Audit Exam #3

What is the process of searching for unrecorded A/P?

1. Compare cash disbursements after FYE and A/P trial balance 2. Use IT to discover unrecorded A/P 3. Make adjusting entry if it impacts net income

What are the three types of misstatements?

1. Factual = indisputable 2. Judgmental = difference in accounting estimates 3. Projected = sampling results in differing conclusions

What are the steps of completing an audit?

1. Search for unrecorded liabilities 2. Review meeting minutes 3. Perform analytical procedures 4. Identify loss contingencies 5. Identify subsequent events 6. Obtain representation letter 7. Communicate misstatements

What are the four types of unmodified opinions?

1. Standard unmodified opinion 2. Unmodified opinion with add'l financial stmt issues (Going concern, inconsistency, correction of previous FS) 3. Unmodified opinion with audit-related issues 4. Unmodified opinion with group auditors

What are common sources of unrecorded A/P?

1. Unmatched invoices and unbilled receiving reports 2. A/P recorded *after* FYE 3. Invoice received *after* FYE 4. Consignments where the client is the consignee

What is the difference between auditing AR and AP?

AR tests for existence AP tests for completion

A material AND pervasive departure from GAAP results in what type of opinion?

Adverse opinion

A material departure from GAAP will result in an auditor consideration of whether to issue an __________ or _________

Adverse opinion Qualified opinion

An auditor wishes to draw reader attention to a financial statement note disclosure on significant transactions with related parties. Where should this be disclosed?

An emphasis-of-matter paragraph to the auditors' report

What is the audit approach for PPE?

Audit the *changes* in the accounts

The search for unrecorded liabilities for a public company includes procedures usually performed through the _______ date

Auditors' report

When is the best time to audit PPE?

Can be done anytime, usually done in interim period. Just test the last few months after balance sheet date

Which assertion is being tested in accounts payable?

Completeness

The best procedure to determine valuation of payables is _________-

Confirmation

What is the auditor's primary job in examining accounts payable?

Detecting UNRECORDED a/p

A material AND pervasive scope limitation results in what type of opinion?

Disclaimer of opinion

What is the audit procedure for Payroll?

Examine internal controls, particular separation of duties

In performing a test of controls, the auditors vouch a sample of entries in the purchases journal to the supporting documents. Which assertion would this test?

Existence

An auditor accepted an engagement to audit the 2018 financial statements of EPF Corp 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. What date should the client's representation letter be dated?

February 10, 2019

An audit report for a public client indicates that the financial statements were prepared in conformity with ________?

Generally accepted accounting principles (United States)

Assets with indefinite useful lives must be tested for ___________

Impairment

A possible loss, stemming from past events that will be resolved as to existence and amounts, is referred to _______?

Loss contingency

"Key audit matters" are used for ___________

Non-public companies

What is the audit procedure for Selling, General, and Admin Expenses?

Perform analytical procedures

"Critical audit matters" are used for ___________

Public companies

A material departure from GAAP results in what type of opinion?

Qualified opinion

A material scope limitation results in what type of opinion?

Qualified opinion

A nonpublic company's change in accounting principles that the auditors believe is not justified is likely to result in which type of audit opinion?

Qualified, possibly adverse

When is the best time to audit accounts payable?

Right after FYE

What is the substantive procedure for auditing accounts payable?

Search for unrecorded A/P

An audit report for a public client indicates that the audit was performed in accordance with ______?

Standards of the Public Company Accounting Oversight Board (United States)

What is accounting conservatism?

The practice of estimating lower value for assets and higher value for liabilities, resulting in a slightly lower (conservative) value for net income

What is the auditors' main objective in analyzing repair and maintenance expense accounts?

To discover items that should have been capitalized

What are the two types of subsequent events?

Type 1 = Event occurred *before* FYE and requires adjustment Type 2 = Event occurred *after* FYE and need not be adjusted, but may require disclosure

Why is confirmation less effective with accounts payable?

Unable to detect unrecorded A/P

When the matter is properly disclosed in the financial statements of a nonpublic company, the likely result of substantial doubt about the ability of the client to continue as going concern is the issuance of which type of audit opinion?

Unmodified with an additional paragraph

What is the most important substantive test when auditing PPE?

Vouching of additions to the PPE accounts during the period

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) Capitalization b) Financing c) Investing d) Operations

a) Capitalization

An audit of the balance in the accounts payable account is ordinarily not designed to: a) Detect accounts payable that are substantially past due b) Verify that accounts payable were properly authorized c) Ascertain the reasonableness of recorded liabilities d) Determine that all existing liabilities at the balance sheet date have been recorded

a) Detect accounts payable that are substantially past due

For effective internal control, the A/P department should compare the info on each vendor's invoice with: a) Receiving report and the purchase order b) Receiving report and the voucher c) Vendor's packing slip and the purchase order d) Vendor's packing slip and the voucher

a) Receiving report and the purchase order

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) Notify the board of directors that the auditor's report must no longer be associated with the financial statements b) Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the info c) Request that mgmt disclose the effects of the newly discovered info by adding a footnote to subsequently issued financial statements d) Issue revised pro forma financial statements with the new info

b) Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the info

A client erroneously recorded a large purchase twice. Which of the following internal control measures would be most likely to detect this error in a timely and efficient manner? a) Footing the purchases journal b) Reconciling vendors' monthly statements with subsidiary payable ledger accounts c) Tracing totals from the purchases journal to the ledger accounts d) Sending written quarterly confirmation to all vendors

b) Reconciling vendors' monthly statements with subsidiary payable ledger accounts

When confirming A/P, the approach is most likely to be one of: a) Selecting the accounts with the largest balances at year-end, plus a sample of other accounts b) Selecting the accounts of companies with whom the client has previously done the most business, plus a sample of other accounts c) Selecting a random sample of A/P at year-end d) Confirming all accounts

b) Selecting the accounts of companies with whom the client has previously done the most business, plus a sample of other accounts

To determine that each voucher is submitted and paid only once, when a payment is approved, supporting documents should be canceled by the: a) Authorized members of the audit committee b) Accounting department c) Individual who signs the checks d) Chief executive officer

c) Individual who signs the checks

Which of the following events occurring on January 5 is most likely to result in an adjusting entry? a) A business combination b) Early retirement of bonds payable c) Settlement of litigation d) Plant closure due to a strike

c) Settlement of litigation

Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because: a) Accounts payable balances at the balance sheet date may not be paid before the audit is completed b) Correspondence with the audit client's attorney will reveal all legal action by vendors for nonpayment c) There is likely to be other reliable external evidence available to support the balances

c) There is likely to be other reliable external evidence available to support the balances

As a result of analytical procedures, the independent auditors determine that the gross profit percentage has declined from 30% in the preceding year to 20% 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) Evaluate management's performance in causing this decline c) Require note disclosure d) Consider the possibility of a misstatement in the financial statements

d) Consider the possibility of a misstatement in the financial statements

Which of the following is the best audit procedure for determining the existence of unrecorded liabilities? a) Examine confirmation requests returned by creditors whose accounts appear on a subsidiary trial balance of accounts payable b) Examine unusual relationships between monthly accounts payable balances and recorded purchases c) Examine a sample of invoices a few days prior to and subsequent to year-end to ascertain whether they have been properly recorded d) Examine selected cash disbursements in the period subsequent to year-end

d) Examine selected cash disbursements in the period subsequent to year-end

Which of the following is most likely to be included near completion of an audit? a) Obtaining an understanding of internal control b) Confirmation of receivables c) Observation of inventory d) Performing analytical procedures

d) Performing analytical procedures

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

d) Test whether employee time reports are approved by supervisors

What is a subsequent event?

event or transaction that occurs after the balance sheet date but before financial statements are issued or are available to be issued

Critical audit matters are most likely to include those matters that ...?

involve challenging, subjective, or complex auditor judgment

The auditors' report should be dated as of

the date the auditors have accumulated sufficient appropriate evidence