Chapter 16 LS

True or false: Because of the potential risks, few companies outsource the payroll function.

False

An event occurring after the date of the balance sheet but prior to completion of the audit and issuance of the audit report is called a(n)

Subsequent

The distribution of pay through paychecks should be performed by ______.

a person with no other functions related to payroll

The sales account is often verified by the auditors in conjunction with the audit of ______.

accounts receivable

The primary purpose of the representation letter is to have the ______ acknowledge that they are primarily responsible for the fairness of the financial statements.

client's principal officers

The most important audit objective when auditing the statement of cash flows is ______.

determine the presentation and disclosure are appropriate

Conservatism in the valuation of liabilities means that when two (or more) reasonable alternative values are indicated, the accountant will choose the ______ amount.

higher

Differences between management and the auditors concerning accounting estimates, or the selection or application of accounting policies the auditors consider inappropriate give rise to

judgmental

Auditors usually perform ______ substantive procedures on the statement of cash flows.

limited

The interest revenue account is often verified by the auditors in conjunction with the audit of ______.

notes receivable

A report by management discussing this year's operating results, financial summaries, employment data, and the names of officers and directors are all examples of

other information

Financial and nonfinancial information that is included in a document that contains audited financial statements but does not include required supplementary information is called

other information

For auditors to issue an unmodified opinion, the estimate of the total misstatements has to be ______ less than a material amount.

significantly

The review of the audit working papers at or near the completion of fieldwork is generally done by ______.

the partner in charge of the engagement

AICPA AU 725 provides guidance on supplementary information regarding ______.

- comparing information with accounting records - obtaining written representations from management - inquiry of management

The most important control over payroll is the ______.

division of payroll work among several departments

Which of the statements regarding required supplementary information (RSI) are correct?

- Auditors are required to compare RSI for consistency to the basic financial statements and other knowledge obtained during the audit. - Auditors are required to obtain written representations from management regarding this information.

Further audit procedures for payroll include ______.

- analytical procedures to test the reasonableness of payroll expense - examining contract and supporting records to test commission earnings

Auditors' estimates of misstatements arising from audit sampling conclusions concerning populations result in ______ misstatements.

projected

For the auditors to issue an unmodified opinion ______.

they must conclude there is a low risk of material misstatement

If a CPA firm discovers a material misstatement in audited financial statements after the auditors' report has been issued, and the client will not notify affected parties, the auditor should notify ______.

- each person known to be relying on the audited financial statements - the client's board of directors - regulatory agencies having jurisdiction over the client

True or false: Auditors use management review controls to help detect and correct misstatements that are not prevented or detected by other controls.

True

Auditors should obtain a summary of compensation of ______ for the year and compare to contracts, minutes of directors' meetings, or other authorization.

officers

Most loss contingencies may also appropriately be called

contingent liabilities

The cost of goods sold account is often verified by the auditors in conjunction with the audit of ______.

inventories

The review of the work of the audit staff is primarily accomplished through a review of the ______.

working papers

The product warranty account is often verified by the auditors in conjunction with the audit of ______.

accrued liabilities

AICPA AU 240 requires auditors to evaluate whether ______ performed as substantive procedures or in the overall review stage indicate a previously unrecognized risk of material misstatement due to fraud.

analytical procedures

Auditors should review the minutes of meetings of stockholders and directors, including meeting held through the date of the ______.

audit report

The representation letter should be signed by the client's principal officers as of the date of the ______.

audit report

The auditors' report should ______.

be dated at the last day of fieldwork or later

In the valuation of assets, the accounting doctrine of __________ means that, when two or more reasonable values are indicated, the accountant will choose the lower amount.

conservatism

A possible loss stemming from past events that will be resolved by some future event is called a loss

contingency

Auditors often develop an expectation of account balances for selling, general, and administrative expense accounts, and investigate balances that are significantly ______ than the expectations.

different

Examining subsequent cash disbursements is done to detect ______ that existed at year-end but were omitted in the client's financial statements.

liabilities

Conservatism in the valuation of assets means that when two (or more) reasonable alternative values are indicated, the accountant will choose the ______ amount.

lower

Auditors should review the __________ of meetings of stockholders and directors, including important subcommittees of directors, such as the audit committee and the investment committee.

minutes

Analytical procedures related to selling, general, and administrative expenses include developing an expectation of the account balance and comparing the ______ with the expected account balance.

prior year balance

Auditors consider the relevance of the assertions addressed, the level of aggregation of the data, the consistency of performance, the predictability of management expectations, and the criteria used to determine when items are investigated when evaluating management

review controls

Procedures at the end of the audit include ______.

searching for unrecorded liabilities obtaining the representation letter

True or false: An unqualified opinion cannot be issued if there is a change in accounting principle or when other auditors are involved in an audit.

False

After the issuance of its audit report, a CPA firm encountered facts indicating the client's financial statements were materially misstated and, upon investigation, determined the facts were significant and existed at the date of the audit. The auditors should ______.

advise the client to make appropriate disclosure to anyone relying upon the audit report

A subsequent event is an event occurring ______ the balance sheet date, and ______ to completion of the audit and issuance of the audit report.

after; prior

Outsourcing the payroll function ______.

provides the expertise that some companies lack is often cost beneficial

Certain organizations are mandated by a designated accounting standard setter to present __________ ___________ information as unaudited schedules accompanying the financial statements.

required supplementary

Information presented outside the basic financial statements, excluding required supplementary information, that is not considered necessary for the financial statements to be fairly presented in accordance with the applicable financial reporting framework is called ______ information.

supplementary