Audit test #3

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The client valued certain inventory items at their current replacement cost rather than the item's historical cost

price testing of inventory by reference to current purchase invoices

Audit procedures for consignment inventory could include a comparison of the physical inventory with the client's _________.

records

Many instances of misstatement are based on the inappropriate recognition of __________

revenue

which of the following audit procedures is best for identifying unrecorded trade accounts payable

reviewing cash disbursements recorded in subsequent to the balance sheet date to determine whether the related payable applies to the prior period.

13 Material purchases of assets from an affiliated company should be disclosed in the financial statements.

t

13 The auditors' approach to the audit of property, plant, and equipment largely results from the fact that relatively few transactions occur.

t

confirmation of AR provides some assurance that no lapping or other manipulation affecting AR is being carried on

t

the evidence regarding AP in the client's possession is generally more reliable that that for AR

t

bond transactions are normally confirmed with

the bond trustee

The client failed to include purchased goods in tranit, for which the client had title, in their inventory

examining receiving documents for goods received around year end.

11 Confirmation requests should contain a "business reply" envelope addresses to the auditors at the client's address.

f

11 The department approving a sales transaction should be the shipping department

f

13 A typical procedure in the audit of property is examination of public records to verify the ownership of the property.

f

Auditors should not review the client's planning of the physical inventory.

f

When the auditors cannot satisfy themselves as to the accuracy of ending inventory and a material misstatement may exist, they normally may still give an unqualified opinion on the client's income statement.

f

confirmation of AP is a required generally accepted auditing procedure

f

the auditors should determine that the issuance of bonds was approved by the company's stockholders.

f

Potential Misstatements—Inventory. Error or fraud? Intentional misstatement of inventory prices.

fraud

Potential Misstatements—Inventory. Error or fraud? Intentional misstatement of inventory production costs.

fraud

Potential Misstatements—Inventory. Error or fraud? Intentional recording of purchases in the subsequent period

fraud

Potential Misstatements—Inventory. Error or fraud? Items are stolen and no journal entry is recorded.

fraud

Potential Misstatements—Revenue. is this an error or fraud? Holding sales journal open to record next year's sales in the current year.

fraud

Potential Misstatements—Revenue. is this an error or fraud? Intentional overshipment of goods.

fraud

Potential Misstatements—Revenue. is this an error or fraud? Recording a fictitious sale without receiving a customer order for the goods.

fraud

Potential Misstatements—Revenue. is this an error or fraud? Recording a sale for goods that the customer is anticipated to return.

fraud

Purchasing and cash disbursements can provide opportunity for ______ by employees.

fraud

10 To gather evidence regarding the balance per bank in a bank reconciliation, an auditor could examine all of the following except:

general ledger

13 Even when internal control is weak, a significant portion of the audit work on property, plant, and equipment may be performed at an interim date.

t

13 Evidence of continued ownership of property is obtained by vouching payments to a mortgage trustee.

t

For a continuing client, the auditors will often find that the audit time required for capital stock is small in relation to the dollars recorded in the accounts.

t

Material AR from related parties should be stated separately from other receivables.

t

Observation of inventory is a generally accepted auditing procedure.

t

The lower of cost or market test by the auditors is generally designed to assure that inventories are not valued above their net realizable values.

t

The use of a tagging system for inventory taking is designed to prevent double counting of goods.

t

overstatement of financial results can involve failure to record a transaction

t

Failing to record all sales transactions

tracing a sample of shipping documents to record sales transactions

the auditor's program to examine interest-bearing debt most likely will include steps that require

vouching borrowing and repayment transactions

10 Action taken by the client shortly before the balance sheet date to improve the financial picture presented in the financial statements

window dressing

Assume that the auditors are concerned about disbursement transactions that have been recorded for improper amounts. which procedures would possibly identify these transactions?

yes and yes

Side _________ can substantially alter the terms of a sale.

agreements

Potential Misstatements—Inventory. Error or fraud? Erroneous pricing of inventory

error

to test the existence assertion for the recorded receivables, an auditor would select a sample from the

AR subsidiary ledger

10 The auditors should insist that a representative of the client be present during the physical examination of securities in order to:

Acknowledge the receipt of securities returned.

13 Which of the following best describes the auditors' approach to the audit of the ending balance of property, plant and equipment for a continuing nonpublic client?

Agreement of the beginning balance to prior year's working papers and audit of significant changes in the accounts.

Potential Misstatements—Revenue. is this an error or fraud? Recording sales in the wrong period based on incorrect shipping information.

error

Potential Misstatements—Revenue. is this an error or fraud? Revenue earned from franchise is incorrectly calculated

error

13-27

Because Ross Products, Inc. acquired its building in a related-party transaction, the auditors cannot rely upon the $2,400,000 valuation as actual cost. To determine the genuine cost of the building, the auditors must obtain permission from J. A. Ross, who is sole owner of both Ross Products, Inc. and J. A. Ross Construction Co., to examine the records of the construction company. Assuming permission is obtained, the auditors may review the materials, labor, and overhead charges to the construction of the building. In addition, the auditors must investigate the customary profit margins of the construction company; it would be appropriate to value the building at cost plus normal profit. The auditors may request J. A. Ross to obtain an independent appraisal of the building's fair value as of April 1, Year 9. As a result of these audit procedures, the auditors will have evidence as to construction cost plus normal profit and replacement cost. Construction cost plus profit is an appropriate valuation for the building unless it exceeds replacement cost, in which case the latter value should be used.

Which of the following is an auditor least likely to consider a departure from U.S. generally accepted accounting principles?

Including in inventory items that are consigned out to vendors, but not yet sold.

10 The auditors compare information on canceled checks with information contained in the cash disbursement journal. The objective of this test is to determine that:

No discrepancies exist between the data on the checks and the data in the journal

A "bill and hold" scheme is most likely to include:

Recording of sales items that the company retains as of year-end.

13 An auditor has identified numerous debits to accumulated depreciation of equipment. Which of the following is most likely?

Plant assets were retired during the year.

4. There will be a essay question which requires you to describe one of the articles you submitted. You will need to BRIEFLY discuss each of the 5 items as listed in the WSJ articles assignment instructions. The key grading point will be what should have done to prevent the fraud. Be specific: for example, "improve internal controls" would require what specific internal controls need to be improved.

Prepare this

13 Which of the following is not a control that should be established for purchases of equipment?

Requiring that the department in need of the equipment order the equipment.

Failing to inform the auditors of pledged AR

Reviewing standard confirmations from financial institutions.

Which of the following would an auditor most likely question included in calculation of the overhead rate for a company that manufactures a product?

Sales expense.

10 As one of the year-end audit procedures, the auditor instructed the client's personnel to prepare a confirmation request for a bank account that had been closed during the year. After the client's treasurer has signed the request, it was mailed by the assistant treasurer. What is the major flaw in this audit procedure?

The request was mailed by the assistant treasurer.

10 a ____________________ is a form designed to provide corroborating evidence about the client's account balances and outstanding loans

bank confirmation

10 A _______________ is a statement covering a specific number of business days after the client's balance sheet date.

bank cutoff statement

15/16 When an auditor finds a debit to accounts payable, which of the following accounts is most likely to be credited?

cash

When an auditor finds a debit to AP, which is the following accounts is most likely to be credited?

cash

in auditing long-term debt, an auditor would be most likely to

compare interest expense with the long-term debt amount for reasonableness.

Tests to help identify the _____ of controls help to evaluate the client's internal control structure.

effectiveness

the client added items to the completed physical inventory that were not held on hand at the time of the physical inventory

listing test counts in the working papers for later comparison to the final inventory listing/obtaining information on the tag or sheet numbers used during the physical incentory for the comparison to final inventory listing

There will be a two column bank reconciliation. I gave up on modifying the four column proof of cash or eight column proof of cash because these problems were too time consuming. I know you are heart broken. See eclass for solution to inclass exercise.

look this shit up

Inventories with a high risk of ______ may be warranted as a significant risk.

obsolescence

________ needs to be assured in order to recognize revenue.

Collectibility

A receiving department compares inventory items received with copies of purchase orders. The purchase orders list the name of the vendor and do not list the quantities of the material ordered. Using the purchase orders, the receiving department is most likely to detect:

Deliveries for which no purchase order was issued.

your client performed the physical count of inventory as of November 30, one month prior to year-end. Subsequently, your client closed the sales journal on 12/29/XX, two days before year-end, and reported those two days' credit sales in January of the next year. Assuming the client uses a perpetual inventory system, which of the following is most likely to be overstated related to the year XX financial statements.

Inventory

10 manipulations causing an amount of cash to be simultaneously in the balance of two or more accounts

Kiting

10 Concealment of a cash shortage by delaying the recording of cash receipts

Lapping

15/16 A client recorded a payable for a large purchase twice. Which of the following controls would be most likely to detect this error in a timely and efficient manner?

Reconciling vendors' monthly statements with subsidiary payable ledger accounts.

14-28

The monthly statements of the six creditors should be compared with the client's voucher register or accounts payable ledger, and any exceptions should be carefully noted. These exceptions should be investigated by reference to invoice, debit or credit memoranda, receiving records, correspondence files, or other supporting data. The auditors should also compare the cash payments to these creditors during the subsequent period with the items shown by the accounting records as liabilities at the balance sheet date. This comparison may show that some of the payments in the subsequent period are for liabilities which existed but were unrecorded at the balance sheet date.

provide an indication of its audit significance and any special audit procedures: the audit of a construction company that uses the percentage of completion method of accounting for contracts.

When a company uses the percentage-of-completion method, there is a risk that management may misestimate the amount of revenue earned on uncompleted contracts. The auditors must carefully evaluate the costs allocated to the contracts and the estimates of the percentage-of-completion. In some cases, the auditors may decide to engage a specialist, such as an engineer.

Revenues are deemed to be earned when the company has ______ what it must do to fulfill its obligation.

accomplished

_____ considering information about the client and its environment, the auditors must assess the risks of material misstatement related to assertions about inventory.

after

which of the following is a likely procedure to test the adequacy of the allowance for doubtful accounts?

age receivables.

10 Your client left the cash receipts journal open after year-end for an extra day and included January 1 cash receipts in the 12/31/XX totals. All of those cash receipts were due to cash sales. Assuming the client uses a periodic inventory system with a 12/31/XX count of the physical inventory, which of the following is most likely to be true relating to the year XX financial statements? A) Sales are understated. B) Accounts receivable are understated. C) Inventory is overstated. D) Net income is overstated.

d. net income is overstated

10 A compensating balance agreement always requires that cash be reclassified as a noncurrent asset.

f

10 A proof of cash is an audit procedure that is performed on almost every engagement.

f

10 Confirmations for cash balances should be mailed only to the financial institutions with which the client has a cash balance at year-end.

f

10 Mailroom personnel of a company should prepare a control listing of incoming cash receipts and deposit them intact daily.

f

10 The auditors should count small petty cash funds at year-end to make sure that balance is not understated on the financial statements.

f

12-21

(1) Organization structure is poor. The receiving department should not be under the authority of the purchasing agent. (2) Copies of purchase orders sent to receiving department should not show quantities. This encourages careless counting. (3) The receiving department should prepare a receiving report for each shipment received. These documents will permit evaluation of the department's work, indicate proportion of returns, and establish accountability for goods. (4) Errors by buyers are covered up by the existing system since any deficiency in goods received is not reported by the receiving department to anyone but the buyer. (5) Goods should be kept in storerooms until required for production, not sent directly to the factory production area. (6) There is apparently no control over the movement of raw materials into goods-in-process and no record of the quantities of goods-in-process. (7) The perpetual inventory records (physical units only) for finished goods are apparently not integrated with the accounting records. (8) The custody of finished goods and the recordkeeping for these goods are assigned to the same employee.

14-29

The subsequent period plays a major part in the auditors' work on accounts payable. One of the auditors' principal objectives in the examination of accounts payable is to determine that all liabilities existing at the balance sheet date have been recorded. Few audit procedures can be carried out at an interim date to accomplish this objective. Instead, the auditors' review of vendors' statement, confirmation of accounts payable, review of subsequent cash disbursements, and other procedures designed to disclose unrecorded accounts payable, are all carried out during the subsequent period.

provide an indication of its audit significance and any special audit procedures: the audit of a machinery manufacturing company that engages in bill and hold transactions

When a company engages in bill and hold transactions there is a possibility that the company is inappropriately recognizing revenue. The auditors must ascertain that any transactions recognized as sales meet the criteria for revenue recognition as set forth in SEC Accounting and Auditing Enforcement Release No. 108. In these circumstances, the auditors will review the provisions of sales contracts and consider confirming the terms with customers.

provide an indication of its audit significance and any special audit procedures: the audit of a software company that engages in multiple element agreements that involve a fixed fee for software, updates, and customer support.

When a company sells using a multiple element arrangement, the revenue must be allocated to the elements in relation to their fair values. Therefore, there is a possibility that management may attempted to misstate revenue by inappropriate allocation. In these situations, the auditors will review the sales contracts and evaluate the reasonableness of management's allocation of the revenue to the various elements.

provide an indication of its audit significance and any special audit procedures: The audit of a manufacturing company that uses complex sales agreements that allows product returns under certain circumstances.

When a company's sales agreements allow for returns, there is a risk that management may misstate the estimate of sales returns and, therefore, misstate revenue and receivables. In these situations, the auditors should carefully review the contracts to determine that revenue should be recognized at the time of sale. If revenue recognition is appropriate, they should next evaluate the adequacy of management's estimate of sales returns.

the client made significant errors in extending inventory quantities by their cost on the completed physical inventory listing

test the clerical accuracy of the final inventory listing

Recording of sales made in the subsequent period

comparing the recorded sales several days before and after the balance sheet date with shipping documents

Recording fictitious AR

confirming a sample of AR

One way to avoid misstatement of revenue is to ensure the client has proper _________

cutoff policies

13 A major control procedure related to plant and equipment is a budget for depreciation.

f

an auditor obtains evidence of stockholders' equity transactions for a publicly traded company by reviewing the entity's"

minutes of board of directors

A client might overstate December 31 AR balances by dating and recording January transactions in December. Such entries recorded in which journal are most likely to achieve this end?

sales

analytical procedures are used by auditors to gain evidence about the adequacy of the allowance for the uncollectible accounts

t

when it is impossible to confirm AR, the auditors may be able to satisfy themselves as to the existence of AR by alternative procedures

t


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