Final- Accounting 374 Auditing

The criteria used to determine whether or not a contingent liability should be recorded at the balance sheet date are identical under FAS 5 and IAS 37. **True ** False

** False The criteria are not identical. IAS 37 imposes a lower standard regarding the likelihood of occurrence than does FAS 5.

The use of pre-numbered forms for the purchasing and receiving functions relate to the financial statement assertion of: **Presentation and Disclosure. **Completeness. **Valuation. **None of the above.

**Completeness. The use of pre-numbered forms is related to the assertion of Completeness since the use of such forms is one way to ensure that all transactions that should be recorded have, in fact, been recorded.

Which of the following provides the most competent evidence regarding the existence of accounts payable? **Recalculate the balance of accounts payable per the trial balance. **Perform analytical procedures. **Confirm balances with creditors and suppliers. **Test for unrecorded liabilities.

**Confirm balances with creditors and suppliers. Confirmation provides independent third party evidence (i.e., most reliable evidence) regarding the Existence of accounts payable.

When testing plant and equipment balances, an auditor may inspect new additions listed on the analysis of plant and equipment. This procedure is designed to obtain evidence regarding the assertions of... **Presentation & Disclosure, but not Existence **Neither Existence nor Presentation & Disclosure **Existence and Presentation & Disclosure **Existence, but not Presentation & Disclosure

**Existence, but not Presentation & Disclosure Inspecting new asset additions provides evidence regarding the assertion of existence, but not presentation & disclosure.

The risk of material misstatement in an amount management estimates for a reserve is directly related to the: **Tone at the top. **Internal controls over cash disbursements. **Extent of documentation. **Experience of management in estimating the reserve.

**Experience of management in estimating the reserve. Management's experience estimating the reserve is directly related to the probability that the reserve will be misstated. Generally, the longer management has been estimating a reserve, the greater their ability to evaluate the reserve against actual realizations to verify the reserve's reasonableness

Shareholders rationally expect managers to engage in earnings manipulation **True **False

**False Shareholders expect managers to engage in earnings management (i.e., taking real actions designed to improve financial performance). However, shareholders do not expect managers to engage in earnings manipulation (i.e., using the accounting mechanism to report improved financial performance).

Auditors perform analytical procedures regarding inventory primarily to obtain evidence regarding the Rights & Obligations assertion. **True **False

**False The auditor uses analytical procedures regarding the inventory balance to obtain evidence regarding whether or not the inventory is appropriately recorded at the lower of cost or market (i.e., the Valuation assertion).

The review of subsequent transactions does not provide auditors with an effective way to obtain evidence regarding the reasonableness of an estimate. **True **False

**False To evaluate the reasonableness of an estimate, an auditor can: review and test process to develop estimate; develop independent expectation & corroborate estimate's reasonableness; or review subsequent events & transactions speaking to reasonableness.

Auditors rely on the performance of cut-off tests to obtain evidence regarding the assertion of completeness with respect to property, plant, & equipment. **True **False

**False the auditor will perform analytical procedures to obtain evidence regarding the assertion of completeness for PP&E balances, not cut-off tests.

Auditors perform test counts during an observation of a client's physical inventory count to obtain evidence regarding the assertions of Existence, Rights & Obligations, and Valuation. **True **False

**False Performing test counts during an inventory observation does not provide evidence regarding the assertion of Rights & Obligations, but rather for Completeness as well as Existence and Valuation.

The level of inherent risk regarding inventory balances is lower for a manufacturing client than it is for a non-manufacturing client. **True **False

**False The probability that there will be a material misstatement in an account balance (ignoring internal controls) is greater for a manufacturing client's inventory since the inventory account is much more complex than it is for a non-manufacturing client.

An entity uses a valuation model of discounted future cash flows to evaluate goodwill for impairment. The level of inherent risk regarding potential misstatement increases as the length of time for which cash flows are forecasted decreases. **True **False

**False As the length of time for which cash flows are forecasted increases, the likelihood of a material misstatement regarding impairments increases as well.

Which of the following best describes the reason that the auditors record their inventory test counts in the working papers? **For use in planning subsequent audits. **To document compliance with generally accepted accounting principles. **For subsequent tracing to the client's Final Priced Inventory listing. **To provide evidence regarding the client's rights to the inventory.

**For subsequent tracing to the client's Final Priced Inventory listing. The auditor traces the test counts to the client's final priced inventory listing which supports the recorded balance of inventory in the financial statements.

Which of the following is not one of the independent auditor's objectives regarding the audit of property, plant, and equipment? **Inspecting significant asset additions. **Verifying that recorded depreciation expense is reasonable. **Verifying that disposals have been properly recorded. **Performing analytical procedures to verify that the client has the legal right to property, plant, and equipment.

**Performing analytical procedures to verify that the client has the legal right to property, plant, and equipment. The auditor will perform analytical procedures regarding the reasonableness of PP&E and depreciation expense, but does not use analytical procedures to obtain evidence regarding the assertion of rights & obligations. The auditor will use tests of details to obtain evidence regarding that assertion.

The use of which of the following standard forms is most closely related to an entity's objectives regarding the appropriate allocation of resources? **Purchase Orders. **Sales Invoices. **Purchase Requisitions. **Receiving Reports.

**Purchase Requisitions. The use of purchase requisitions is directly related to an entity's objectives regarding resource allocation (i.e., ensuring that resources are allocated to the departments/divisions with approved needs for the resources).

Analysis of which account is least likely to reveal evidence relating to recorded retirement of equipment? **Property, plant, and equipment **Purchase returns and allowances **Accumulated depreciation **Insurance expense

**Purchase returns and allowances Purchase returns and allowances are unlikely to be related to retirements of physical assets, but are more likely to be related to acquisitions of assets.

Which of the following procedures provides evidence most relevant to the completeness assertion for accounts payable balances? **Recalculating invoice totals for amounts recorded as accounts payable. **Performing analytical procedures. **Testing subsequent disbursements. **Confirming accounts payable.

**Testing subsequent disbursements. The test of subsequent disbursements is conducted specifically to obtain evidence regarding the assertion of completeness for payables.

Which of the following is true about the auditor's observation of the client's physical inventory count? **The auditors should justify the omission of an observation in the audit report. **The auditors should supervise the client's personnel. **The auditor's observation addresses the existence assertion. **The count must always be made at year-end.

**The auditor's observation addresses the existence assertion. The auditor's observation provides direct (and therefore, reliable) evidence regarding the assertion of existence.

Which of the following is not a cue that can be used by auditors to identify potential earnings manipulation? **The timing of transactions. **The system of internal control. **Management's incentives. **Changes in underlying assumptions for estimates.

**The system of internal control. The auditor can use changes in underlying assumptions for estimates, the timing of transactions, and management's incentives to identify potential earnings manipulation. However, the system of internal control is not relevant since we assume that managers capable of earnings manipulation can override the system of internal control.

Revenue recognition is the most common area for earnings manipulation because it often involves complex judgments on the part of management. **True **False

**True This is precisely why revenue recognition is a common target for manipulation.