Chapter 16 AAAAuditing

Management estimates the company's allowance for doubtful accounts as $200,000 and the auditors develop an estimate that suggests that the amount should be between $230,000 and $250,000. The likely misstatement in this situation is:

$30,000

Which of the following subsequent events might require an adjustment to the client's financial statements? A business combination with another company. A major customer declares bankruptcy causing a material receivable to be uncollectible. Loss of plant and equipment due to a fire. The loss in insured. Plant employees could possibly go on strike.

A major customer declares bankruptcy causing a material receivable to be uncollectible. Loss on the sale of a closely-held investment

A client has a calendar year-end. Listed below are four events that occurred after December 31. Which one of these subsequent events is most likely to result in adjustment of the December 31 financial statements? The client decided to change depreciation methods in the coming year. A substantial portion of the company's inventory was written off as obsolete on January 31. The factory building was damaged by a fire on January 19. A major subsidiary was sold on February 7.

A substantial portion of the company's inventory was written off as obsolete on January 31.

For clients that distribute checks or cash payments and have significant payroll control weakness, which of the following audit procedures is aimed at determining whether every name on the company payroll is a bona fide employee actually on the job? A surprised observation of a paycheck distribution, while establishing the identity of each employee receiving payment. A test of payroll extensions. Analytical comparisons of budgeted to actual payroll expense. Comparison of payee names on canceled payroll checks with the payroll register.

A surprised observation of a paycheck distribution, while establishing the identity of each employee receiving payment. Visit the working areas and confirm with employees their badge or identification numbers.

An auditor most likely would assess control risk at the maximum if the payroll department supervisor is responsible for

Authorizing payroll rate changes for all employees

With respect to issuance of an audit report which is dual dated for a subsequent event occurring after the completion of field work but before issuance of the auditors' report, the auditors' responsibility for events occurring subsequent to the completion of field work is: A. Extended to include all events occurring until the date of the last subsequent event referred to. B. Limited to the specific event referred to. C. Limited to all events occurring through the date of issuance of the report. D. Extended to include all events occurring through the date of submission of the report to the client.

B. Limited to the specific event referred to.

Which of the following procedures would an auditor most likely perform while evaluating audit findings at the conclusion of an audit? Obtain assurance from the entity's attorney that all material litigation has been disclosed in the financial statements. Verify the clerical accuracy of the entity's proof of cash and its bank cutoff statement. Determine whether reportable conditions have been corrected. Calculate an estimate the total of uncorrected misstatements in the financial statements.

Calculate an estimate the total of uncorrected misstatements in the financial statements.

Which of the following could test the occurrence assertion for payroll-related liabilities?

Compare items in accrued payroll taxes to the supporting payroll tax return

Which of the following is not a procedure that is designed to provide evidence about the existence of loss contingencies? Obtaining a lawyers' letter. Confirming accounts payable. Reviewing the minutes of board of directors' meetings. Review correspondence with banks.

Confirming accounts payable.

Which of the following procedures would an auditor most likely perform while evaluating audit findings at the conclusion of an audit?

Develop an estimate of the total likely misstatement in the financial statements

Material loss contingencies should be recorded in the financial statements if available information indicates it is probable that a loss had been sustained prior to the balance sheet date and the amount of such loss can be reasonably estimated. For a public company these considerations will affect the audit report as follows: If a loss meets these criteria, the auditor may issue an unqualified opinion but is required to point out the contingency in an explanatory paragraph of the report. If a loss meets these criteria and is disclosed in the financial statement notes, the auditor may issue an unqualified opinion, but is required to point out the contingency in an explanatory paragraph of the report. If a loss meets these criteria and is disclosed in the financial statement notes, the auditor may issue an unqualified opinion, but should consider adding an explanatory paragraph as a means of emphasizing the disclosure. If a loss is probable but the amount cannot be reasonably estimated and is disclosed in the notes to the financial statements, the auditor may issue an unqualified opinion.

If a loss is probable but the amount cannot be reasonably estimated and is disclosed in the notes to the financial statements, the auditor may issue an unqualified opinion.

In connection with the annual audit, which of the following is not a "subsequent events" procedure? Review available interim financial statements. Read available minutes of meetings of stockholders, directors, and committees. With regard to meetings for which minutes are not available, inquire about matters dealt with at such meetings. Make inquiries with respect to the financial statements covered by the auditors' previously issued report if new information has become available during the current examination that might affect that report. Discuss with officers the current status of items in the financial statements that were accounted for on the basis of tentative, preliminary, or inconclusive data.

Make inquiries with respect to the financial statements covered by the auditors' previously issued report if new information has become available during the current examination that might affect that report.

For which of the following ledger accounts would the auditor be most likely to analyze the details? Postage expense. Supplies expense. Miscellaneous expense. Sales salaries expense.

Miscellaneous expense.

Which of the following is not a procedure that auditors typically perform to search for significant events during the period after year-end but prior to the audit report date? Review minutes of board of directors' meeting. Review the latest available interim financial statements. Inquire about any unusual adjustments made subsequent to the balance sheet date. Perform analytical procedures in the period subsequent to the balance sheet date.

Perform analytical procedures in the period subsequent to the balance sheet date.

Analytical procedures are required as a part of the: Detailed tests of balances. Internal control assessment. Procedures performed near the end of the audit. Substantive testing.

Procedures performed near the end of the audit.

Which of the following internal control objectives is likely to be the auditors/ major concern in the audit of the payroll cycle

Recorded payroll transactions are valid.

Which of the following procedures is not a procedure that is completed near the end of the engagement? Review cash transactions. Review to identify subsequent events. Obtain the lawyer's letter. Obtain the letter of representations.

Review cash transactions.

Key segregations of duties in the human resource management process include all of the following except: The supervision function should be separated from the payroll-processing function. The disbursements function should be separate from the supervision function. The human resources function should be separate from setting salaries. The payroll-processing function should be separate from the general ledger function.

The human resources function should be separate from setting salaries.

Auditors should perform audit procedures relating to subsequent events? Through year-end. Through issuance of the audit report. Through the date of the audit report. For a reasonable period after year-end.

Through the date of the audit report.

A substantive test of transactions to test the completeness assertion includes

Tracing sample of time cards to the payroll register

Which of the following is not a procedure normally performed while completing the audit of a public company? Obtain a lawyer's letter. Obtain a representations letter. Perform an overall review using analytical procedures. Update internal control questionnaire.

Update internal control questionnaire.

The date of the management representation letter should coincide with the: date of the auditor's report. balance sheet date. date of the latest subsequent event referred to in the notes to the financial statements. date of the engagement agreement.

date of the auditor's report.

An example of an internal control weakness is to assign to a supervisor the responsibility for: reviewing and approving time reports for subordinate employees. initiating requests for salary adjustments for subordinate employees. authorizing payroll checks for terminated employees. distributing payroll checks to subordinate employees.

distributing payroll checks to subordinate employees.

Overall analysis of income statement accounts may bring to light errors, omissions, and inconsistencies not disclosed in the overall analysis of balance sheet accounts. The income statement analysis can best be accomplished by comparing monthly: income statement ratios to balance sheet ratios. revenue and expense account balances to the monthly reported net income. income statement ratios to published industry averages. revenue and expense account totals to the corresponding figures of the preceding years.

revenue and expense account totals to the corresponding figures of the preceding years.

Which of the following is a control activity that most likely could help prevent employee payroll fraud?

the human resources department promptly sends employee termination notices to the payroll rupervisor