Chapter 7 Homework Lecture and Homework
read, inspection
1 0 ._ the agreement between Johnson Wholesale Company and the client to determine whether the shipment is a sale or a consignment.
analytical procedures
1. Calculate the ratio of sales commission expense to sales as a test of sales commissions.
confirming accounts receivable with business organizations, Qualifications of provider
1. Confirm receivables with consumers versus confirming accounts receivable with business organizations.
recompute, recalculation
1 . ___ the unit selling price times quantity on the duplicate sales invoice and compare the total to the amount on the duplicate sales invoice. Type of Evidence? ____.
Planning the audit
1. Should focus on enhancing the auditor's understanding of the client's business and the transactions and events that have occurred since the last audit date
Inspection, Completeness
1. Trace from receiving reports to vendors' invoices and entry in the acquisitions journal. TYPE OF AUDIT EVIDENCE? Inspection TRANSACTION-RELATED AUDIT OBJECTIVE? Completeness
inspection
10. Examine an insurance policy stating the amount of the fire insurance coverage on buildings and equipment.
planning the audit
10. Use the preliminary or unadjusted working trial balance as a source of
analytical procedures
11. Calculate the ratio of cost of goods sold to sales as a test of overall reasonableness of gross margin relative to the preceding year.
inquiries of client
12. Obtain information about internal control by requesting the client to fill out a questionnaire.
reperformance
13. Trace the total in the cash disbursements journal to the general ledger.
observation
14. Watch employees count inventory to determine whether company procedures are being followed.
physical examination
15. Examine a piece of equipment to make sure that a major acquisition was actually received and is in operation.
inspection
16. Examine corporate minutes to determine the authorization of the issue of bonds.
inquiries of client
17. Obtain a letter from management stating that there are no unrecorded liabilities.
analytical procedures
18. Review the total of repairs and maintenance for each month to determine whether any month's total was unusually large.
recalculation, posting and summarization
2. Add the sales journal for the month of July and trace amounts to the general ledger. TYPE OF AUDIT EVIDENCE? Recalculation TRANSACTION-RELATED AUDIT OBJECTIVE? Posting and summarization
Physically examine 3-inch steel plates, Qualifications of provider
2. Physically examine 3-inch steel plates versus examining electronic parts.
inquiries of client
2. Review the accounts receivable with the credit manager to evaluate their collectibility.
Planning the audit
2. Should focus on identifying areas that may represent specific risks relevant to the audit
Observe, Observation
2. ___whether the accounts receivable bookkeeper is prohibited from handing cash. Type of Evidence? ____.
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21 a. Which of the following types of documentary evidence should the auditor consider to be the most reliable? (1) A sales invoice issued by the client and supported by a delivery receipt from an outside trucker (2) Confirmation of an account payable balance mailed by and returned directly to the auditor (3) A check, issued by the company and bearing the payee's endorsement, that is included with the bank statements mailed directly to the auditor (4) An audit schedule prepared by the client's controller and reviewed by the client's treasurer
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21 b. Audit evidence can come in different forms with different degrees of persuasiveness. Which of the following is the least persuasive type of evidence? (1) Vendor's invoice (2) Bank statement obtained from the client (3) Computations made by the auditor (4) Prenumbered sales invoices
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21 c. Which of the following presumptions is correct about the reliability of audit evidence? (1) Information obtained indirectly from outside sources is the most reliable audit evidence. (2) To be reliable, audit evidence should be convincing rather than merely persuasive. (3) Reliability of audit evidence refers to the amount of corroborative evidence obtained. (4) Effective internal control provides more assurance about the reliability of audit evidence.
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22 a. For all audits of financial statements made in accordance with auditing standards, the use of analytical procedures is required to some extent In the Planning Stage As a Substantive Test In the Completion Stage (1) Yes No Yes (2) No Yes No (3) No Yes Yes (4) Yes No No
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22 b. Which of the following situations has the best chance of being detected when a CPA compares 2016 revenues and expenses with the prior year and investigates all changes exceeding a fixed percent? (1) An increase in property tax rates has not been recognized in the company's 2016 accrual. (2) The cashier began lapping accounts receivable in 2016. (3) Because of worsening economic conditions, the 2016 provision for uncollectible accounts was inadequate. (4) The company changed its capitalization policy for small tools in 2016.
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22 c. Which of the following would not be considered to be an analytical procedure? (1) Estimating payroll expense by multiplying the number of employees by the average hourly wage rate and the total hours worked. (2) Projecting the error rate by comparing the results of a statistical sample with the actual population characteristics. (3) Computing accounts receivable turnover by dividing credit sales by the average net receivables. (4) Developing the expected current year sales based on the sales trend of the prior five years.
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23 a. The following questions concern audit documentation. Choose the best response. a. Which of the following is not a primary purpose of audit documentation? (1) To coordinate the audit (2) To assist in preparation of the audit report (3) To support the financial statements (4) To provide evidence of the audit work performed
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23 b. During an audit engagement, pertinent data are compiled and included in the audit files. The audit files primarily are considered to be (1) a client-owned record of conclusions reached by the auditors who performed the engagement. (2) evidence supporting financial statements. (3) support for the auditor's representations as to compliance with auditing standards. (4) a record to be used as a basis for the following year's engagement.
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23 c. Although the quantity, type, and content of audit documentation will vary with the circumstances, audit documentation generally will include the (1) copies of those client records examined by the auditor during the course of the engagement. (2) evaluation of the efficiency and competence of the audit staff assistants by the partner responsible for the audit. (3) auditor's comments concerning the efficiency and competence of client management personnel. (4) auditing procedures followed and the testing performed in obtaining audit evidence.
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24 a. According to PCAOB audit standards, audit documentation must be retained for (1) one year. (2) three years. (3) five years. (4) seven years.
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24 b. Which of the following types of audit evidence is generally the most reliable? (1) A bank statement (2) A bank confirmation (3) Analytical procedures (4) Inquiries made of the audit committee
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24 c. An auditor most likely would apply analytical procedures in the overall review stage of an audit to (1) identify unusual or unexpected balances that were not previously identified. (2) obtain an understanding of high-risk areas. (3) evaluate the design and implementation of internal control. (4) identify related party transactions that may not have been previously identified.
inspection
3. Compare a duplicate sales invoice with the sales journal for customer name and amount.
Examine duplicate sales invoices when several competent people are checking each other's work, Effectiveness of internal controls
3. Examine duplicate sales invoices when several competent people are checking each other's work versus examining documents prepared by a competent person on a one-person staff.
inspection, classification
3. Examine expense voucher packages and related vendors' invoices for approval of expense account classification. TYPE OF AUDIT EVIDENCE? Inspection TRANSACTION-RELATED AUDIT OBJECTIVE? Classification
Substantive testing
3. Require documentation in the working papers of the auditor's expectation of the ratio or account balance
Compute, analytical procedure
3. ___the ratio of cost of goods sold to sales and compare the ratio to previous years. Type of Evidence? ____.
Statement is not correct concerning analytical procedures
4. Do not result in detection of misstatements
observation, timing and completeness
4. Observe opening of cash receipts to determine that cash receipts are promptly deposited and recorded. TYPE OF AUDIT EVIDENCE? Observation TRANSACTION-RELATED AUDIT OBJECTIVE? Timing and Completeness
confirmation
4. Obtain a written statement from a bank stating that the client has $15,671 on deposit and liabilities of $500,000 on a demand note.
Physically examine inventory of parts for the number of units on hand , Degree of objectivity
4. Physically examine inventory of parts for the number of units on hand versus examining them for the likelihood of inventory being obsolete.
Foot, Trace, recalculation and reperformance
4. ___ the sales journal and ___ the total to the general ledger. Type of Evidence? ____.
recalculation
5. Add the sales journal entries to determine whether they were correctly totaled.
inquiries of client, accuracy
5. Ask the accounts payable clerk about procedures for verifying prices, quantities, and extensions on vendors' invoices. TYPE OF AUDIT EVIDENCE? Inquiries of client TRANSACTION-RELATED AUDIT OBJECTIVE? Accuracy
substantive testing
5. Designed to obtain evidential matter about particular assertions related to account balances or classes of transactions
discussion with the CPA firm's own legal counsel, Independence of provider
5. Discuss the likelihood and amount of loss in a lawsuit against the client with client's in-house legal counsel versus discussion with the CPA firm's own legal counsel.
scan, analytical procedure
5.___ the sales journal, looking for large and unusual transactions requiring investigation. Type of Evidence? ____.
inquire, inquiry of client
6 . _____ of management whether all accounting employees are required to take annual vacations. Type of Evidence? ____.
confirming a bank balance, Degree of objectivity
6. Confirm the oil and gas reserves with a geologist specializing in oil and gas versus confirming a bank balance.
physical examination
6. Count a sample of inventory items and record the amount in the audit files.
substantive testing
6. Generally use data aggregated at a lower level than the other stages
Inspection, occurrence
6. Vouch entries in sales journal to sales invoices and related shipping documents. TYPE OF AUDIT EVIDENCE? Inspection TRANSACTION-RELATED AUDIT OBJECTIVE? Occurrence
count, physical examination
7 . _____ all marketable securities as of the balance sheet date to determine whether they equal the total on the client's list. Type of Evidence? ____.
deterioating
7-34 a. The company's financial position is ___ significantly. The company's ability to pay its bills is marginal (quick ratio = 0.97), and its ability to generate cash is weak (days to convert inventory to cash = 266.7 in 2016 versus 173.8 in 2012). The earnings per share figure is misleading because it appears stable while the ratio of net income to common equity has been halved in two years. The accounts receivable may contain a significant amount of uncollectible accounts (accounts receivable turnover reduced 25% in four years), and the inventory may have a significant amount of unsalable goods included therein (inventory turnover reduced 40% in four years). The company's burden for increased inventory and accounts receivable levels has required additional borrowings. The company may experience problems in paying its operating liabilities and required debt repayments in the near future.
Confirm a bank balance, Independence of provider
7. Confirm a bank balance versus examining the client's bank statements.
confirmation
7. Obtain a letter from the client's attorney addressed to the CPA firm stating that the attorney is not aware of any existing lawsuits.
overall review
7. Should include reading the financial statements and notes to consider the adequacy of evidence gathered
confirm, confirmation
8 . _______________the balance in the bank account directly with the East State Bank. Type of Evidence? ____.
recalculation
8. Extend the cost of inventory times the quantity on an inventory listing to test whether it is accurate.
substantive testing
8. Not required during this stage
Physically count the client's inventory held by an independent party, Auditor's direct knowledge
8. Physically count the client's inventory held by an independent party versus confirming the count with an independent party.
examine, compare, inspection
9 . ______ a sample of duplicate sales invoices to determine if the controller's approval is included and______ each duplicate sales invoice to the sales journal for agreement of name and amount.
statement is not correct concerning analytical procedures
9. Involve reconciliation of confirmation replies with recorded book amounts
confirmation
9. Obtain a letter from an insurance company to the CPA firm stating the amount of the fire insurance coverage on buildings and equipment.
physically counting the client's inventory, Independence of provider and auditor's direct knowledge
9. Obtain a physical inventory count from the company president versus physically counting the client's inventory
independence, internal controls, direct, qualifications, objectivity, timeliness
The six factors determining the reliability of evidence are: 1. ___ of provider 2. Effectiveness of client's ___ ___ 3. Auditor's ___ knowledge 4. ___ of individuals providing the information 5. Degree of ___ 6. ____
