CHAPTER 5

5-45 F.)Analytical procedures are most likely to detect: (1) Weaknesses of a material nature in internal control. (2) Unusual transactions. (3) Noncompliance with prescribed control activities. (4) Improper separation of accounting and other financial duties.

Analytical procedures are effective in isolating unusual transactions because such transactions may represent a change in a relationship being investigated. Analytical procedures are not typically considered to be tests of internal control, although in certain circumstances they might reveal errors caused by weaknesses in the internal control.

5-46 i.) Audit Procedures - Determine whether disbursements are properly approved. Match Type of Audit Procedure.

Type of Audit Procedure - Tests of controls.

5-46 k.) Audit Procedures - Compare current financial information with comparable prior periods. Match Type of Audit Procedure.

Type of Audit Procedure - Analytical procedures.

5-46 j.) Audit Procedures - Confirm Accounts Receivable. Match Type of Audit Procedure.

Type of Audit Procedure - Test of details of account balances, transactions, or disclosures.

5-46 g.) Audit Procedures - Prepare a flowchart of internal control over sales. Match Type of Audit Procedure.

Type of Audit Procedure - Risk assessment procedures.

5-46 a.) Assertion meaning - Completeness

All assets have been recorded.

5-46 d.) Assertion meaning - Presentation and disclosure

Assets are properly classified.

5-46 f.) Assertion meaning - Valuation

Assets are recorded at proper amounts.

5-46 e.) Assertion meaning - Rights and obligations

The company legally owns the assets.

5-12. "Use of data analytics is likely to increase the use of sampling and eliminate the audit of all items in a population." Comment on the accuracy of this quotation.

The statement is inaccurate in that in many areas of the audit the use of data analytics may lead to auditing entire populations (e.g., authorization of sales, authorization of warranty work) more frequently than had been done in the past.

5-45 C.)As part of their audit, auditors obtain a representation letter from their client. Which of the following is not a valid purpose of such a letter? (1) To increase the efficiency of the audit by eliminating the need for other audit procedures. (2) To remind the client's management of its primary responsibility for the financial statements. (3) To document in the audit working papers the client's responses to certain verbal inquiries made by the auditors during the engagement. (4) To provide evidence in those areas dependent upon management's future intentions.

A client letter of representations may never be used as a substitute for other appropriate auditing procedures.

5-45 H.) A primary purpose of the audit working papers is to: (1) Aid the auditors by providing a list of required procedures. (2) Provide a point of reference for future audit engagements. (3) Support the underlying concepts included in the preparation of the basic financial statements. (4) Support the auditors' opinion.

A primary purpose of audit working papers is to provide documented evidence that the auditors had a firm basis for their report.

5-45 D.) Which of the following statements best describes why auditors investigate related party transactions? (1) Related party transactions generally are illegal acts. (2) The substance of related party transactions may differ from their form. (3) All related party transactions must be eliminated as a step in preparing consolidated financial statements. (4) Related party transactions are a form of management fraud.

According to the definition of "related parties," one party may be able to influence the other to the extent that the two parties do not pursue their own separate interests in conducting transactions. Thus, a risk exists that the substance of related party transactions may differ from their form.

5-11. Provide an example in which a data analytics technique applied in financial statement auditing could serve as both a test of a control and a substantive procedure.

Any solution addressing both effectiveness of operation of a control and substantiating an account balance is appropriate. For example, testing a control over authorization of sales returns and allowances may result in evidence addressing the appropriate valuation of overall revenues.

5-8. As part of the verification of accounts receivable as of the balance sheet date, the auditors might inspect copies of sales invoices. Similarly, as part of the verification of accounts payable, the auditors might inspect purchase invoices. Which of these two types of invoices do you think represents the stronger type of evidence? Why?

Because the purchase invoices are prepared by companies other than the client, they represent more reliable evidence. Falsification of such documents would require rather elaborate planning to obtain letterheads of an outside organization; whereas in many companies, sales invoice forms are readily available to many employees and may not even be controlled by serial numbers. This comparison is merely a specific example of the general rule that documentary evidence created outside an organization is generally considered more dependable than internally created documents.

5-45 E.) Of the following, which is the least reliable type of audit evidence? (1) Confirmations mailed by outsiders to the auditors. (2) Correspondence between the auditors and suppliers. (3) Copies of sales invoices inspected by the auditors. (4) Canceled checks returned in the year-end bank statement directly to the client.

Copies of sales invoices represent internally generated evidence, which is considered least reliable. Confirmations mailed by outsiders and correspondence between the auditor and suppliers represent more reliable externally generated evidence. Canceled checks, although internally generated, are considered reliable because they bear the endorsement of the payee and a perforation or stamp indicating payment by the bank.

5-45 J.)Which of the following is not a function of audit working papers? (1) Assist management in illustrating that the financial statements are in accordance with generally accepted accounting principles. (2) Assist audit team members responsible for supervision in reviewing the work. (3) Assist auditors in planning future engagements. (4) Assist peer reviewers and inspectors in performing their roles.

The audit working papers are not prepared to assist management in illustrating that the financial statements are in accordance with generally accepted accounting principles. The other three replies are functions of audit working papers.

5-44. At 12 o'clock, when the plant whistle sounded, George Jones, an assistant auditor, had been working on his laptop computer. Jones stopped work immediately, but not wanting to waste a lot of time, he simply closed his laptop. He then departed for lunch. The auditor-in-charge, who had been observing what was going on, was critical of the assistant's actions. What do you think was the basis for criticism by the auditor-in-charge?

The criticism by the auditor-in-charge was properly based on the fact that the assistant auditor left the audit work (which is of a confidential nature) exposed to the examination of anyone who came along during the lunch hour. The computer should have been turned off or otherwise properly secured during the auditor's absence.

5-22. What are the major functions of audit working papers?

The primary functions of audit working papers are to provide (1) evidence of the auditor's basis for concluding on the achievement of the audit's overall objectives and (2) evidence that the audit was planned and performed in accordance with GAAS. Secondary functions include (1) assisting the audit team in planning and performing the work, (2) serving as a record of matters of continuing significance for future audits, (3) assisting audit team members responsible for supervising and reviewing the work, (4) demonstrating accountability of the various audit team members for the work performed, and (5) assisting firm reviewers, inspection and review individuals, and successor auditors with performing their roles.

5-45 K. In using the work of a specialist, the auditors referred to the specialist's findings in their report. This would be an appropriate reporting practice if the: (1) Client is not familiar with the professional certification, personal reputation, or particular competence of the specialist. (2) Auditors, as a result of the specialist's findings, give a qualified opinion on the financial statements. (3) Client understands the auditors' corroborative use of the specialist's findings in relation to the representations in the financial statements. (4) Auditors, as a result of the specialist's findings, decide to indicate a division of responsibility with the specialist.

The work of a specialist is only referred to in circumstances in which those findings do not support the representations made by management in the financial statements, thus causing the auditors to modify their report.

5-45 L - A difference of opinion concerning accounting and auditing matters relative to a particular phase of the audit arises between an assistant auditor and the auditor responsible for the engagement. After appropriate consultation, the assistant auditor asks to be disassociated from the resolution of the matter. The working papers would probably: (1) Remain silent on the matter since it is an internal matter of the auditing firm. (2) Note that the assistant auditor is completely dissociated from responsibility for the auditors' opinion. (3) Document the additional work required because all disagreements of this type will require expanded substantive procedures. (4) Document the assistant auditor's position and how the difference of opinion was resolved.

When a difference of opinion cannot be resolved, the working papers should be expanded to document the various positions and to describe how the difference of opinion was resolved.

5-45 B.)Which of the following business characteristics is not indicative of high inherent risk? (1) Operating results that are highly sensitive to economic factors. (2) Large likely misstatements detected in prior audits. (3) Substantial turnover of management. (4) A large amount of assets.

A large amount of assets by itself is not indicative of high inherent risk. Operating results highly sensitive to economic factors, large past misstatements, and turnover of management all represent characteristics that may indicate high inherent risk.

5-46 c.) Assertion meaning - Existence and occurrence

There is such an asset.

5-45 J1 Functions of audit working papers

*Assist audit team members responsible for supervision in reviewing the work. *Assist auditors in planning future engagements. * Assist peer reviewers and inspectors in performing their roles.

5-45 G.) Which of the following is not a primary approach to auditing an accounting estimate? (1) Review and test management's process for developing the estimate. (2) Review subsequent transactions. (3) Confirm the amounts. (4) Develop an independent estimate.

Auditors use three basic approaches for auditing accounting estimates—reviewing management's process, reviewing subsequent transactions, and developing an independent estimate. Confirmation is not a basic approach for auditing most accounting estimates.

5-45 I.) In what section of the audit working papers would a long-term lease agreement be filed? (1) Current working paper file. (2) Permanent working paper file. (3) Lead schedule file. (4) Corroborating documents file.

Relatively unchanging data, such as a long-term lease agreement, is placed in the permanent working paper file.

5-45 A.)Which of the following is not a financial statement assertion made by management? (1) Existence of recorded assets and liabilities. (2) Completeness of recorded assets and liabilities. (3) Valuation of assets and liabilities. (4) Effectiveness of internal control.

The effectiveness of internal control is not a financial statement assertion made by management.

5-46 b.) Assertion meaning - Cutoff

Transactions are recorded in the correct accounting period.

5-46 h.) Audit Procedures - Calculate the ratio of bad debt expense to credit sales. Match Type of Audit Procedure.

Type of Audit Procedure - Analytical procedures.