AUD Final - 16

Commitment

A contractual obligation to carry out a transaction at specified terms in the future. Material commitments should be disclosed in the financial statements.

Which of the following is least likely to be considered a substantive procedure relating to payroll? A. Test computations of compensation under profit sharing for bonus plans. B. Test commission earnings. C. Test whether employee time reports are approved by supervisors. D. Investigate fluctuations in salaries, wages, and commissions.

Test whether employee time reports are approved by supervisors.

Type 2 Subsequent Event

Those involving facts coming into existence subsequent to the balance sheet date; consider for disclosure

January 7, 2014: The mineral content of a shipment of ore en route to Hollis Mfg. Corporation on December 31, 2013, was determined to be 72 percent. The shipment was recorded at year-end at an estimated content of 50 percent by a debit to Raw Materials Inventory and a credit to Accounts Payable in the amount of $82,400. The final liability to the vendor is based on the actual mineral content of the shipment.

Type 1; Adjust FS

On January 18, 2014, a major customer filed for bankruptcy. The customer's financial condition had been degenerating over recent years.

Type 1; Adjust FS

January 16, 2014: As a result of reduced sales, production was curtailed in mid-January and some workers were laid off.

Type 2; Consider disclosure

The audit of inventories may help in the auditor determination of _____

COGS

When auditing the statement of cash flows, which of the following would an auditor not expect to be a source of receipts and payments? A. Operations. B. Capitalization. C. Investing. D. Financing.

Capitalization.

Which of the following is most likely to be considered a Type 1 subsequent event? A. Introduction of a new line of products after year-end for which major research had been completed prior to year-end. B. Customer checks deposited prior to year-end but determined to be uncollectible after year-end. C. A business combination completed after year-end, but for which negotiations began prior to year-end. D. A strike subsequent to year-end due to employee complaints about working conditions that originated two years ago.

Customer checks deposited prior to year-end but determined to be uncollectible after year-end.

Factual Misstatements

Misstatements about which there is no doubt as to amount.

When paper paycheck's are issued, the company's ____ should distribute them to the employees of the company

Paymaster

On January 28, 2014, a famous analyst who followed the industry provided a negative report on his expectations concerning the short and intermediate term for the industry.

Type 2; Consider disclosure

January 15, 2014: Following a series of personal disagreements between Ray Hollis, the president, and his brother-in-law, the treasurer, the latter resigned, effective immediately, under an agreement whereby the corporation would purchase his 10 percent stock ownership at book value as of December 31, 2013. Payment is to be made in two equal amounts in cash on April 1 and October 1, 2014. In December, the treasurer had obtained a divorce from his wife, who is Ray Hollis's sister.

Type 2; Consider disclosure, the agreement concerning the purchase of the stock occurred after the date of the financial statements, thus making no journal entry necessary.

Contingent Liability

A possible liability, stemming from past events, that will be resolved as to existence and amount by some future event.

Loss Contingency

A possible loss, stemming from past events, that will be resolved as to existence and amount by some future event.

Iron curtain approach

An approach to making materiality judgments that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting all misstatements (including projecting misstatements where appropriate) existing in the balance sheet at the end of the current year, irrespective of whether the misstatements occurred in the current year or previous years.

Rollover Approach

An approach to making materiality judgments that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting misstatements (including projecting misstatements where appropriate) only during the current year.

General Risk Contingency

An element of the business environment that involves some risk of a future loss. Examples include the risk of accident, strike, price fluctuations, or natural catastrophe. General risk contingencies should not be disclosed in financial statements.

As a result of analytical procedures, the independent auditors determine that the gross profit percentage has declined from 30 percent in the preceding year to 20 percent in the current year. The auditors should: A. Express an opinion that is qualified due to the inability of the client company to continue as a going concern. B. Require note disclosure. C. Consider the possibility of a misstatement in the financial statements. D. Evaluate management's performance in causing this decline.

Consider the possibility of a misstatement in the financial statements.

The search for unrecorded liabilities for a public company includes procedures usually performed through the: A. Date of the auditors' report. B. End of the client's year. C. Date the report is filed with the SEC. D. Day the audit report is issued.

Date of the auditors' report.

It is difficult to audit ____ without the consideration of the property account.

Depreciation

Subsequent to the issuance of the auditor's report, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. After determining that the information is reliable, the auditor should next: A. Issue revised pro forma financial statements taking into consideration the newly discovered information. B. Request that management disclose the effects of the newly discovered information by adding a footnote to subsequently issued financial statements. C.Notify the board of directors that the auditor's report must no longer be associated with the financial statements. D. Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.

Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.

A ____ is a list of all specific disclosures required by financial accounting standards

Disclosure checklist

An auditor accepted an engagement to audit the 2018 financial statements of EFG Corporation and began the fieldwork on September 30, 2018. EFG gave the auditor the 2018 financial statements on January 17, 2019. The auditor completed the audit on February 10, 2019, and delivered the report on February 16, 2019. The client's representation letter normally would be dated:

February 10, 2019; the date sufficient, appropriate evidence was obtained.

The ___ department of a company should authorize employee pay rate changes

HR

Amortization relates to ____ assets as depreciation relates to property and equipment.

Intangible

A possible loss, stemming from past events that will be resolved as to existence and amounts, is referred to as a(n):

Loss contingency

Which of the following is the best way for the auditors to determine that every name on a company's payroll is that of a bona fide employee presently on the job? A. Examine human resources records for accuracy and completeness. B. Visit the working areas and verify that employees exist by examining their badge or identification numbers. C. Make a surprise observation of the company's regular distribution of paychecks on a test basis. D. Examine employees' names listed on payroll tax returns for agreement with payroll accounting records.

Make a surprise observation of the company's regular distribution of paychecks on a test basis.

Projected Misstatement

Misstatements identified by the auditors during the course of the audit that are due to extrapolation of sample results to the entire population.

Which of the following procedures is most likely to be included near completion of an audit? A. Confirmation of receivables. B. Observation of inventory. C. Obtaining an understanding of internal control. D. Performing analytical procedures.

Performing analytical procedures.

Financial statements that give effect to a subsequent event as though the event had occurred at the balance sheet date are known as _____ financial statements

Pro forma

Which of the following events occurring on January 5, 20X2, is most likely to result in an adjusting entry to the 20X1 financial statements? A. plant closure due to strike B. a business combination C. early retirement of bonds payable D. settlement of litigation

Settlement of litigation

Type 1 Subsequent Event

Those providing additional evidence about facts existing on or before the balance sheet date; adjust financial statement amounts