditor would be most concerned about

Suspense debits that management believes will benefit future operations.

At the completion of an audit, which of the following entities has ownership of the audit working papers?

The CPA firm that performed the audit.

The two requirements crucial to achieving audit efficiency and effectiveness with a personal computer are selecting

The appropriate audit tasks for personal computer applications and the appropriate software to perform the selected audit tasks.

In auditing accounts receivable, the negative form of external confirmation request most likely would be used when

The assessed risk of material misstatement relative to accounts receivable is low.

Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because

The auditor cannot infer that all nonrespondents have verified their account information.

Which of the following factors would least likely affect the form, content, and extent of audit documentation?

The medium in which it is recorded and maintained.

Auditing standards describe generalizations about the reliability of evidence. The situations given below indicate the relative degrees of assurance provided by two types of evidence obtained in different situations. Which describes an exception to one of the generalizations?

The report of an auditor's specialist regarding the valuation of a collection of paintings held as an investment provides greater assurance than the auditor's physical observation of the paintings.

Which of the following best describes the primary purpose of audit procedures?

To gather evidence.

When companies use information technology (IT) extensively, evidence may be available only in electronic form. What is an auditor's best course of action in such situations?

Use generalized audit software to extract evidence from client databases.

Under which of the following circumstances should an auditor consider confirming the terms of a large complex sale?

When the combined assessment of inherent and control risk over the sale is high.

The Accounts Receivable-Confirmation Statistics working paper (indexed B-3) was prepared by Adam Apple during the calendar year 20X1 audit of Lewis Walter Co., a continuing audit client. The audit manager reviewed the working paper and proposed a memo. Correct the audit manager's memo as appropriate based on your analysis of the working paper. To revise the document, click on each segment of underlined text below and select the needed correction, if any, from the list provided. If the underlined text is already correct in the context of the document, select [Original Text] from the list. If removal of the underlined text is the best revision to the document, select [Delete Text] from the list if available.

staff member who completed the working paper and the date the working paper was completed. Some confirmations are missing, because only 198 sample items were actually accounted for. correctly been left out of the dollar amount and percent columns. However, we should apply alternative procedures and note the results on the current working papers. external negative confirmation requests in dollars to the total balance of accounts receivable should be 1%. The working paper does not support the conclusion that the adjustments are immaterial.