ACCT 4240 Exam 3
Which of the following would not overstate current-period net income?
Failing to record a check paying an item in Vouchers Payable
Which cycle is not directly linked to the production cycle?
Finance and investment cycle
Which of the following approaches is most suitable for auditing the finance and investment cycle?
Gain an understanding of internal controls and perform extensive substantive procedures
A major objective of written representations is to
Impress on management its ultimate responsibility for the financial statements and disclosures
Which of the following management assertions is an auditor most likely testing if the audit objective states that all inventory on hand is reflected in the ending inventory balance?
Inventory is complete.
A client has a separate sales group for its largest "preferred" customers. This is a select group of customers that normally make purchases in excess of $250,000 and often have accounts receivable balances in excess of $1 million. Which of the following audit procedures would the auditor most likely perform?
Send out positive confirmations on a large sample of these customers
Subsequent knowledge of which of the following would cause the entity to adjust its December 31 financial statements?
Settlement of litigation in February for $100,000 that had been estimated at $12,000 in the December 31 financial statements
Which of the following statements best describes why an auditor would use only substantive procedures to evaluate specific relevant assertions and risks?
Testing the operating effectiveness of the relevant controls would not be efficient.
The primary reason auditors request responses to attorney letters is to provide auditors
Corroboration of the information furnished by management about litigation, claims, and assessments.
Which of the following would be considered an analytical procedure?
Comparing inventory balances to recent sales activities.
A retailer's physical count of inventory was higher than that shown by the perpetual records. Which of the following could explain the difference?
Credit memos for several items returned by customers had not been recorded.
Which of the following is the most important audit consideration when examining the stockholders' equity section of a client's balance sheet?
Entries in the capital stock account can be traced to resolutions in the minutes of meetings of the board of directors.
Flatez was engaged to examine the financial statements of Gamma Corporation for the year ended June 30. Having completed an examination of the investment securities, which of the following is the best method of verifying the accuracy of recorded dividend income?
Comparing recorded dividends with a standard financial reporting service's record of dividends
What substantive procedures should you apply in examining the common stock and treasury stock accounts? Organize your answer as a list of audit procedures organized by the financial statement assertions.
Treasury Stock: Existence (a) Inspect the certificates held as treasury stock.
Tests of Controls Related to Controls and Assertions. Required: For each procedure, identify (a) the internal control activity (strength) being tested and (b) the assertion(s) being addressed. 1. Balance and reconcile detailed production cost sheets to the work-in-process inventory control account.
(1) a. Preparation of summary material and labor entries. b.Valid work-in-process inventory transactions are recorded and none omitted (completeness).
Tests of Controls Related to Controls and Assertions. Required: For each procedure, identify (a) the internal control activity (strength) being tested and (b) the assertion(s) being addressed. 2. Scan closed production cost sheets for missing numbers in the sequence.
(2) a.Production cost sheets prenumbered and accounted for. b. Valid finished goods inventory transactions are recorded and none omitted (completeness).
Tests of Controls Related to Controls and Assertions. Required: For each procedure, identify (a) the internal control activity (strength) being tested and (b) the assertion(s) being addressed. 3. Vouch a sample of open and closed production cost sheet entries to (a) labor reports and (b) issue forms and materials used reports.
(3) a. Independent check on materials and labor used. b. Recorded labor and material transactions are valid (occurrence).
Tests of Controls Related to Controls and Assertions. Required: For each procedure, identify (a) the internal control activity (strength) being tested and (b) the assertion(s) being addressed. 4. Locate the material issue forms and determine whether they are (a) prenumbered, (b) kept in a secure location, and (c) available to unauthorized persons.
(4) a. Issue forms secure and used by authorized personnel. Prenumbered and accounted for. b. All material issues are authorized (occurrence). All issue forms are recorded (completeness).
Tests of Controls Related to Controls and Assertions. Required: For each procedure, identify (a) the internal control activity (strength) being tested and (b) the assertion(s) being addressed. 5. Select several summary journal entries in the work-in-process inventory and (a) vouch them to weekly labor and material reports and to production cost sheets and (b) trace them to the control account.
(5) a. Use of control account. b. Production transactions are recorded properly (classification).
Tests of Controls Related to Controls and Assertions. Required: For each procedure, identify (a) the internal control activity (strength) being tested and (b) the assertion(s) being addressed. 6. Select a sample of the material issue forms in the production department file. Examine them for a. Issue date and materials used report date.
(6a) a. Recording of materials used. b. Material used is recorded in proper period (accuracy).
Tests of Controls Related to Controls and Assertions. Required: For each procedure, identify (a) the internal control activity (strength) being tested and (b) the assertion(s) being addressed. 6. Select a sample of the material issue forms in the production department file. Examine them for b. Production order number.
(6b) a. Standard control number. b. Job accounting is complete (completeness).
Tests of Controls Related to Controls and Assertions. Required: For each procedure, identify (a) the internal control activity (strength) being tested and (b) the assertion(s) being addressed. 6. Select a sample of the material issue forms in the production department file. Examine them for c. Floor supervisor's signature or initials.
(6c) a. Material received custody. b. Material used is authorized (occurrence).
Tests of Controls Related to Controls and Assertions. Required: For each procedure, identify (a) the internal control activity (strength) being tested and (b) the assertion(s) being addressed. 6. Select a sample of the material issue forms in the production department file. Examine them for d. Name and number of material.
(6d) a. Proper material received. b. Job cost accounting accurate (accuracy).
Tests of Controls Related to Controls and Assertions. Required: For each procedure, identify (a) the internal control activity (strength) being tested and (b) the assertion(s) being addressed. 6. Select a sample of the material issue forms in the production department file. Examine them for e. Raw materials stores clerk's signature or initials.
(6e) a. Proper release of correct materials. b. Material release recorded accurately (accuracy).
Tests of Controls Related to Controls and Assertions. Required: For each procedure, identify (a) the internal control activity (strength) being tested and (b) the assertion(s) being addressed. 6. Select a sample of the material issue forms in the production department file. Examine them for f. Material requisition in raw materials stores file, noting the date of requisition.
(6f) a. Material release authorized and timely. b. Authorized issue of material and in proper period (occurrence, accuracy).
Tests of Controls Related to Controls and Assertions. Required: For each procedure, identify (a) the internal control activity (strength) being tested and (b) the assertion(s) being addressed. 7. Determine by inquiry and inspection whether cost clerks review dates on reports of units completed for accounting in the proper period.
(7) a. Timely recording. b. Inventory recorded in proper period (completeness, cutoff).
In which of the following circumstances would the use of the negative form of accounts receivable confirmation most likely be justified?
A small number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.
PP&E Assertions and Substantive Procedures. This question contains three items that are management assertions about property and equipment. Following them are several substantive procedures for obtaining evidence about management's assertions. 1. The entity has legal right to property and equipment acquired during the year.
1. Rights evidence: d. Examine deeds and title insurance certificates.
PP&E Assertions and Substantive Procedures. This question contains three items that are management assertions about property and equipment. Following them are several substantive procedures for obtaining evidence about management's assertions. 2. Recorded property and equipment represent assets that actually exist at the balance-sheet date.
2. Existence evidence: g. Physically examine all major property and equipment additions.
PP&E Assertions and Substantive Procedures. This question contains three items that are management assertions about property and equipment. Following them are several substantive procedures for obtaining evidence about management's assertions. 3. Net property and equipment are properly valued at the balance-sheet date.
3. Valuation evidence: b. Review the provision for depreciation expense and determine whether depreciable lives and methods used in the current year are consistent with those used in the prior year.
When confirming accounts payable, emphasis should be put on what kind of accounts?
Accounts with small or zero balances.
An auditor reviews job cost sheets to test which transaction assertion?
Accuracy
Reviewed a sample of vendor invoices for prices paid for inventory.
Accuracy and valuations
Reviewed vendor invoices and purchase orders for terms of the contract.
Accuracy and valuations
From the auditors' point of view, inventory counts are more acceptable prior to the year-end when
Accurate perpetual inventory records are maintained.
Which of the following statements is correct with respect to the elements of the "fraud triangle"?
All: Motive is a cause that pressures people into action. Opportunity refers to a situation that allows someone with motive to carry out fraud. A lack of integrity describes a person who does not stick to the social or organizational ethical code. Fraud is most common when these three factors exist together.
For audits of financial statements made in accordance with generally accepted auditing standards, the use of analytical procedures is required to some extent.
As a substantive test: No; In the final review stage: Yes
Chandler, an assistant accountant with the firm of Better & Best, is auditing the financial statements of Tech Consolidated Industries Inc. The firm's audit plan calls for the preparation of written representations. Required: 1.In an audit of financial statements, in what circumstances are auditors required to obtain written representations?
Auditors are required to obtain written representations in all audits conducted under generally accepted auditing standards.
Shane, is the auditor of Brian Corp. Shane plans to follow last year's work papers in selecting accounts payable to be confirmed. Confirmations were mailed to 50 of Jill's 200 suppliers. The sample was designed to select accounts with the largest balances. Shane & Brian spent a lot of time reconciling minor differences between the confirmation amounts & the accounts payable trial balance. Required: Do you believe Shane should use the same sample design for accounts payable confirmations this year? If not, what suggestions can you give to improve the design?
Because of the concern for understatement of liabilities, auditors are more concerned with the completeness and valuation assertions for accounts payable. Auditors emphasize accounts payable that are more likely understated. Therefore, small and zero balances should be included in the sample design. Also, vendors with high activity during the year might be selected.
A related party is a person or entity that
Can exert significant influence over or be influenced by the company
Give any audit steps or reporting requirements you believe should be taken or recognized in connection with each of the following: 1. "The debtor company shall endeavor to maintain a working capital ratio of 2:1 at all times and, in any fiscal year following a failure to maintain said ratio, the company shall restrict compensation of officers to a total of $500,000. Officers for this purpose shall include the board chair, president, all vice presidents, secretary, and treasurer."
Check balance sheets at beginning and through the previous fiscal year for working capital ratio. If under 2:1, check compensation of officers for compliance with limitation.
What substantive procedures should you apply in examining the common stock and treasury stock accounts? Organize your answer as a list of audit procedures organized by the financial statement assertions.
Common Stock & Treasury Stock: Completeness (f) Reconcile the number of shares: Issued - Treasury = Outstanding
What substantive procedures should you apply in examining the common stock and treasury stock accounts? Organize your answer as a list of audit procedures organized by the financial statement assertions.
Common Stock: Existence (a) Verify authorized shares with reference to corporate charter. (b) Confirm outstanding shares with owners. (c) Count outstanding shares as shown in the stock record book stubs. (d) Verify authorization in board minutes to issue new shares. (e) Obtain written representations about the number of shares authorized, issued, and outstanding.
What substantive procedures should you apply in examining the common stock and treasury stock accounts? Organize your answer as a list of audit procedures organized by the financial statement assertions.
Common Stock: GAAP disclosure (h) Read the financial statements and footnotes to determine whether all numbers of shares, terms, and descriptions are accurate. (i) Vouch stock option and profit-sharing plan disclosures to contracts and plan documents.
What substantive procedures should you apply in examining the common stock and treasury stock accounts? Organize your answer as a list of audit procedures organized by the financial statement assertions.
Common Stock: Valuation (g) Vouch amount of paid-in capital to cash receipts.
Which of the following procedures would an auditor most likely perform in searching for unrecorded payables?
Compare cash payments occurring after the balance sheet date with the accounts payable trial balance.
Emily was engaged to examine the financial statements of Gamma Corporation for the year ended June 30. Having completed an examination of the investment securities, which of the following is the best method of verifying the accuracy of recorded dividend income?
Comparing recorded dividends with a standard financial reporting service's record of dividends.
An auditor selected items for test counts while observing a client's physical inventory count. The auditor then traced the test counts to the client's inventory listing. This procedure most likely obtained evidence concerning management's balance assertion of
Completeness
In a test of controls, auditors may trace receiving reports to vouchers recorded in the voucher register. This is a test for
Completeness
Test counted inventory and traced the count to the perpetual inventory record.
Completeness
When auditing account balances of liabilities, auditors are most concerned with management's assertion about
Completeness
An audit team testing long-term investments would ordinarily use analytical procedures to ascertain the reasonableness of the
Completeness of recorded investment income
Which of the following is the assertion with the highest inherent risk in auditing inventory?
Existence
Which of the following is the best reason for prenumbering in sequence such documents as sales orders, shipping documents, and sales invoices?
Enables personnel to check the numerical sequence for missing documents and unrecorded transactions.
Which of the following is the best audit procedure for determining the existence of unrecorded liabilities?
Examine a sample of cash disbursements in the period subsequent to year-end
Give any audit steps or reporting requirements you believe should be taken or recognized in connection with each of the following: 2. "The debtor company shall keep all property that is security for this debt insured against loss by fire to the extent of 100 percent of its actual value. Policies of insurance comprising this protection shall be filed with the trustee."
Examine client's copies of insurance policies or certificates of insurance for compliance with the covenant, preparing schedule of book value, appraised or estimated actual value, and coverage for report. Confirm policies held with trustee.
Give any audit steps or reporting requirements you believe should be taken or recognized in connection with each of the following: 3. "The debtor company shall pay all taxes legally assessed against property that is security for this debt within the time provided by law for payment without penalty and shall deposit receipted tax bills or equally acceptable evidence of payment of same with the trustee."
Examine vouchers supporting tax payments on all property covered by the indenture. By reference to the local tax laws and the vouchers, determine that all taxes have been paid before the penalty free period expired. If vouchers in any case are inadequate, confirm with trustee who holds the tax receipts.
Selected a sample of inventory items from the perpetual records and vouch additions to receiving reports.
Existence
As payments are received, one mailroom employee is assigned the responsibility of prelisting receipts and preparing the deposit slip prior to forwarding the receipts, deposit slip, and remittance advices to accounts receivable for posting. Accounts receivable personnel re-foot the deposit slip, stamp a restrictive endorsement on the back of each check, and then forward the receipts and deposit slip to the treasury department. Evaluate the internal control of the described process. Which of the following is a reasonable assessment of internal control in this process?
Inadequate internal control because of a lack of separation of duties
Which of the following is not required by generally accepted auditing standards?
Management letter
The auditor tests the quantity of materials charged to work-in-process by vouching these quantities to
Material requisitions
All corporate capital stock transactions should ultimately be traced to the
Minutes of the meetings of the board of directors
Chandler, an assistant accountant with the firm of Better & Best, is auditing the financial statements of Tech Consolidated Industries Inc. The firm's audit plan calls for the preparation of written representations. Required: 4. In what respects may auditors' other responsibilities be relieved by obtaining written representations?
Obtaining written representations does not relieve auditors from their responsibility for planning and performing the audit. As a result, auditors must still perform all usual procedures to corroborate representations made by management.
Review inventory footnote for the financial statements.
Presentation and disclosure
To determine the client's planned amount and timing of production of a product, the auditor reviews the
Production plan
Which of the following would not be considered an analytical procedure?
Projecting a deviation rate by comparing the results of a statistical sample with the actual population characteristics
To determine whether accounts payable are complete, auditors perform a test to verify that all merchandise received has been recorded. The population for this test consists of all
Receiving reports
An audit team would most likely verify the interest earned on bond investments by
Recomputing the interest earned on the basis of face amount, interest rate, and period held
An audit team would most likely verify the interest earned on bond investments by
Recomputing the interest earned on the basis of face amount, interest rate, and period held.
The purpose of tracing a sample of inventory tags to a client's computerized listing of inventory items is to determine whether the inventory items
Represented by tags were included on the listing
A client has a large and active investment portfolio that is kept in a bank safe deposit box. If the auditors are unable to count securities at the balance sheet date, they most likely will
Request the client to have the bank seal the safe deposit box until the auditors can count the securities at a subsequent date.
A client maintains perpetual inventory records in quantities and in dollars. If the assessed control risk is high, an auditor would probably
Request the client to schedule the physical inventory count at the end of the year.
What is an auditor's primary method to corroborate information on litigation, claims, and assessments?
Reviewing the response from the client's lawyer to a letter of audit inquiry.
Which of the following accounts does not appear in the acquisition and expenditure cycle?
Sales returns
Which of these substantive procedures is not used to obtain evidence about contingencies?
Scanning expense accounts for credit entries
Which of the following procedures is least likely to be performed before the balance-sheet date?
Search for unrecorded liabilities
Auditors have a responsibility related to management's disclosure of new information related to subsequent events until
The audit report release date.
An auditor is examining a nonpublic company's inventory procurement system and has decided to perform tests of controls. Under which of the following conditions do GAAS require tests of controls be performed by an auditor?
The auditor believes that testing the controls could lead to a reduction in overall audit time and cost.
Union Pacific Corp. opened its new 19-story, $260 million headquarters in Omaha, NE. The railroad operator is the owner of the city's largest building, the Union Pacific Center. Under an initial operating lease, Union Pacific guaranteed 89.9% of all construction costs through the building's completion date. After completing the building, the company signed a new operating lease, which guarantees 85% of the building's costs. Both were "synthetic" leases, which allow the company to take income tax deductions for interest and depreciation while maintaining complete operational control. Required: 2. What audit evidence would you require for testing the appropriate accounting for this lease?
The auditor would need to review an independent estimate of the value of the building and of its expected useful life. The auditor would also review the terms of the lease for life, renewal options, rental rate, additional rental costs, and so on. The auditor may also want to confirm the terms of the lease with the lessor. Finally, the auditor would test the client's calculations for the lease treatment under SFAS 13 and obtain representation from the client that the assumptions are appropriate.
Which of the following best describes the role of analytical procedures near the end of the audit engagement?
To provide an overall review of the financial information and assessment of the adequacy of evidence gathered during the audit engagement.
Which of the following audit procedures is the most effective in testing sales for understatement?
Trace a sample of shipping documents to sales invoices recorded in the sales journal.
Which of the following statements is not true with respect to written representations?
The failure of management to furnish them is a significant scope limitation, resulting in either an adverse opinion or a disclaimer of opinion.
When a client company does not maintain its own capital stock records, the auditors should obtain written confirmation from the transfer agent and registrar concerning
The number of shares issued and outstanding
Which of the following is an internal control activity that could prevent a paid disbursement voucher from being presented for payment a second time?
The official who signs the check should compare the check with the voucher and should stamp "PAID" on the voucher documents.
Which of the following is an internal control weakness for a company whose inventory of supplies consists of a large number of individual items?
The warehouse manager is responsible for maintenance of perpetual inventory records
Which of the following is an internal control weakness for a company whose inventory of supplies consists of a large number of individual items?
The warehouse manager is responsible for maintenance of perpetual inventory records.
Loan covenants are used for which of the following reasons?
To protect the lender from the borrower's substantially weakening of the latter's financial position.
What substantive procedures should you apply in examining the common stock and treasury stock accounts? Organize your answer as a list of audit procedures organized by the financial statement assertions.
Treasury Stock: GAAP disclosure (c) Read the financial statements, particularly the schedule of capital changes and the footnotes to determine whether the treasury stock amounts (including gains and losses) are properly classified and described.
What substantive procedures should you apply in examining the common stock and treasury stock accounts? Organize your answer as a list of audit procedures organized by the financial statement assertions.
Treasury Stock: Valuation (b) Vouch amounts recorded for purchase to cash disbursements and amounts received on resale to cash receipts. Recalculate gain (loss) and trace to retained earnings or other capital account.
When an entity uses a trust company as custodian of its marketable securities, the possibility of concealing fraud most likely would be reduced if the
Trust company has no direct contact with the entity employees responsible for maintaining investment accounting records
Union Pacific Corp. opened its new 19-story, $260 million headquarters in Omaha, NE. The railroad operator is the owner of the city's largest building, the Union Pacific Center. Under an initial operating lease, Union Pacific guaranteed 89.9% of all construction costs through the building's completion date. After completing the building, the company signed a new operating lease, which guarantees 85% of the building's costs. Both were "synthetic" leases, which allow the company to take income tax deductions for interest and depreciation while maintaining complete operational control. Required: 1. Explain why Union Pacific would want to structure the lease to be an operating lease.
Union Pacific would prefer accounting for the lease as an operating lease for a number of reasons: • The charge to income for interest and depreciation under capital lease is higher in early years than rent expense charged for an operating lease. • Treating the lease as an operating lease reduces the asset base and improves return on assets. • Treating the lease as an operating lease avoids recording the debt for a capital lease, which results in a lower debt to equity ratio.
Which of the following statements is correct concerning the use of negative confirmation requests?
Unreturned negative confirmation requests rarely provide significant explicit evidence.
Chandler, an assistant accountant with the firm of Better & Best, is auditing the financial statements of Tech Consolidated Industries Inc. The firm's audit plan calls for the preparation of written representations. Required: 2.To whom should the representations be addressed and as of what date should they be dated?
Written representations should be addressed to auditors and dated as of the date of the auditor's reports (audit completion date).
Chandler, an assistant accountant with the firm of Better & Best, is auditing the financial statements of Tech Consolidated Industries Inc. The firm's audit plan calls for the preparation of written representations. Required: 3. Who should sign the representations and what would be the effect of a refusal to sign them?
Written representations should be signed by members of management whom auditors believe are responsible and knowledgeable about matters covered by the representations (usually the chief executive officer, chief financial officer, treasurer, or controller). Their refusal to sign the representations would constitute a scope limitation that would preclude the issuance of an unqualified opinion.
The auditor uses the assessed level of risk of material misstatement to determine the acceptable level of detection risk for financial statement assertions. As the acceptable level of detection risk decreases, the auditor may do one or more of the following except change the
assurances provided by substantive tests to a lower level
Emily Hayes is in charge of the audit of Blue Distributing Corp, a wholesaler that owns one warehouse containing 80% of its inventory. Emily is reviewing the audit documentation that was prepared to support the firm's opinion on Blue's F/S and wants to be certain that essential audit procedures are well documented. Required: 1. What evidence should Emily expect to find indicating that the observation of the client's physical count of inventory was well planned and that assistants were properly supervised 2. What substantive procedures should Emily find in the audit documentation of management's balance assertions about existence and completeness of inventory quantities at the end of the year?
a. Emily should find in the audit working papers a planning memo describing the client's inventory taking plan and notes about the auditors' firsthand observation of the instructions being given to counters, along with a memo about the auditors' observation of the counting. This memo should tell about supervision of the audit staff, and the working papers (test counts) should show the review signatures of the supervising auditors. b. Working papers should document performance of these substantive procedures for the existence and completeness assertions: (1) observation of physical inventory count (2) Scan the inventory compilation for items added from sources other than the physical inventory count. (3) At year-end, obtain the number of the last shipping and receiving documents. Use these to scan the sales, inventory/cost of sales, and accounts payable entries for proper cutoff. (4) Confirm/inspect inventories held in public warehouses. (5) Select sample of used tags and trace them to the items on the floor.
Are journal entries authorized at appropriate levels? Required: a. Identify the assertion. b. Specify one test of controls to determine whether the control was operating effectively. c. Give an example of an error or fraud that could occur. d. Write a substantive procedure that could find errors or frauds.
a. Journal entries are authorized and prepared in accordance with generally accepted accounting principles (accuracy, classification). b. Examine entries for approval initials. c. The company might override controls to create fraudulent entries. d. Select a sample of recorded journal entries and re-perform calculations and review for appropriate accounts.
Are the quantity and quality of goods received determined at the time of receipt by receiving personnel independent of the purchasing department? Required: a. Identify the assertion. b. Specify one test of controls to determine whether the control was operating effectively. c. Give an example of an error or fraud that could occur. d. Write a substantive procedure that could find errors or frauds.
a. Liabilities are recorded at the appropriate quantity and description (accuracy). b. Select a sample of invoices and agree them to the receiving report. Observe receiving department counting receipts. c. Vendors could bill for quantities greater than the amount actually shipped, overstating costs or expenses. d. Observe the client's inventory account and test the reconciliation of the count to the perpetual inventory.
Are vendors' invoices matched against purchase orders and receiving reports before a liability is recorded? Required: a. Identify the assertion. b. Specify one test of controls to determine whether the control was operating effectively. c. Give an example of an error or fraud that could occur. d. Write a substantive procedure that could find errors or frauds.
a. Liabilities are recorded for actual purchases at the appropriate amounts (accuracy). b. Observe client personnel making comparisons. Examine initials for approval. Review correcting journal entries that result from the comparison. c. Purchases or other liabilities may be recorded for transactions that didn't exist or at incorrect amounts. d. Re-perform comparison on a test basis.
Are purchase orders above a certain level approved by an officer? Required: a. Identify the assertion. b. Specify one test of controls to determine whether the control was operating effectively. c. Give an example of an error or fraud that could occur. d. Write a substantive procedure that could find errors or frauds.
a. Purchases and accounts payable are authorized to assure compliance with company policy (authorization). b. For a sample of cash disbursements, vouch to approval signatures on invoices, receiving reports and purchase orders. c. Costs and expenses might be incurred that are not properly supported. d. Select a sample of current-year debits in accounts (e.g., inventory, fixed assets, expenses), and vouch them to supporting documents.
After obtaining an understanding of the entity's internal control and assessing control risk, an auditor of a non-public company decided not to perform additional tests of controls. The auditor most likely concluded that the
additional evidence to support a further reduction in control risk was not cost beneficial
The acceptable level of detection risk is inversely related to the
assurance provided by substantive tests
An audit plan for the examination of the retained earnings account should include a step that requires verification of the
authorization for both cash and stock dividends
In the audit of investment securities, auditors develop specific audit assertions related to the investments. They then design specific substantive procedures to obtain evidence about each of these assertions. Following is a selection of investment securities assertions: 3. Investments are properly valued at the balance-sheet date.
d. Determine whether any other-than-temporary impairments in the carrying value of investments have been properly recorded.
Chase is auditing the financial statements of Mackenzie Company. As she is nearing the audit completion date, Alexandra realizes that she needs to evaluate whether all material contingencies are properly accounted for and disclosed in Mackenzie's financial statements. Because of its size, Mackenzie has retained external counsel (Andrew, LLP) to handle its various legal matters. Required: 2. What are the responsibilities of Chase, Mackenzie, and Andrew with respect to litigation, claims, and assessments?
b. Chase's responsibilities with respect to litigation, claims, and assessments are to perform the procedures noted in (a) and initiate the request to the client for the attorney letter. Mackenzie's responsibilities with respect to litigation, claims, and assessments are to respond to auditors' inquiries regarding litigation, claims, and assessments; provide auditors a list, description, and evaluation of litigation, claims, and assessments; and send a letter to the attorney that includes information related to litigation, claims, and assessments. Andrew's responsibilities with respect to litigation, claims, and assessments are to respond to auditors regarding Mackenzie's description of litigation, claims, and assessments.
In a test of controls, auditors may trace receiving reports to vouchers recorded in the voucher register. This is a test for
completeness
An auditor is planning the testing of the accounts payable balance. The auditor's main concerns should be
completeness and cutoff
The auditor traces items from the receiving reports to the accounts payable journal in order to satisfy the
completeness assertion
The overall attitude and awareness of an entity's board of directors concerning the importance of the client's internal control usually is reflected in its
control environment
In the audit of investment securities, auditors develop specific audit assertions related to the investments. They then design specific substantive procedures to obtain evidence about each of these assertions. Following is a selection of investment securities assertions: 1. Investments are properly described and classified in the financial statements.
e. (best) Verify that transfers from the trading portfolio to the held-to-maturity investment portfolio have been properly recorded. g. (possible) Trace investment transactions to minutes of the board of directors meetings to determine that transactions were properly authorized (especially for the portfolio classification).
Confirmation of individual accounts receivable balances directly with debtors will, of itself, normally provide the strongest evidence concerning the
existence of the balances confirmed
The risk of material misstatement differs from detection risk in that it
exists independently of the financial statement audit
When an auditor increases the planned assessed level of control risk because certain control activities were determined to be ineffective, the auditor would most likely increase the
extent of substantive tests of details
In the audit of investment securities, auditors develop specific audit assertions related to the investments. They then design specific substantive procedures to obtain evidence about each of these assertions. Following is a selection of investment securities assertions: 2. Recorded investments represent investments actually owned at the balance-sheet date.
f. Obtain positive confirmations as of the balance-sheet date of investments held by independent custodians.
In performing a search for unrecorded retirements of fixed assets, an auditor most likely would
inspect the property ledger and the insurance and tax records, and then tour the client's facilities
The typical business activity in the financing and investment cycle that requires an accounting entry is
investment of excess funds in temporary or long-term securities
An auditor should normally perform alternative procedures to substantiate the existence of accounts receivable when
no reply to a positive confirmation request is received
In determining the adequacy of the allowance for uncollectible accounts, the least valuable evidence would be obtained from
no reply to negative confirmations
Improperly capitalizing an expense item results in
overstatement of profit in the current year and understatement in future years
Proper separation of duties reduces the opportunities to allow persons to be in positions to both
perpetrate a fraud and then conceal it in the books
Your client is in the process of acquiring another company. You have been requested to verify that cash for the company being acquired is properly stated. The audit technique that will yield the most persuasive evidence is
preparation and review of standard bank confirmation inquiries
A company's cost accountant periodically reconciles job cost sheets to the work-in-process inventory accounts. This reconciliation is most likely performed to provide assurance that
production accounting and posting is complete
Each of the following types of controls is considered to be an entity-level control, except those
regarding the company's annual stockholder meeting
The type of financial analysis that expresses balance sheet accounts as percentages of total assets is known as
vertical analysis
Chase is auditing the financial statements of Mackenzie Company. As she is nearing the audit completion date, Alexandra realizes that she needs to evaluate whether all material contingencies are properly accounted for and disclosed in Mackenzie's financial statements. Because of its size, Mackenzie has retained external counsel (Andrew, LLP) to handle its various legal matters. Required: 1. List some common procedures that Chase will perform with respect to Mackenzie's litigation, claims, and assessments.
•Inquire of management regarding litigation, claims, and assessments. •Obtain from management a description and evaluation of litigation, claims, and assessments. •Examine documents in the client's possession concerning litigation, claims, and assessments, including correspondence and invoices from lawyers. •Obtain assurance from management that it has disclosed all material unasserted claims the lawyer has advised them are likely to be litigated. •Read minutes of meetings of stockholders, directors, and appropriate committees. •Read contracts, loan agreements, leases, and correspondence from taxing or other governmental agencies. •Obtain information concerning guarantees from bank confirmations. •Review the legal expense account and cash disbursements records and invoices related to legal services.
