CH 14 Audit

A client erroneously recorded a large purchase twice. Which of the following internal control measures would be most likely to detect this error in a timely and efficient manner?

reconciling vendors' monthly statements with subsidiary payable ledger accounts.

When testing customer deposits, auditors typically review a(n) ______of the individual deposits.

list

An understatement of liabilities will

exaggerate the financial strength of a company.

With respect to auditing product warranty accruals, auditors should be alerted to changes in the client's

products sold

To gain overall assurance as the reasonableness of accounts payable, tha auditor may consider

ratios

For effective internal control, the accounts payable department should compare the information on each vendor's invoice with the:

receiving report and the purchase order.

Federal and state gov do not specify the exact ____ to be maintained, but do specify the amounts to be withheld

records

A purchase was recorded before year-end which should have been recorded after year-end and payment of it has not yet occured

reviewing receiving reports issued shortly before and after year-end.

An audit of the balance in the accounts payable account is ordinarily not designed to:

detect accounts payable that are substantially past due.

Warranty repair and replacement expense should be:

estimated and accrued for current year sales.

Use the understanding of the client and its environment to consider inherent risks.

is performed first

Income taxes withheld from employees but not yet submitted to the government are considered to be

liability

After performing test of controls, auditors may revise the risk of

material misstatement based on the results.

When auditors find unrecorded liabilities, before adjusting they must consider_______.

materiality

Auditors obtain a trial balance of accounts payable as of the balance sheet date and use this list as a starting point for

substantive procedures.

Auditors often obtain written

representations from management regarding the existence of unrecorded payables,

For most accrued liabilities, the audits approach will emphasize a:

review and test of management's process of developing the estimates.

Auditors need to consider _____ terms for determining ownership and whether a liability should be recorded.

shipping

All material related payables should be

disclosed in the financial statements.

When a client has established effective IT application controls for purchase transactions the auditor:

may find it more effective to test the controls instead of a sample of transactions.

If duplicate payments, returns to vendors after payment or advances to suppliers result in material debit balances in accounts payable, the balances should:

be classified as assets

Auditors analyze the unclaimed wages account for the purpose of determining that CREDITS represent unclaimed wages after payroll distribution and

DEBITS represent only authorized payments to employees, remittances to the state under unclaimed property laws, or transfers back to general cash funds.

determine that the presentation and disclosure of accounts payable are appropriate

Inquire of management concerning the existence of related party transactions.

Assumption regarding the liability for postemployment benefit other than pensions should be developed by:

a specialist

Basic auditing steps for accrued liabilities include:

considering the need for accrual of other accrued liabilities not presently considered -identifying and evaluating the reasonableness of the assumptions that underlie the computation of the liability., -examining contracts that provide the basis for accrual

Tax guidelines do not allow the ____ of the accrual for warranty claims.

deduction.

Property tax payments are typically

few in number

Auditors need to compare the percentage of claims accrued to current year___.

sales

Auditors should review container deposits shown as refunded to customers to verify:

they were not stolen by employees.

Principal working papers include:

-confirmation requests -lead schedule

In addition to accounts payable, other items classified as current liabilities include:

-sales tax payable -customers' deposits -unclaimed wages

which of the following is the best audit procedure for determining the existence of unrecorded liabilities?

Examine selected cash disbursements in the period subsequent to year-end

Auditors may review the portion of accounts payable that is ___ at year-end and compare it to corresponding data for previous years.

past-due

Proper balance sheet presentation of accounts payable requires that any material amounts payable to

related parties such as directors and officers, be disclosed separately from other accounts payable.

The existence of an unrecorded accrued payable not due for payment for several months

reviewing union contracts,

Which of the following procedures is least likely to be completed before the balance sheet date?

search for unrecorded liabilities.

When confirming accounts payable, the approach is most likely to be one of:

selecting the accounts of companies with whom the client has previously done the most business, plus a sample of other accounts.

The least likely approach in auditing management's estimate relating to an accrued liability is to:

send confirmations relating to the estimate.

When gaining an understanding of internal controls over accounts payable, auditors will perform a WALK-THROUGH of

several purchase transactions and observe the implementation of the various controls.

The following statements are true:

-The primary objective of audit procedures for liabilities is completeness. -Understanding liabilities is generally done by failing to make an entry.

The following statements are correct:

-a number of small errors may have a material effect on the financial statements. - an important aspect of materiality of an unrecorded transaction is its affect on net income. -auditors should avoid proposing adjusting entries for inconsequential errors.

Analytical procedures performed to gain assurance about the overall reasonableness of accounts payable and related accounts include:

-comparing amounts owed to individual creditors to balances in prior years -computing ratios and comparing them to prior years.

Monthly vendor statements should be reconciled promptly with the

accounts payable ledger or list of open vouchers.

When testing other accrued liabilities, auditors may independently calculate the amount and ______ it to management's estimate.

compare

ordinarily, the most significant assertion relating to accounts payable is:

completeness

Auditors are primarily concerned with the

completeness of recorded accounts payable,.

The auditors cannot express an opinion on either the balance sheet of income statement of a corporation without first obtaining evidence that the provision for

income taxes has been properly computed.

To determine that each voucher is submitted and paid only once, when a payment is approved, supporting documents should be cancelled by the:

individual who signs the checks.

Interest-bearing obligation

is not to be included in accounts payable.

As repairs on warranty items take place, the accrual account is ___.

debited

Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because:

there is likely to be other reliable external evidence available to support the balances.

Confirmation of accounts payable is emphasized less than confirmation of accounts receivable because the greatest risk in the audit of liabilities is the possibility of ____ amounts

unrecorded.

Establish the completeness of recorded accounts payable. Substantive procedure=>

vouch purchases recorded after year-end

Recording a provision for warranty liabilities is:

-not allowed for tax purposes -required for proper financial statement presentation.

Considerations in auditing accrued pension liability include:

-service costs -gains and losses on assets -amortization of service costs. -interest cost

In an effective purchasing system, copies of the purchase order should be sent to the ___ departments.

-stores -receiving -accounts payable

Potential sources of unrecorded payables include:

-vouchers payable entered into the register after the balance sheet date -invoices received by the client after the balance sheet date -unmatched invoices and unbilled receiving reports.

The audit of accounts payable should include test of controls and substantive procedures that establish the _____ of recorded accounts payable.

completeness.

In an audit, the valuation of year-end accounts payable is most likely addressed by:

confirmation

Testing the voucher register or the accounts payable ledgers by vouching specific items back through journals to original documents:

is necessary to determine the operating effectiveness of certain controls.

All property tax transactions are generally

analyzed in the working papers.

The validity of the amount in the general ledger control account is

established by tracing posting to the voucher register and cash disbursements journal.

Vacation pay should be accrued:

for vacation not taken and for future vacation earned during the year.

The search for unrecorded liabilities must be made

after the balance sheet date.

A substantive procedure that auditors perform when the risk of material misstatement of accounts payable is high is to reconcile accounts payable with monthly statements from _____.

creditors

Sales tax collected from customers constitute

current liabilities of the business until they are remitted to the taxing authority.

Deposits on contracts and similar advances from customers are recorded as

current liabilities on the balance sheet.

In performing a test of controls, the auditors vouch a sample of entries in the purchases journal to the supporting documents. Which assertion would this test of controls most likely test?

existence

When searching for unrecorded liabilities, the auditors consider transactions recorded

after year-end

WHen unrecorded liabilities are discovered by the auditors, they should evaluate whether the omission is sufficiently material to warrant

an adjusting journal entry,

Determine that the valuation of warranty loss reserves is measured in accordance to GAAP.

test the computations made by the client to set up the accrual.

When reviewing accrued commissions and bonuses payable, an essential consideration is:

authority for the payment.

The existence of a fictitious account payable in an audit in which accounts payable are not confirmed

vouching selected accounts on the year-end trial balance of accounts payable.

Concerns regarding accrued payrolls include:

- determining of total liabilities at year end -proper matching of costs and revenues.

The most effective means of disclosing unrecorded accounts payable is comparing cash payments after the balance sheet date with the accounts payable trial balance.

TRUE

Determine the existence of year-end recorded accounts payable and that the client has obligations to pay these liabilities. Substantive procedure

confirm outstanding year-end balances of payables.

When all of a company's product are sold with warranties, the balance in the accrual account should move

directly with the balance in sales.

Income taxes withheld from employees' pay and not remitted as of the balance sheet date constitute a

liability to be verified by the auditors.

When designing planned SUBSTANTIVE procedures, the auditors should consider potential misstatements that may occur and the weakness in control or

other factors that make them misstatements more likely.

When subsequent procedures to verify individual vouchers are done after the balance sheet date, the client should:

prepare a list of year-end unpaid vouchers.

Accounts payable confirmations can be mailed to vendors from whom

substantial purchases have been made.

If any inherent risks of accounts payable are related to FRAUD,

the auditors will make certain they understand the programs and controls established by management to control the risk.