Chapter 5
Trend analysis
Review of changes in an account balance over time.
Horizontal analysis
Review of client financial statement amount over time.
A primary measure of the effectiveness of an analytical procedure is its _______ which can be improved by performing a more detailed analysis.
precision
Audit risk is the risk that financial statements will contain a material departure from GAAP and the auditor will issue:
an unmodified opinion
Calculating days sales in ending accounts receivable and comparing it to the prior year would be an example of:
analytical procedure
To increase the reliability of evidence, completed confirmations are sent directly to the
auditor ****not a client; less reliable
The type of audit procedures performed by auditors to obtain audit evidence include:
- Test of controls - Substantive procedures - Risk assessment procedures
________ ratios typically include the inventory turnover and accounts receivable turnover ratios.
Activity
Reasonable test
An explicit expectation, not based on a formal statistical model, is computed for the financial statement amount using financial or nonfinancial data.
Inspections of tangible assets provides high-quality evidence as to the _________ assertion.
existence
The representation letter includes several specific items. A good example of this is that the management of a company typically will state that all known liabilities are accurately reflected in the ___________________
financial statement
Documentary evidence is obtained through ____________ of records and documents and can be in paper or electronic form.
inspection
The audit risk model can be used to assess the risk of material misstatement and restrict detection risk to achieve a _____ level of risk that the financial statements are materially misstated.
low
Accounting estimates such as the allowance for obsolete inventory are affected by estimates made by
management
The quantity of audit evidence needed is affected by the risk of misstatement and the _________ of audit evidence.
quality
Individuals or entities that may have dealings with the client in which one party is significantly influenced by the other such that it may not pursue its separate interests is known as a __________ party.
related
At the end of the audit, auditors are required to obtain a ____________ letter from management that summarizes important oral representations made by management during the audit.
representation
An individual or company that has a certain expertise in a field of knowledge other than accounting and auditing is a
specialist
_____________ assertions are those that have a reasonable possibility of containing a misstatement, without regard to the effect of controls, that could cause financial statements to be materially misstated.
Relevant
T/F: Adjusting journal entries are ordinarily recorded by the client, while reclassifying journal entries need not be recorded
True
T/F: in performing analytical procedures, the auditors may use dollar amounts, physical quantities, or percentages.
True
For related party transactions, auditors should be most concerned about obtaining evidence regarding which assertion:
presentation and disclosure
Which of the following choices are categories of traditional financial ratios?
- Activity ratio - Leverage ratio
Rank the pieces of documentary evidence from most reliable to least reliable
1. Cutoff bank statement—prepared externally and sent directly to auditors—high reliability 2. Vendor's invoice—prepared externally and held by the client 3. Paid check—prepared internally but reviewed by outsiders (the bank) 4. Client copy of sales invoice—prepared internally and held by client
Rank the inputs management use to apply fair value techniques based on reliability of audit evidence from most reliable to least reliable:
1. Observable quoted prices in active markets for identical assets or liabilities. 2. Other observable quoted prices, generally for similar assets or liabilities in active markets. 3. Unobservable inputs for the asset or liability.
Match the type of transaction with its example: Nonroutine
Calculating Depreciation Expense
Cross-sectional analysis
Comparison with similar firms (ex. industry) at a point in time.
Ratio analysis
Comparisons of relationships between two or more financial accounts or account balance to nonfinancial data.
Match the test of details type with the example: Test of Account Balance
Confirmation of accounts receivable balance
For the audit risk model, auditors must restrict this risk through the performance of substantive procedures:
Detection
Match the type of transaction with its example: Estimation
Estimating the allowance for uncollectible accounts
Management makes assertions for financial statements regarding all of the following except:
Fairness of the audit opinion
T/F: The auditors should propose an adjusting journal entry for all material related-party transactions
False
T/F: The most reliable form of documentary evidence generally is considered to be documents created by the client
False
T/F: The primary purpose of a letter of representations is to obtain additional evidence about specific accounts
False
T/F: The professional standards consider calculating depreciation expense a "routine" transaction
False
T/F: The use of lead schedules is designed to increase the detail of the working trial balance
False
T/F: Working papers of continuing audit interest usually are filed with the administrative working papers
False
Match the type of transaction with its example: Routine
Sales Transactions
In regards to audit evidence, ________ is a measure of the quantity of audit evidence that should be obtained.
Sufficiency
Match the test of details type with the example: Test of Disclosure
Test of property, plant, and equipment footnote
Match the test of details type with the example: Test of class of transaction
Tests of inventory purchases to determine if properly accounted for
T/F: A vendor's invoice is an example of documentary evidence created by a third party and held by the client
True
Vertical analysis
Use of common-size financial statements in which all accounts are expressed as a percentage of a base number in the statement.
Regression analysis
Use of statistical models to quantify the auditors' expectation about a financial statement amount or ratio.
Auditors should investigate any significant differences between their prior expectations and the actual amounts on the client's financial statements. Which of the following are proper methods of investigation in this case?
- Reconsidering the factors and methods originally used in making the expectations - Inquiry of management
Which of the following choices below are categories of representations that can be found in a representation letter:
- The financial statements are complete and were prepared with the use of generally accepted accounting principles - All items requiring any disclosure are sufficiently disclosed
T/F: When the risk of material misstatement for an account is high, the auditors may perform additional substantive procedures to restrict detection risk to a lower level
True