2.11.19 Flashcards
Which of the following is an analytical procedure that an auditor most likely uses to form an overall conclusion?
Reading the financial statements and considering whether there are any unusual or unexpected balances that were not previously identified.
Analytical procedures used to form an overall conclusion should ordinarily include reading the financial statements and considering (1) the adequacy of evidence gathered in response to unusual or unexpected balances identified in planning or conducting the audit, and (2) unusual or unexpected balances or relationships not previously detected.
In a test of purchase orders, the auditor selected a random sample of 60 items out of a population of 1,200 purchase orders. The auditor discovered $4,000 in overstatement in the sample. The company’s materiality is $65,000. The tolerable misstatement for purchases is $50,000. What should the auditor do next?
Project the detected error to the entire population.
The auditor should project the results of sampling to the population.
In performing a search for unrecorded retirements of fixed assets, an auditor most likely would
Inspect the property ledger and the insurance and tax records, and then tour the client’s facilities.
In a search for unrecorded retirements, that is, a test of the completeness assertion, the auditor should first determine from the property ledger what assets are recorded and then tour the facilities to determine whether those assets are physically present. The completeness assertion addresses whether all transactions that should be presented (e.g., retirements) are included in the statements. However, in this case, the completeness assertion is closely related to the existence assertion.
Ajax, Inc., is an affiliate of the audit client and is audited by another firm of auditors. Which of the following is most likely to be used by the auditor of the client to obtain assurance that all guarantees of the affiliate’s indebtedness have been detected?
Review client minutes and obtain a representation letter.
The entity’s auditor should review minutes of board of directors and relevant committee meetings and obtain a representation letter to obtain assurance that all guarantees of the affiliate’s indebtedness have been identified.
Which of the following statements is not true of the test data approach to testing an accounting system?
The test data must consist of all possible valid and invalid conditions.
The test data approach includes preparation of dummy transactions by the auditor. These transactions are processed by the client’s computer programs under the auditor’s control. The test data consist of one transaction for each valid and invalid condition that interests the auditor. Consequently, the test data need not consist of all possible valid and invalid conditions.
An auditor should obtain evidence relevant to all the following factors relevant to third-party litigation against a client except the
Jurisdiction in which the matter will be resolved.
The auditor is least interested in determining where the particular matter in litigation will be resolved. The major issue is the effect of the litigation on the fair presentation of the financial statements. Accordingly, the auditor should obtain evidence relevant to (1) the period in which the underlying cause for legal action occurred, (2) the degree of probability of an unfavorable outcome, and (3) the amount or range of potential loss.
What is an auditor’s primary method to corroborate information on litigation, claims, and assessments?
Reviewing the response from the client’s legal counsel to a letter of inquiry.
The letter of inquiry to the entity’s external legal counsel is the primary means of corroborating information obtained from management about material litigation, claims, and assessments.
On April 14, Year 2, an auditor expressed an unmodified opinion on the financial statements of the Emerson Company for the year ended February 28, Year 2. A structural defect in Emerson’s recently completed plant first appeared in late Year 1, but the auditor did not learn of it until April 25, Year 2. On May 1, Year 2, the auditor learned that the defect would cause material losses to the company. The auditor’s primary responsibility is
To determine that immediate steps are taken to inform all parties who are relying on information contained in the statements.
If the financial statements have been issued, they have been made available to third parties, along with the auditor’s report. Accordingly, the auditor should (1) discuss the matter with management (and, possibly, those charged with governance); (2) determine whether the statements need revision; and (3) if so, inquire how management intends to address the matter. To determine whether revision is needed, the auditor considers (1) the applicable reporting framework and (2) whether persons are currently relying or likely to rely on the statements who would attach importance to the subsequently discovered facts. Also, given that the unrevised statements are available to third parties, the auditor should determine whether management has timely and appropriately informed statement users that the statements are not to be relied upon (AU-C 560).
Which of the following management assertions is an auditor most likely testing if the audit objective states that all inventory on hand is reflected in the ending inventory balance?
inventory is complete.
The completeness assertion about account balances at the end of a period is that all assets, liabilities, and equity interests that should have been recorded have been recorded. The completeness assertion for inventory is to determine whether the balance contains inventory (1) on hand and (2) owned by the entity that is in transit or stored at outside locations.
An auditor wishes to evaluate the design and perform tests of controls over a client’s cash disbursements procedures. If the controls leave no audit trail of documentary evidence, the auditor most likely will test the procedures by
Observation and inquiry.
When the auditor obtains an understanding of controls relevant to the audit, (s)he performs risk assessment procedures to obtain evidence about their design and implementation. These procedures may include (1) inquiries, (2) observations of the application of the controls, (3) inspection of documents and reports, and (4) tracing transactions through the financial reporting system. Although risk assessment procedures and tests of controls differ, they may use the same types of procedures. Thus, the auditor may decide that it is efficient to test operating effectiveness and evaluate design and implementation at the same time. Furthermore, some risk assessment procedures may provide evidence about operating effectiveness. For example, the auditor may (1) inquire about the use of budgets, (2) observe comparison of budgets and actual results, and (3) inspect reports on the investigation of variances (AU-C 330 and AS 2301). In the absence of documentary evidence, the auditor performs observation and inquiry procedures and traces transactions through the system.
The auditor should document the understanding of internal control. For example, a narrative memorandum may be used to
Provide a written description of the process and flow of documents and of the control points.
An auditor should prepare documentation of internal control during an audit. Examples of an auditor’s documentation include flowcharts, narrative memoranda, questionnaires, and decision tables. A narrative memorandum is a written description of the process and flow of documents and of the control points. For an information system that makes little use of IT or that processes few transactions, documentation in the form of a memorandum may suffice.
Which of the following procedures is considered a test of controls?
An auditor interviews and observes appropriate personnel to determine segregation of duties.
When the auditor observes the operation of a control, (s)he can evaluate its effectiveness at a moment in time. Observing that different personnel perform appropriate duties provides evidence of proper segregation.
The primary purpose of sending a standard confirmation request to financial institutions with which the client has done business during the year is to
Corroborate information regarding deposit and loan balances.
The AICPA Standard Form to Confirm Account Balance Information with Financial Institutions is used to confirm specifically listed deposit and loan balances. The form confirms the account name, account number, interest rate, and balance for deposits.
Auditors are often concerned with the possibility of overstatement of sales and receivables. However, management may also have reasons for understating these balances. Which of the following would explain understatement of sales and receivables?
To avoid paying taxes.
State sales taxes and federal and state income taxes are based upon sales or profits, respectively. Management may attempt to reduce or avoid tax liability by not recording and reporting all sales and receivables.
Assurance services differ from consulting services in that assurance services
Focus on providing advice:
Involve monitoring of one party by another:
No
Yes
Assurance services encompass attestation services but not consulting services. Assurance services differ from consulting services in two ways: (1) they focus on improving information rather than providing advice, and (2) they usually involve situations in which one party wants to monitor another rather than the two-party arrangements common in consulting engagements.
