Chapter 13, 14, and 15 AUDIT
Ordinarily, the most significant assertion relating to AP is... 1. Completeness 2. existence 3. presentation 4. valuation
1. Completeness Because an understatement of liabilities overstates income, auditors are ordinarily most concerned with the completeness assertion for payables. Note, however, that in circumstances in which a client may be motivated to understate income (e.g., to minimize taxes), existence becomes a bigger concern.
The auditors would be most likely to find unrecorded LT liabilities by analyzing... 1. Interest payments 2. Discounts on LT liab. 3. Premiums on LT liab 4. Recorded LT liab accts
1. Interest payments Auditors will test the relationship between interest payments and recorded long term liabilities. When interest payments seem too high, it may be due to the existence of unrecorded liabilities. Also, the process of performing procedures to determine who interest is paid to may reveal unrecorded debt.
An auditor is most likely to trace Treas. Stock purchase transactions to the... 1. Numbered stock certs on hand 2. articles of incorporation 3. year's int/e 4. minutes of the audit committee
1. Numbered stock certs on hand The auditors should trace treasury stock purchase transactions to the certificates on hand. If the certificates are not on hand, they should be confirmed directly with the custodian. The articles of incorporation, answer (2), will not provide information on the details of specific stock issuances and treasury stock transactions. There is no interest on the treasury stock, and accordingly, answer (3) doesn't relate directly to treasury stock. Finally, it is far more likely that the overall board of directors, not the audit committee, will approve treasury stock transactions. Therefore, answer (4) is not correct.
In the continuing audit of a manufacturing company of medium size, w/h of the following areas would you expect to require the LEAST amount of audit time? 1. Owner's equity 2. revenue 3. assets 4. liabilities
1. Owner's equity Transactions in the owners' equity accounts are very few in comparison with the volume of entries in the other three groups. Consequently, the audit time required for owners' equity is usually much smaller than for revenue, assets, or liabilities.
Which of the following statements is NOT typical of PPE as compared to the most current asset accounts? 1. a PPE cutoff error near year-end has a more significant effect on NI 2. relatively few transactions occur in PPE during the year 3. the assets involved with PPE ordinarily have relatively longer lives 4. PPE equip accounts have a higher dollar value
1. a PPE cutoff error near year-end has a more significant effect on NI A property, plant and equipment cutoff error has less of an effect, not more, on net income. This is because the only effect on income is the small amount of depreciation involved.
Audit of the following accounts is MOST likely to reveal evidence relating to recorded retirements of equipment? 1. accumulated deprec. 2. CoGS 3. purchase returns and allow. 4. purchase disc.
1. accumulated deprec. Because the proper recording of a retirement requires elimination of the accumulated depreciation related to the retired equipment, review of this account is most likely to provide evidence about a recorded retirement. .
In an audit, the valuation of year-end AP is most likely to be addressed by... 1. confirmation 2. examination of cash disbur. immediately prior to year-end 3. examination of cash disbur. immediately subsequent to year-end 4. analytical procedures applied to vouchers payable at year-end
1. confirmation The best procedure to determine valuation of payables is confirmation. Examination of cash disbursements in the subsequent period is more directed towards completeness of payables. Analytical procedures may be useful but would not be as effective as confirmation with respect to the valuation assertion.
An audit of the balance in AP account is ordinarily NOT designed to... 1. detect AP that are substantially past due 2. verify that AP were properly authorized 3. ascertain the reasonableness of recorded liabilities 4. determine that all existing liab at the BS date have been recorded
1. detect AP that are substantially past due The auditors do not have as an objective the determination of whether accounts payable are past due.
All corporate capital stock transactions should ultimately be traced to the... 1. minutes of the BoD 2. cash receipts journal 3. cash disbursements journal 4. numbered stock certs
1. minutes of the BoD Capital stock transactions should all be approved by the client's board of directors. Answer (2) is incorrect because there will be no cash receipt for stock repurchase transactions. Answers (c) and (d) are incorrect because cash disbursements will not be recorded and numbered stock certificates will not be on hand after stock sales.
For effective internal control, the AP dept should compare the information on each vendor's invoice with the... 1. receiving report and the PO 2. receiving report and the voucher 3. vendors pack slip and the PO 4. vendors pack slip and voucher
1. receiving report and the PO Each vendor's invoice should be compared with the receiving report (to determine that it was received) and the purchase order (to determine that it was ordered). Answer (2) is incomplete because of the omission of the purchase order. Answers (3) and (4) are incorrect because the receiving report, prepared by the company itself, provides better evidence of what has been received than the vendor's packing slip.
In the audit of a sole proprietorship, a common difficulty is lack of... 1. segregation of personal net worth and business capital 2. availability of the owner 3. agreement as to the distribution between RE and Owner's capital 4. proper measures of dividends
1. segregation of personal net worth and business capital A common difficulty for a sole proprietorship is segregating personal and business assets and personal net worth. For example, credit cards and cash accounts may be used for both personal and business use, thus complicating the accounting process.
A likely reason that consideration of client compliance with debt provisions is important to an audit is that violation of such debt provisions may affect the total recorded... 1. Number of debt restrictions 2. Current Liab. 3. LT Assets 4. Capital Stock
2. Current Liab. When debt provisions are violated, long term debt often becomes immediately payable, and therefore, a current liability.
W/h of the following is an internal control weakness related to factory equipment? 1. checks issued in payment of purchases of equipment are not signed by the controller 2. all purchases of factory equipment are required to be made by the department in need of the equipment 3. factory equip. replacements are generally made when the estimated useful lives, as indicated in depr. schedule, have expired 4. proceeds from sales of fully depreciated equip is credited to other income
2. all purchases of factory equipment are required to be made by the department in need of the equipment The purchase of factory equipment should be made by the purchasing department regardless of which unit of the company will use the equipment. The purchasing department has the expertise and the established procedures and documents to insure that all purchases are made in accordance with company policy.
The auditor's plan for the examination of LT debt should include steps that require the... 1. verification of the existence of the bondholders 2. examination of copies of debt agreements 3. inspection of the AP subsidiary ledger 4. Investigation of credits to the bond interest income account
2. examination of copies of debt agreements The auditors' examination of long-term debt always includes an examination of copies of debt agreements to ensure the client is not in violation of the covenants of these agreements. Answer (1) describes a procedure that is not performed. Answers (3) and (4) describe procedures that may be performed but they pertain more directly to other accounts.
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? 1. completeness 2. existence 3. valuation 4. rights
2. existence Vouching from the purchases journal to the supporting documents provides evidence with respect to the existence assertion for purchases.
The audit procedure of confirmation is least appropriate with respect to... 1. the trustee of an issue of bonds payable 2. holders of common stock 3. holders of NR 4. holders of NP
2. holders of common stock It is not customary to confirm stockholdings by direct communication with individual stockholders. For an actively traded stock, contacting individual stockholders would be very costly and not likely to produce a satisfactory proportion of replies.
To strengthen internal control over the custody of heavy mobile equipment, the client would most likely institute a policy requiring a periodic... 1. increase in insurance coverage 2. inspection of equipment and reconciliation with accounting records 3. verification of liens, pledges, and collateralizations 4. accounting for work orders
2. inspection of equipment and reconciliation with accounting records Inspection of equipment and the reconciliation of the equipment with accounting records will strengthen internal control over custody of the equipment.
A client accidentally 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? 1. footing the purchases journal 2. reconciling vendors' monthly statement with the subsid. payables ledger accounts 3. tracing totals from the purchases journal to the ledge accounts 4. sending written quarterly confirmation to all vendors
2. reconciling vendors' monthly statement with the subsid. payables ledger accounts The most efficient way in which the duplicate recording of a purchase transaction may be detected is by reconciling the related payable accounts with vendors' statements.
W/h of the following procedures is LEAST likely to be completed before the balance sheet date? 1. confirmation of receivables 2. search for unrecorded liabilities 3. observation of inventory 4. review of internal accounting control over cash disbursements
2. search for unrecorded liabilities Because a significant portion of the search for unrecorded liabilities deals with transactions recorded after year-end, it is least likely to be completed before the balance sheet date.
When confirming AP, the approach is most likely to be one of... 1. selecting the accounts with the largest balances at year-end, plus a sample of other accounts 2. selecting the accounts of companies with whom the client has previously done the most business, plus a sample of other accounts 3. selecting a random sample of AP at year-end 4. confirming all accounts
2. selecting the accounts of companies with whom the client has previously done the most business, plus a sample of other accounts Accounts payable confirmations are ordinarily sent to suppliers with whom the client has done the most business. This is because the largest potential for an understatement may exist due to the client having established high levels of credit. A sample of other accounts will ordinarily also be selected.
A transfer agent and a registrar are most likely to provide the auditor with evidence on... 1. Restrictions on the payment of accounts payable 2. shares issued and outstanding 3. preferred stock liquidation value 4. transfers occurring between mgmt and related parties
2. shares issued and outstanding A registrar and transfer agent keep information on the shares issued, outstanding, and the owners of that stock.
Which of following is least likely to be an audit objective for debt? 1. Determine the existence of recorded debt 2. Establish the completeness of recorded debt 3. Determine that the client has rights to receive proceeds relating to the redemption of debt 4. Determine that the valuation of debt is in accordance with GAAP
3. Determine that the client has rights to receive proceeds relating to the redemption of debt The client will not receive proceeds related to redemption of its interest-bearing debt—it will pay off the debt.
The auditors can best verify a client's bond sinking fund transactions and year-end balance by... 1. recomputation of Int/E, Int/P, and amort of bond discount or premium 2. confirmation with the individual holders of retired bonds 3. confirmation with the bond trustee 4. examination and count of the bonds retired during the year
3. confirmation with the bond trustee The bond trustee will be able to provide information on both the sinking fund transactions and the year-end balance.
Which of the following is MOST likely to be an audit objective in the audit of owner's equity? 1. establish that recorded owner's equity includes all LT debt and equity balances 2. determine that common stock is valued at current market value 3. determine that the presentation and disclosure of owner's equity are appropriate 4. determine that the existence of recorded owner's equity is in conformity with equity accounting rule valuations
3. determine that the presentation and disclosure of owner's equity are appropriate An audit objective for owners' equity is to determine that presentation and disclosure is appropriate. Answer (1) is incorrect because owners' equity does not include long-term debt. Answer (2) is incorrect because common stock should not be valued at current market value. Answer (4) is incorrect because the term "equity accounting rule valuations" is of uncertain meaning.
The auditors are most likely to seek info from the plant manager with respect to the... 1. adequacy of the provision for uncollectible accounts 2. appropriateness of physical inventory observation procedures 3. existence of obsolete machinery 4. deferral of procurement of certain necessary insurance coverage
3. existence of obsolete machinery The plant manager would be the most appropriate individual for inquiries about the existence of machinery that is no longer useable.
To determine that each voucher is submitted and paid only once, when a payment is approved, supporting documents should be canceled by the... 1. authorized members of the audit committee 2. accounting department 3. individual who sings the checks 4. CFO
3. individual who sings the checks The individual who signs the checks should ordinarily be provided with supporting documents that provide support for the disbursement. That individual should then manually or electronically "cancel" the documents so that the amount isn't paid a second time.
An effective procedure for identifying unrecorded retirements of equipment is to... 1. foot related property records 2. recalculate depre. on the related equip. 3. select items of equip. in the accounting records and then locate them in the plant 4. select items of equip. and then locate them in the accounting records
3. select items of equip. in the accounting records and then locate them in the plant An inability to locate assets may reveal to the auditors that unrecorded retirements have occurred.
W/h of the following is NOT an overall test of the annual provision for depre/E? 1. compare rates used in the current year with those used in prior years 2. test computation of depre. provisions for a representative # of units 3. test deductions from an accum depre for assets purchased during the year 4. perform analytical procedures
3. test deductions from an accum depre for assets purchased during the year Assets purchased during the year should not result in deductions from the accumulated depreciation account.
For the audit of a continuing non-public client, the emphasis of the testing for property accounts is on... 1. all transactions resulting in the ending balance 2. tests of control over disposals 3. transactions that occurred during the year 4. performing analytical procedures on the beg. balances of the accts
3. transactions that occurred during the year Ordinarily, the emphasis for testing property accounts is on transactions that occurred during the year because the account turns over so slowly. Note, however, that audits performed under the PCAOB Standard 2 also require consideration of internal control over property, plant and equipment.
To ensure accountability for fixed asset retirements, management should implement an internal control that includes... 1. continuous analysis of misc revenue to locate any cash proceeds from the sale of plant assets 2. periodic inquiry of plant executives by internal auditors as to whether any plant assets have been retired 3. utilization of serially numbered retirement work orders 4. periodic observation of plant assets by the internal auditors
3. utilization of serially numbered retirement work orders Serially numbered retirement work orders provide a systematic means of assuring that units of plant and equipment are not retired without authorization by management. Retirement work orders also provide the accounting department with the information necessary to record the retirement of equipment in the accounting records. The alternative procedures suggested are not satisfactory. Some retirements of plant asset do not involve cash receipts. The inquiries and observations by internal auditors would come after the fact of asset retirements.
W/h of the following would an auditor MOST likely include on an internal control questionnaire for NP? 1. are assets that collateralize notes payable critically needed for the entity's continued existence? 2. are two or more authorized signatures required on checks that repay notes payable 3. are the proceeds from notes payable used for the purchase of non-current assets 4. are direct borrowings on notes payable authorized by the BoD
4. are direct borrowings on notes payable authorized by the BoD Answer (4) is correct because companies frequently require that direct borrowings on notes payable be authorized by the board of directors; accordingly, auditors will determine whether proper policy has been followed.
Which of the following is the best audit procedure for determining the existence of recorded liabilities? 1. examine confirmation requests returned by creditors whose accounts appear on a subsidiary trial balance of AP 2. examine unusual relationships between monthly accounts payable balances and recorded purchases 3. examine a sample of invoices a few days prior to and subsequent to year-end to ascertain whether they have been properly recorded 4. examine selected cash disbursements in the period subsequent to year-end
4. examine selected cash disbursements in the period subsequent to year-end Examining selected cash disbursements in the period subsequent to the year-end is the best audit procedure for determining the existence of unrecorded liabilities. All liabilities must eventually be paid, and will therefore be reflected in the accounts when paid if not when incurred. By close study of payments made subsequent to the balance sheet date, the auditors may find items that should have appeared in the balance sheet.
The auditors may conclude that the depreciation charges are insufficient by noting... 1. insured values greatly in excess of book values 2. large amounts of fully depreciated assets 3. continuous trade-ins of relatively new assets 4. excessive recurring losses on assets retired
4. excessive recurring losses on assets retired Excessive recurring losses on assets retired show that the depre¬ciation expense recognized during the actual useful lives of the assets has been less than the real cost of using the assets.
W/h of the following accounts should be reviewed by the auditors to gain reasonable assurance that additions to property, plant, and equipment are NOT understated? 1. depreciation 2. AP 3. cash 4. repairs
4. repairs In recording expenditures on property, plant, and equipment, the logical choice usually is between a revenue expenditure and a capital expenditure. If the outlay is judged to be a revenue expenditure (rightly or wrongly), it will probably be recorded in the Repairs and Maintenance account. If items that should be capitalized are erroneously charged to Repairs and Maintenance, the result will be an understatement of property, plant, and equipment. Consequently, the auditors can gain evidence that additions to property, plant, and equipment are not understated by reviewing the Repairs and Maintenance account. The other alternatives suggested in the question are not plausible. An erroneous debit to cash would be disclosed quickly because of the disagreement between cash receipts and the cash being deposited daily in the bank. A debit to Accounts Payable would lead to protests from creditors. A debit to Depreciation Expense would be a conspicuous error because of the timing of the entry and the lack of a related credit to Accumulated Depreciation.
The LEAST likely approach in auditing management's estimate relating to an accrued liability is to... 1. independently develop an estimate of the amount to compare to managements estimate 2. review and test management's process of developing the estimate 3. review subsequent events or transactions bearing on the estimate 4. send confirmation relating to the estimate
4. send confirmation relating to the estimate Auditors audit estimates through (1) independently developing an estimate, (2) reviewing management's process, and (3) reviewing subsequent events. There often is no one to send a confirmation related to the estimate.
Auditor confirmation of AP balances at the BS 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 nonpayments 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 Auditors will usually find in the client's possession externally created evidence such as vendors' invoices and statements that substantiate the accounts payable. No such external evidence is on hand to support accounts receivable.
