Chapter 5 Auditing

Comparison between the relationships among financial or nonfinancial data

Data interrelationships

Methods and records to process, summarize, and report the company's transactions

Accounting Information Systems

Valuation

Assets are recorded at proper amounts

Variety of records in support of the company's business and accounting information system

Documentary evidence

Managers and partners typically review at the _____ of the engagement timeline.

End

Working papers are reviewed at ______ supervisory level(s) of a CPA firm.

Every

Which of the following eliminates voluminous details from the auditors' working trial balance by classifying and summarizing similar or related items?

Lead schedules

Tangible asset from examination

Physical evidence

What is an example of risk assessment procedures?

Prepare a flowchart of internal control over sales

Concurring partners are often concerned with _____ control standard compliance.

Quality

Which of the following procedures is not customarily used by the auditors in determining the existence of related parties? a) Inquire of customers, suppliers, and employees as to their knowledge of related-party transactions. b) Evaluate the company's procedures for identifying and properly accounting for related-party transactions. c) Inquire of appropriate management personnel as to the names of all related parties and whether there were any transactions with these parties during the period. d) Review prior years' work papers for the names of known related parties.

a) Inquire of customers, suppliers, and employees as to their knowledge of related-party transactions.

As part of their audit, auditors obtain a representation letter from their client. Which of the following is not a valid purpose of such a letter? a) To increase the efficiency of the audit by eliminating the need for other audit procedures. b) To remind the client's management of its primary responsibility for the financial statements. c) To document in the audit working papers the client's responses to certain verbal inquiries made by the auditors during the engagement. d) To provide evidence in those areas dependent upon management's future intentions.

a) To increase the efficiency of the audit by eliminating the need for other audit procedures.

The permanent file of the auditors' working papers generally should include: a) names and addresses of all audit staff personnel on the engagement. b) a copy of the corporate charter. c) time and expense reports. d) a copy of key customer confirmations.

b) a copy of the corporate charter.

Of the following, which is the least reliable type of audit evidence? a) Confirmations mailed by outsiders to the auditors. b) Correspondence between the auditors and suppliers. c) Copies of sales invoices inspected by the auditors. d) Canceled checks returned in the year-end bank statement directly to the client.

c) Copies of sales invoices inspected by the auditors.

Which of the following business characteristics is not indicative of high inherent risk? a) Operating results that are highly sensitive to economic factors. b) Large likely misstatements detected in prior audits. c) Substantial turnover of management. d) A large amount of assets.

d) A large amount of assets.

Which of the following procedures is not customarily used by the auditors in determining the existence of related parties? a) Review prior years' work papers for the names of known related parties. b) Inquire of appropriate management personnel as to the names of all related parties and whether there were any transactions with these parties during the period. c) Evaluate the company's procedures for identifying and properly accounting for related-party transactions. d) Inquire of customers, suppliers, and employees as to their knowledge of related-party transactions.

d) Inquire of customers, suppliers, and employees as to their knowledge of related-party transactions.

Audit procedures performed to obtain an understanding of the client and its environment, including its internal control, and to assess the risk of material misstatement are referred to as:

tests of controls

Representations or evidence from outside parties

Third party representations

Cutoff

Transactions are recorded in the correct accounting period

A client representation letter helps to remind the client officers of their primary and personal responsibility for the financial statements.

True

A confirmation reply from an account receivable account ordinarily would be considered more reliable evidence than an account receivable clerk's reply to an inquiry from the auditor.

True

Audit evidence may be defined as any information that corroborates or refutes the auditor's premise that the financial statements present fairly the client's financial position and operating results.

True

Detection does not exist when no audit is performed

True

Strong internal control will increase the reliability of certain types of evidence and reduce the overall quantity of substantive procedures performed by the auditors.

True

The recording of a fraudulent credit sale at well above the item's cost on the last day of the year will increase the current ratio.

True

Reviewers are concerned that the ________ all tie together.

Working papers

Name 4 examples of a current file.

1. A confirmation of financial institution deposits 2. An adjusted trial balance 3. Adjusting journal entries 4. An analysis of miscellaneous expenses

Name 6 examples of a permanent file.

1. A lease agreement 2. Articles of incorporation 3. An analysis of long-term debt 4. A pension agreement 5. An analysis of owners' equity accounts 6. A chart of accounts

Presentation and disclosure

Assets are properly classified

Completeness

All assets have been recorded

What are 2 examples of analytical procedures?

Calculate the ratio of bad debt expense to credit sales and compare current financial information with comparable prior periods

Written documentation and representation from clients

Client representations

What are the 6 assertions?

Completeness, cutoff, existence & occurrence, presentation & disclosure, rights & obligations and valuation

Computations made independently to provide arithmetical accuracy of client records

Computations

What is an example of tests of details of account balances, transactions, or disclosures?

Confirm accounts receivable

Both _____ risk and _____ risk exist independently of the audit of financial statements

Control and inherent

Reviewers are concerned if immaterial passed misstatements have a ______ material effect.

Cumulative

What is an example of tests of controls?

Determine whether disbursements are properly approved

Analytical procedures are only useful near completion of the audit as a final overview of the audited figures.

False

Audit working papers generally provide evidence of compliance with planning and risk assessment requirements of an audit, but not of performing further audit procedures.

False

The possibility of material misstatement before considering the client's internal control

Inherent risk

In using the work of a specialist, the auditors referred to the specialist's findings in their report. This would be an appropriate reporting practice if the: a) Client is not familiar with the professional certification, personal reputation, or particular competence of the specialist. b) Auditors, as a result of the specialist's findings, give a qualified opinion on the financial statements. c) Client understands the auditors' corroborative use of the specialist's findings in relation to the representations in the financial statements. d) Auditors, as a result of the specialist's findings, decide to indicate a division of responsibility with the specialist.

b) Auditors, as a result of the specialist's findings, give a qualified opinion on the financial statements.

Absent any other changes, an increase in the risk of material misstatement results in an increase in _______

Audit risk

Audit working papers should provide primary support from the client's financial statements.

False

If strong internal control exists in a client company, then evidence obtained internally is much stronger than evidence obtained from sources outside the client company.

False

Oral evidence is sufficient by itself if it comes from a top corporate officer.

False

Related party transactions have in common that they all result from dealings between parties related due to ownership interests.

False

Valuation of equipment carried at $70,000 could best be established by physically inspecting the equipment.

False

Working papers should be kept for no more than three years because of the cost of storage.

False

Working papers should never be prepared by the client's personnel.

False

Rights and obligations

The company legally owns the assets

Existence and occurrence

There is such an asset

The auditors' working papers will generally be least likely to include documentation showing how the: a) client's schedules were prepared. b) unusual matters were resolved. c) engagement had been planned. d) client's internal control structure had been considered.

a) client's schedules were prepared.

Which of the following statements best describes why auditors investigate related party transactions? a) Related party transactions generally are illegal acts. b) The substance of related party transactions may differ from their form. c) All related party transactions must be eliminated as a step in preparing consolidated financial statements. d) Related party transactions are a form of management fraud.

b) The substance of related party transactions may differ from their form.