Audit 4

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What are the standard auditing procedures?

FIVE-CARROT-CARS
Footing
Inquiry
Vouching
Examining, Confirmation, Analytical Procedures, Reperformance, Reconciliation, Observation, Tracing, Cut-off review, Auditing related accounts simultaneously, Representation letter, Subsequent events review

What are the relevant assertions to the audit of account balances?

CVER
Completeness, Valuation, allocation and accuracy, Existence, Rights and obligations

What are the relevant assertions to the audit of transactions and events?

COVEU
Completeness, Cut-off, Valuation allocation and accuracy, Existence, Understandability and classification

What are the relevant assertions to the audit of disclosures?

CVRU
Completeness, valuation allocation and accuracy, Rights and obligations, Understandability

T/F: Audit evidence obtained from an independent party provides greater assurance of reliability.

True

T/F: Relationships among balance sheet accounts tend to be more predictable that income statement accounts.

False

Where should the direction of the audit test come from to determine whether transactions have been recorded?

Original source documents

When an analytical procedure is used as the principal substantive test of a significant f/s assertion, what is the auditor required to document?

The auditor's expectation and the factors considered in developing that expectation

What assertion would recalculation of the amortization and review of the amortization period test?

Valuation and allocation assertion

T/F: Information obtained indirectly from outside sources is the most reliable evidential matter.

False, directly

What procedure would be most effective in reducing attestation risk?

Examination of evidence

T/F: Strong, effective internal controls improve the reliability of data.

True

How is risk reduced by through segregation of duties?

ARC
Authority, Recordkeeping, Custody

T/F: The biggest concern with revenue is overstatement of assets and revenue.

True

Who makes the deposit if there is no cashier under the revenue cycle - Collections?

The Treasury

When auditing the revenue cycle, what assertion is more relevant?

Existence

When would positive confirmations be acceptable to send?

-Large accounts
-Weak internal control
-Expected errors and disputes

When would negative confirmations be used?

-Small balances
-Expect customer attention
-Low risk

What assertions are more relevant for accounts payable?

Completeness and accuracy

T/F: A/P confirmations are required.

False, NOT required

What cash fraud scheme involves the theft of cash often concealed by failing to account for cash receipts

Lapping

What is the best method to guard against lapping?

Lock box system

What is the audit procedure for kiting?

Bank cut off procedure

T/F: The payroll department is a custodial department.

False, recordkeeping!

T/F: Frequent kiting may result in a high level of deposits coupled with a low average balance.

True

What is kiting?

When one check drawn on one bank is deposited in another bank and no record is made of the disbursement in the balance of the 1st bank

What internal control would most likely reduce the risk of diversion of customer receipts by an entity's employees?

Bank lockbox system

What would a responsible employee do immediately upon receiving checks from customers by mail?

Prepare a duplicate listing of checks received

How would an auditor provide assurance that each voucher is submitted and paid only once?

Stamp 'paid' by the check signer

What department approves proper authorization of write-offs of uncollectible accounts?

Treasurer

T/F: Reconciling the control totals for sales invoices w/ the A/R subsidiary ledger would be an effective internal control to reduce the risk of errors in the billing process.

False! Not effective

Accounting for unused prenumbered purchase orders and receiving reports is usually performed in the vouchers payable department.

No

What assertion would an auditor's review of credit ratings of customers with delinquent accounts receivable concern?

Valuation and allocation

What assertion does examination of evidence of credit approval support?

Valuation and allocation

T/F: Examination of evidence of credit approval supports the assertion of rights and obligations.

False

T/F: There is an opportunity for a person to embezzle cash and cover it up if he/she who disburses cash (via blank checks and signature plates) also reconciles the bank statement.

True

What procedure would best detect a liability omission by management?

Review purchase contracts and other legal documents

T/F: By tracing from the shipping documents to the invoices, the auditor confirms that goods that were shipped were properly billed.

True

What account would an auditor focus increased attention on during a recession?

Allowance for doubtful accounts

Why would an auditor review the reconciliation of payroll tax forms that a client is responsible for filing?

To identify potential liabilities for unpaid payroll taxes

How is dividend income from investments tested by?

Referring to dividend record books produced by investment advisory services

How would an auditor generally test the segregation of duties related to inventory by?

Personal inquiry and observation

What assertion does inquiries of production and sales personnel concerning possible excess or obsolete inventory items support?

Valuation and allocation

T/F: In auditing payroll, an auditor would most likely compare payroll costs with entity standards of budgets.

True

In auditing long-term bonds payable, what would an auditor most likely do?

Compare interest expense w/ the b/p amount for reasonableness

What would an auditor do in performing tests concerning the granting of stock options?

Trace the authorization for the transaction to a vote of the board of directors

Should periodic inventory counts be used to adjust perpetual records to maintain perpetual inventory records?

YES

T/F: Examining an analysis of inventory turnover helps identify slow-moving and obsolete items included in inventories.

True

What assertion would analyzing inventory turnover rates support?

Valuation and allocation

T/F: When the A/P manager issues purchase orders, this indicates a strength in A/P procedures.

False,weakness

What is a key control for ensuring sales are properly authorized when assessing control risks for sales?

Sales orders are sent to the credit department for approval

What evidence does tracing shipping documents to prenumbered sales invoices provide?

Shipments to customers were properly invoiced

What substantive testing of payroll balances would be limited if the control risk is assessed as low

Applying analytical procedures and recalculating payroll accruals

What assertion does looking at related party transactions support?

Valuation, allocation, and accuracy

T/F: A related party transaction is considered to be an arm's length transaction.

False, it is NOT

What is the auditor's objective with related party transactions?

Disclosed in accordance with GAAP

What procedures would be applied to determine the existence of related parties?

-Evaluating the company's procedures for identifying and accounting for related party transactions, and obtaining a conflict of interest statement from the client
-Asking management for the names of all related parties
-Reviewing the entity's filings with the SEC
-Reviewing material transactions for related party evidence
-Reviewing prior years' audit documentation or inquiring of the predecessor auditor

T/F: To identify a contingency, an auditor would NOT send an inquiry letter to the client's attorneys.

False, they would!

What factors would an auditor concentrate on in evaluating the reasonableness of an estimate?

-Significant to the accounting estimate
-Sensitive to variations
-Deviations from historical patterns
-Subjective and susceptible to misstatements and bias

T/F: It is unlikely that a CPA would not accept a new audit engagement when the prospective client is unwilling to permit inquiry of its legal counsel.

True

Who requests inquiry of a client's lawyer?

Client management

T/F: Transactions based on terms that are significantly different from those that would be expected in an arm's length transaction may be indicative of related party involvement.

True

Why are auditors hesitant to use embedded audit modules?

Auditors are required to be involved in the system design of the application to be monitored

T/F: Embedded audit modules allow the auditor to capture specific data as transactions are being processed.

True

T/F: Continuous performance of audit tests is not required when financial data is processed electronically.

False, it is required

T/F: When an auditor tests a computerized accounting system, test data are processed by the client's computer programs under the auditor's control.

True

T/F: Whether or not a misstatement is considered material, it is not ultimately a matter of professional judgment.

False, it is

When do significant deficiencies exist?

When an engagement team
-fails to obtain sufficient appropriate evidence
-reached an inappropriate overall conclusion
-report is not appropriate
-Firm is not independent

What is the current ratio?

Current assets/Current liabilities

What is the quick ratio?

(Cash + Marketable securities + Net receivables) / current liabilities

What is the A/R turnover?

Net Sales / Average net receivables

What is the inventory turnover?

COGS/ Average Inventory

What is the total asset turnover?

Net Sales / Average total assets

What is the gross margin percentage?

Gross profit/ Net Sales

What is the net operating margin %?

Net operating income / Sales

What is times interest earned/

Recurring income before taxes and interest/ interest

If analytical procedures performed in the overall review stage of an audit suggest that several accounts have unexpected relationships, what would this indicate?

Additional tests of details are required.

T/F: Average number of days sales in inventory is defined as 365 days per year divided by the inventory turnover.

True

How may inventory turnover ratio increase?

Cost of sales must increase or average inventory must decrease

T/F: The lower the inventory turnover, the better the entity's performance.

False, the HIGHER, the better

T/F: An auditor ordinarily uses a working trial balance resembling the f/s without footnotes and contains columns for reconciliations and tickmarks.

False, columns for reclassifications and adjustments

A copy of what would be included in the audit documentation that makes up the current file?

Bank reconciliation

T/F: In testing the existence assertion for an asset, an auditor ordinarily works from the supporting evidence to the accounting records.

False, from the accounting records to the supporting evidence

What assertion would reviewing the renewal of a note payable shortly after the b/s date support?

Understandability and classification

Would inspection of bank statements obtained directly from the client's financial institution provide reliable audit evidence?

True

T/F: The measure of sufficiency of audit evidence does not lie in the auditor's judgement.

False, it does!

What assertion would selecting items for test counts and tracing the test counts to the client's inventory listing support?

Completeness

What provides a greater assurance of reliability: Bank statement of bank reconciliation?

Bank statement

Between a sales invoice and vendor invoice, which provides the least assurance of reliability?

Sales invoice

What confirmation would an auditor be most likely to identify a contingent liability?

Standard bank confirmation

What is the sampling unit in a test of controls pertaining to the existence of payroll transactions?

Payroll register entry

What procedures are good controls over the payroll system?

-A voucher for the amount of the payroll is prepared in the general accounting department based on the payroll department's payroll summary
-Payroll checks are prepared by the payroll dept. and signed by the treasurer
-The personnel dept sends employees' hire and termination notices to the payroll department

What is the purpose of segregating the duties of personnel and distributing payroll checks?

To separate the authorization of transactions from the custody of related assets

T/F: Confirmation of A/R provides evidence that the customer and the receivable are complete.

False, exist!

Why might auditor confirmation of A/P balances at the balance sheet date be unnecessary?

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

What are the 2 assertions for which confirmation of A/R balances provides primary evidence for?

Rights and obligations and existence

What is the most likely method of auditing interest earned on bond investments?

Recomputing the interest earned

What internal controls most likely would give the greatest assurance that securities held as investments are safeguarded?

Access to securities requires the signatures and presence of 2 designated officials

What control is most likely to prevent the improper disposition of equipment?

A separation of duties between those authorized to dispose of equipment and those authorized to approve removal work orders

T/F: Customer confirmations relate to contingent liabilities disclosed.

False, relate to receivables

What is the primary evidence regarding year-end cash balances in the f/s?

Bank reconciliation

What step is required in an auditor's program to examine long-term debt/

Examine bond trust indentures

What is the primary purpose of sending a standard confirmation request to financial institutions with which the client has done business?

To corroborate information regarding deposit and loan balances

What population of documents is appropriate to determine whether A/P are complete and an auditor performs a test to verify that all merchandise received is recorded?

Receiving reports

What is a cashier's job description that would contain compatible duties?

Receive remittances and prepare the daily deposit slip

If the objective of a test of details is to detect overstatement of sales, the auditor should trace transactions from the:

Accounting records to the source documents

T/F: Tracing bills of lading to sales invoices provides evidence that shipments to customers were recorded as sales.

False, that shipments to customers were invoiced

T/F: Lapping schemes involve write-offs.

False, they don't!

T/F: Inquiries about access to recorded cash, tracing from the cash receipts journal, and testing the general ledger balance provide evidence regarding possible unrecorded transacionts.

False, they do!

T/F: Observing the consistent use of cash registers and tapes by employees would provide evidence to the auditor regarding the controls over the existence of cash receipts.

False, completeness!

What department stamps, perforates, or otherwise cancels supporting document after payment is mailed: vouchers payable or treasury/cash disbursement dept?

Treasury/cash disbursement

What should be used to determine whether A/P are complete when the auditor performs a test to verify that all merchandise received is recorded?

Receiving reports

When the shipping department returns nonconforming goods to a vendor, should the purchasing dept. send to the accounting dept the credit or debit memo?

Debit!

What assertion does an auditor's purpose in reviewing credit ratings of customers with delinquent A/R support?

Valuation and allocation

What are the2 documents most likely to be generated by the revenue cycle application

Credit memos and sales invoices

What would be the source for when the company considers the decline in value of equity securities classified as available-for-sale to be temporary?

Management representation letter

Who has the ultimate responsibility for the performance of the audit and preparation of the report?

The engagement partner

What does tracing items in the inventory listing to inventory tags and the auditor's recorded count sheets verify?

Assurance that all inventory items in a client's inventory listing are VALID

What assertions do confirmation of A/R provide evidence of?

Existence

What is an alternate procedure to support the existence of receivables when an auditor doesn't receive replies to 2nd requests?

Inspect the shipping records documenting the merchandise sold to the debtors

T/F: The requirement for 2 authorized signatures is part of the notes payable system.

False, part of the disbursements internal control system

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