Auditing

The search for unrecorded liabilities for a public company includes procedures usually performed through the: (1)Day the audit report is issued. (2)End of the client's year. (3)Date of the auditors' report. (4)Date the report is filed with the SEC

(3) date of the audit report

An audit of the balance in the accounts payable account is ordinarily not designed to : A) Detect account payable 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 substantially past due.

In an audit, the valuation of year-end accounts payable is most likely addressed by: a) Confirmation b) Examination of cash disbursements immediately prior to year-end c) Examination of cash disbursements immediately subsequent to year-end d) Analytical procedures applied to vouchers payable at year-end

A) confirmation

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 of controls most likely test? a) Completeness b) Existence c) Valuation d) Rights

B) existence

Which of the following procedures is most likely to be included in the final review stage of an audit? A) Obtain an understanding of internal control. B) Confirmation of receivables. C) Observation of inventory. D) Perform analytical procedures.

D) Perform analytical procedures.

What differences should auditors expect to find in supporting evidence for accrued liabilities as contrasted with accounts payable?

Accounts payable arising from purchases of goods or services are usually evidenced by invoices and monthly statements received from the suppliers. In contrast, accrued liabilities generally accumulate on a time basis as a result of the company's obligation to pay salaries, pensions, interest, rent, taxes, and similar items. Invoices and monthly statements usually are not received for accrued liabilities

Suggest two reasons why the adjustments proposed by independent auditors more often than not call for reducing recorded earning?

Adjustments proposed by the independent auditors more often than not have the effect of reducing recorded earnings for the following reasons. First, management is normally under some degree of pressure to report higher earnings. Earnings improvement pleases stockholders, reassures creditors, facilitates financing, and permits larger bonuses and other compensation. Consequently, management has an incentive to interpret every transaction in the most favorable light. There is a tendency to minimize bad news, and to postpone recognition of losses. The auditors may need to make downward adjustments in earnings and owners' equity to offset this optimistic bias on the part of management. A second reason is that the legal liability of auditors arises from overstatement of earnings, owners' equity, and assets, and understatement of liabilities. Lawsuits against CPA firms almost never arise because of understated earnings.

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 information. C) Request that management disclose the effects of the newly discovered information by adding a footnote to subsequently issued financial statements. D) Issue revised pro forma financial statements taking into consideration the newly discovered information.

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

What audit procedure is not ordinarily used to examine selling, general and administrative expenses? A) Analytical procedures B) Use of budgets to identify unexpected differences C) Confirmations to advertising agencies confirming payments D) Detailed tests of balances

C) confirmations to advertising agencies confirming payments

Which of the following events occurring on January 5, 20X2, is most likely to result in an adjusting entry to the 20X1 financial statements? (1)A business combination. (2)Early retirement of bonds payable. (3)Settlement of litigation. (4)Plant closure due to a strike.

(3) Settlement of litigation

The auditors' best course of action with respect to "other financial information" included in a client prepared annual report containing the auditors' report is to: A) Indicate in the auditors' report that the "other financial information" is unaudited. B) Consider whether the "other financial information is accurate by performing a review. C) Obtain written representations from management as to the material accuracy of the "other financial information." D) Read and consider the manner of presentation of the "other financial information."

D) Read and consider the manner of presentation of the "other financial information."

Because of their objectives, certain audit procedures cannot be completed before the end of the audit.

These procedures include (a) search for unrecorded liabilities, (b) review the minutes of meetings, (c) perform final analytical procedures, (d) perform procedures to identify loss contingencies, (e) perform the review for subsequent events, and (f) obtain the representation letter.

Identify three audit procedures (other than "Search for unrecorded accounts payable") that are concerned directly or indirectly with disclosing unrecorded accounts payable.

(1) Reconcile liabilities with monthly statements from creditors. (2) Confirm accounts payable by direct correspondence with vendors. (3) Perform a cutoff of inventory purchases.

When auditing the statement of cash flows, which of the following would an auditor not expect to be a source of receipts and payments? (1)Capitalization. (2)Financing. (3)Investing. (4)Operations.

(1) capitalization

Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because: (1)This is a duplication of cutoff tests. (2) Accounts payable balances at the balance sheet date may not be paid before the audit is completed. (3) Correspondence with the audit client's attorney will reveal all legal action by vendors for nonpayment. (4) There is likely to be other reliable external evidence available to support the balances.

(4) 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 percent in the preceding year to 20 percent in the current year. The auditors should: (1)Express an opinion that is qualified due to the inability of the client company to continue as a going concern. (2)Evaluate management's performance in causing this decline. (3)Require note disclosure. (4)Consider the possibility of a misstatement in the financial statements.

(4) consider the possibility of a misstatement in the financial statements.

Which of the following is least likely to be considered a substantive procedure relating to payroll? (1)Investigate fluctuations in salaries, wages, and commissions。 (2)Test computations of compensation under profit sharing for bonus plans. (3)Test commission earnings. (4)Test whether employee time reports are approved by supervisors.

(4) test whether employee time reports are approved by supervisors.

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? (1)Examine human resources records for accuracy and completeness. (2)Examine employees' names listed on payroll tax returns for agreement with payroll accounting records. (3)Make a surprise observation of the company's regular distribution of paychecks on a test basis. (4)Visit the working areas and verify that employees exist by examining their badge or identification numbers.

(4) visit the working areas and verify that employees exist by examining their badge or identification numbers.

Lawsuits against CPA firms are most likely to allege that auditors were negligent in not detecting which of the following? (a) Overstatement of liabilities and earning, (b) understatement of assets and earning, or (c) overstatement of owner's equity. Explain the reasoning underlying your choice.

(C) over statements of owner's equity. Because managements have a degree of pressure to report higher earning to please stockholder, to assurance creditor, to ga

Identify the section of the standard audit report for a nonpublic company.

1) Introduction—identify the financial statements that have been audited. 2) Managements' responsibility—management is responsible for the preparation and fair presentation of the financial statement in accordance with financial reporting framework. 3) Auditors' responsibility—(A) the auditors' responsibility to express an opinion on the financial statement base on an audit conducted in accordance with GAAS. (B) outline the nature of audit (C) Auditors' conclusion. Opinion

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.

c) Which assertion do confirmation results most directly address-existence or completeness?

Confirmations most directly address existence in that they are sent to recorded accounts. They less directly address completeness since accounts may exist of which the auditor may be completely unaware, and therefore, not confirm.

The auditors usually find in the client's possession documentary evidence, such as invoices, supporting both accounts receivable and account payable. Is there any difference in the quality of such evidence for account receivable and for accounts payable? Explain.

Invoices supporting account payable are more reliable than invoices supporting account receivable, because management would like to exaggerate sales revenue by forge sale invoice and record account receivable, all evidences are created within client's company. However, if management would like to decrease liabilities make financial statement looking better, mangers would omit purchase invoices and decrease liabilities. In addition, invoices supporting account payable are created externally by vendors.

List the major responsibilities of an accounts payable department.

Major responsibilities of the accounts payable department are the verification of invoices, distribution of charges to ledger accounts, preparation of journal entries summarizing the month's transactions, and the maintenance of subsidiary records.

Going concern

Negative cash flows Default on loan agreements Adverse financial ratios Work stoppages Legal proceeding

do you consider the more significant step in establishing strong internal control over accounts payable transactions: the approval of an invoice for payment, or the issuance of a check in payment of an invoice? Explain.

The approval of an invoice for payment is more significant step in establishing strong internal control over accounts payable transaction. Because once the invoices are approved, check would be automatically processed.

What is the purpose of the auditors' review of cash payments subsequent to the balance sheet date?

The purpose of auditors' review of cash payments subsequent to the balance sheet date is to discover unrecorded liabilities. These omissions must be reviewed and a decision must be made as to their materiality and whether or not it warrants an adjusting entry. This decisions hinges to an important extent on whether the transaction affects net income.

When confirming accounts payable, the approach is most likely to e 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 accounts payable 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

Which of the following is least likely to be an audit objective for debt? a) Determine the existence of recorded debt b) Establish the completeness of recorded debt c) Determine that the client has rights to receive proceeds relating to the redemption of debt d) Determine that the valuation of debt is in accordance with GAAP

c) Determine that the client has rights to receive proceeds relating to the redemption of debt

For effective internal control, the accounts payable department should compare the information on each vendor's invoice with the: (1) Receiving report and the purchase order. (2)Receiving report and the voucher. (3)Vendor's packing slip and the purchase order. (4)Vendor's packing slip and the voucher.

(1) receiving report and the purchase order.

A possible loss, stemming from past events that will be resolved as to existence and amounts, is referred to as a(n): (1)Analytical process. (2)Loss contingency. (3)Probable loss. (4)Unasserted claims

(2) Loss contingency

General contingency

A loss might occurred in the future. Example boycott, risk of price increase in essential raw material...

Loss contingency

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

Subsequent event

An event occurring after the date of balance sheet but prior to the date of the auditors' report date.

Management estimates the company's allowance for doubtful accounts as $100,000, and the auditors develop an estimates that suggests that the amount should be between $115,000 and $125,000. The likely misstatement in this situation is: A) $0. B) $15,000. C) $20,000. D) $25,000.

B) $15,000

A possible loss, stemming from past events that will be resolved as to existence and amounts is referred to as a: A) Analytical process. B) Loss contingency. C) Probable loss. D) Unasserted claim.

B) Loss contingency

A client's previous two years of financial statements understated estimated warranty payable by $15,000 and $25,000 respectively, immaterial amounts. This year the auditors estimate that the accrual is understated by an additional $30,000. In this year's audit $50,000 represents a material amount. Assuming that the entire understatement is to be recorded, following SEC SAB 108 the decrease in this year's income due to these understatements is: A) $0. B) $30,000. C) $55,000. D) $70,000.

D) $70,000

Which of the following is the best audit procedure for determining the existence of unrecorded liabilities? A) examine confirmation requests return by creditor whose account appear on 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 subsequent to year-end. D) Examine selected cash disbursements in the period subsequent to year-end.

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

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?

Reconciling vendors' monthly statements with subsidiary payable ledger accounts

Emphasis-of-matter paragraph

Substantial doubt about the company's going-concern status GAPP not consistently applied Uncertainty Other circumstances that auditors believe should be emphasized (e.g. a major catastrophe, related party transactions, and subsequent events) Group audits

The least likely approach in auditing management's estimate relating to an accrued liability is to: a) Independently develop an estimate of the amount to compare to management's estimate b) Review and test management's process of developing the estimate C) Review subsequent events or transactions bearing on the estimate d) Send confirmations relating to the estimate

d) Send confirmations relating to the estimate