12.6 Flashcards
To check the accuracy of hours worked, an auditor would ordinarily compare clock cards with
Shop job time tickets.
The auditor should compare shop job time tickets with the clock cards to determine the accuracy of the hours worked. The job tickets, which contain the total hours worked on each job, should not vary significantly from the employee time cards used to compute payroll.
Vouching selected items from the payroll journal to employee time cards that have been approved by supervisory personnel provides evidence that
Employees worked the number of hours for which their pay was computed.
Effective internal control segregates the authorization, timekeeping, and payroll preparation functions. Preparation should be based on a list of authorized employees and pay rates originating in the human resources department and time records forwarded from the timekeeping department. By vouching entries from the payroll journal to approved employee time cards, the auditor can obtain evidence that the employees worked the number of hours for which their pay was computed.
The purpose of tracing a sample of inventory tags to a client’s computerized listing of inventory items is to determine whether the inventory items
Represented by tags were included on the listing.
The auditor should observe the counting process, determine that proper procedures are followed, and make selected test counts. Because the auditor does not make a complete count, not every misstatement will be detected. But (s)he should be able to determine that no large block of inventory has been omitted. Having accounted for a sequence of inventory tags, the auditor should trace a sample of the tags to the physical inventory listing. The purpose is to test the completeness assertion that all inventory listed on a tag is reflected in the listing.
When a client’s company does not maintain its own stock records, the auditor should obtain written confirmation from the transfer agent and registrar concerning
The number of shares issued and outstanding.
The independent stock registrar is a financial institution employed to prevent improper issuances of stock, especially over-issuances. The transfer agent maintains detailed shareholder records and facilitates transfer of shares. Both are independent and reliable sources of evidence concerning total shares issued and outstanding.
In auditing for unrecorded noncurrent bonds payable, an auditor most likely will
Compare interest expense with the bond payable amount for reasonableness.
The recorded interest expense should reconcile with the outstanding bonds payable. If interest expense appears excessive relative to the recorded bonds payable, unrecorded noncurrent liabilities may exist.
An auditor suspects that certain client employees are ordering merchandise for themselves over the Internet without recording the purchase or receipt of the merchandise. When vendors’ invoices arrive, one of the employees approves the invoices for payment. After the invoices are paid, the employee destroys the invoices and the related vouchers. In gathering evidence regarding the fraud, the auditor most likely would select items for testing from the file of all
Cash disbursements.
The best procedure to test whether any checks have been issued without supporting vouchers, purchase orders, and receiving reports is to select an appropriate sample of canceled checks (cash disbursements) and trace them to the related supporting documentation.
Which of the following explanations might satisfy an auditor who discovers significant debits to an accumulated depreciation account?
Extraordinary repairs have lengthened the life of an asset.
If extraordinary (major) repairs have lengthened the life of an asset without improving its quality or quantity, the entity may reduce the amount of accumulated depreciation to increase the net carrying amount of the asset. This practice is acceptable for representing the increased life of an asset. It also is often used to account for replacements.
A client has a large and active investment portfolio that is kept in a bank safe-deposit box. If the auditor is unable to count the securities at the balance sheet date, the auditor most likely will
Request the client to have the bank seal the safe-deposit box until the auditor can count the securities at a subsequent date.
Securities should be inspected simultaneously with the verification of cash and the count of other liquid assets to prevent transfers among asset categories for the purpose of concealing a shortage. If this procedure is not possible but the securities are kept by a custodian in a bank safe-deposit box, the client may instruct the custodian that no one is to have access to the securities unless in the presence of the auditor. Thus, when the auditor finally inspects the securities, (s)he may conclude that they represent what was on hand at the balance sheet date.
The controller of Excello Manufacturing, Inc. wants to use ratio analysis to identify the possible existence of idle equipment or the possibility that equipment has been disposed of without having been written off. Which of the following ratios would best accomplish this objective?
Gross manufacturing equipment cost to units produced.
The ratio of gross manufacturing equipment cost to units produced increases if equipment is taken out of production but is not written off. As replacement equipment is installed, the amount of units produced remains constant, and the gross equipment cost increases. If equipment is taken out of service without being replaced, gross equipment cost remains constant, units produced decline, and the ratio again increases.
The auditor observes the count of marketable securities on December 31. (S)he records the serial number of each security and checks the serial number and number of shares (or principal amount) against company records. Which error or bad practice has the best chance of being detected by this procedure?
The CFO misappropriated and sold securities on April 4. (S)he speculated successfully with the proceeds and replaced the misappropriated securities on December 29.
The auditor is most likely to detect a misappropriation and replacement of securities by comparing information for the securities counted with the entity’s records. The records would indicate that the recorded serial numbers differ from those of securities counted by the auditor.
When outside firms of nonaccountants specializing in the taking of physical inventories are used to count, list, price, and subsequently compute the total dollar amount of inventory on hand at the date of the physical count, the auditor will ordinarily
Make or observe some physical counts of the inventory, recompute certain inventory calculations, and test certain inventory transactions.
The taking of inventory by an outside firm of nonaccountants (use of a management’s specialist) does not substitute for the auditor’s own observation or performance of some test counts. The auditor may, as a result, be able to reduce the extent of his or her procedures but only after an evaluation of the work of management’s specialist. For example, the auditor may (1) examine its program, (2) observe its procedures and controls, (3) make or observe some physical counts, (4) recompute calculations, and (5) apply tests to post-count transactions.
Which of the following is the most important consideration of an auditor when examining the shareholders’ equity section of a client’s balance sheet?
Entries in the capital stock account can be traced to a resolution in the minutes of the board of directors’ meetings.
A primary concern of the auditor is that all capital stock transactions are properly authorized. Accordingly, all entries in the capital stock account should be traced to the minutes of the board of directors’ meetings. The articles of incorporation, by-laws, and minutes of shareholders’ meetings should also be reviewed. The auditor requires information about the number and rights of shares authorized and issued, the par or stated value, conversion and call features, stock dividends, and stock splits. The auditor also determines whether transactions are properly accounted for and shareholders’ equity items are presented in accordance with the applicable financial reporting framework.
An auditor’s analytical procedures indicate a lower than expected return on an equity method investment. This situation most likely could have been caused by
An error in recording amortization of the excess of the investor’s cost over the investment’s underlying carrying amount.
The transaction to record the amortization is a recurring entry that, if miscalculated, could result in a lower return than expected.
Which of the following procedures would be most appropriate for testing the completeness assertion as it applies to inventory?
Performing cutoff procedures for shipping and receiving.
Testing the cutoff to consider the transfer of title of inventory in shipping and receiving is appropriate for testing the completeness assertion. The terms, FOB shipping point versus FOB destination, should be evaluated to assure that the goods were recorded in the proper period.
During an audit of an issuer of bonds, the auditor should obtain written confirmation regarding debenture transactions from the
Trustee.
Debentures are bonds backed by the general credit of the issuer and not secured by specific assets. A bond issuer normally employs the services of an independent financial institution as trustee. The bond trustee is responsible for executing bond transactions, e.g., distributing or paying interest, and protecting the interests of bondholders. Accordingly, the auditor should confirm transactions with the trustee.
