Chapter 16

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?

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

The aggregated misstatement in the financial statements is made up of: Factual Misstatements Projected Misstatements Judgmental Misstatements (1) Yes Yes Yes (2) Yes Yes No (3) No Yes No (4) No Yes Yes

Option (1)

Which of the following procedures is most likely to be included near completion of an audit?

Performing analytical procedures.

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.

iron curtain approach

When auditing the statement of cash flows, which of the following would an auditor not expect to be a source of receipts and payments?

Capitalization.

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

Commitment

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:

Consider the possibility of a misstatement in the financial statements.

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

Contingent liability

Which of the following is most likely to be considered a Type 1 subsequent event?

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

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

Date of the auditors' report.

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:

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

Misstatements about which there is no doubt as to amount.

Factual misstatements

An auditor accepted an engagement to audit the 20X8 financial statements of EFG Corporation and began the fieldwork on September 30, 20X8. EFG gave the auditor the 20X8 financial statements on January 17, 20X9. The auditor completed the audit on February 10, 20X9, and delivered the report on February 16, 20X9. The client's representation letter normally would be dated:

February 10, 20X9.

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.

General risk contingency

A possible loss, 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 amounts, is referred to as a(n):

Loss contingency.

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

Projected misstatements

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.

Rollover approach

Which of the following events occurring on January 5, 20X2, is most likely to result in an adjusting entry to the 20X1 financial statements?

Settlement of litigation.

Which of the following is least likely to be considered a substantive procedure relating to payroll?

Test whether employee time reports are approved by supervisors.