2.16.19 Flashcards
The auditor is most likely to verify accrued commissions payable in conjunction with the
Sales cutoff test.
Sales commissions and accrued sales commissions payable are based upon sales of the period. The auditor verifies accrued commissions payable in conjunction with procedures applied to the sales cutoff test. The purpose is to obtain reasonable assurance that revenues and related liabilities are recorded in the same period in accordance with the matching principle.
If management refuses to provide certain written representations that the auditor believes are essential, which of the following is appropriate?
The client’s refusal may have an effect on the auditor’s ability to rely on other representations of management.
The refusal constitutes a scope limitation that is often sufficient to preclude an unmodified opinion and may cause the auditor to disclaim an opinion or withdraw from the engagement. The auditor should also consider the effects of the refusal on his or her ability to rely on management’s other representations (AU-C 580).
George Karl, an auditor with extensive experience in the retail industry, is assigned to audit the reasonableness of accounting estimates in the Year 1 financial statements of Haas Company. Haas, which was formed in Year 1, markets fishing lures. Which of the following is the least important consideration for Karl’s audit of the reasonableness of accounting estimates?
Karl has never been involved in an audit of a company that sells fishing lures.
The auditor evaluates the reasonableness of estimates. Among the factors considered are (1) the entity’s experience in making past estimates, (2) any changes that may cause factors different from those previously considered to become significant, and (3) the need to obtain written representations from management regarding the key factors and assumptions. Karl has extensive experience in the retail industry and therefore most likely has an acceptable level of competence. If necessary, Karl may seek the help of a specialist before conducting the audit.
Which of the following circumstances most likely would cause an auditor to consider whether material misstatements exist in an entity’s financial statements?
Supporting records that should be readily available are frequently not produced when requested.
Fraud risk factors relate to misstatements arising from (1) fraudulent financial reporting and (2) misappropriation of assets. Each of these categories may be further classified according to the three conditions that ordinarily exist when fraud occurs: (1) incentives/pressures, (2) opportunities, and (3) attitudes/rationalizations. For example, an opportunity for misappropriation of assets may arise because of inadequate control over assets reflected by a lack of timely and appropriate documentation of transactions, such as credit memos for returns of goods (AU-C 240).
Effective controls relevant to the efficiency of purchases will result in proper evaluation of the time for ordering merchandise. When making this evaluation, the purchasing company should give primary consideration to
The trade-off between the cost of owning and storing excess merchandise and the risk of loss by not having merchandise on hand.
Effective purchasing departments should use the basic economic order quantity (EOQ) calculation that minimizes both the cost of owning and storing excess merchandise and the cost of ordering merchandise (and thus the timing of ordering). This model assumes the demand is constant and does not consider the cost of stockouts. Probabilistic models have been developed to incorporate the risk of loss (cost) by not having merchandise on hand.
In estimating the total value of supplies on repair trucks, Baker Company draws random samples from two equal-sized strata of trucks. The mean value of the inventory stored on the larger trucks (stratum 1) was computed at $1,500, with a standard deviation of $250. On the smaller trucks (stratum 2), the mean value of inventory was computed as $500, with a standard deviation of $45. If Baker had drawn an unstratified sample from the entire population of trucks, the expected mean value of inventory per truck would be $1,000, and the expected standard deviation would be
Greater than $250.
The standard deviation is a measure of variability within a population. That the population was stratified indicates that each stratum has a smaller standard deviation than the population as a whole. If the two diverse populations are combined, the resulting standard deviation is likely to be larger than that of either of the separate strata. Because the standard deviations of the two strata were $250 and $45, the expected standard deviation is likely to be greater than $250.
Billie J. King, CPA, was engaged to audit the financial statements of Newton Co. after its fiscal year had ended. King neither observed the inventory count nor confirmed the receivables by direct communication with debtors, but was satisfied concerning both after applying alternative procedures. King’s auditor’s report most likely contained a(n)
Unmodified opinion.
Because the auditor is satisfied as to inventory quantities and the amounts of receivables, she obtained sufficient appropriate evidence. Accordingly, the opinion is not modified.
The refusal of a client’s legal counsel to provide information requested in an inquiry letter generally is considered
A limitation on the scope of the audit.
Legal counsel’s refusal to furnish the information requested in an inquiry letter either in writing or orally may be a limitation on the scope of the audit sufficient to preclude an unmodified opinion.
In an audit of a purchasing department, which of the following usually is considered a risk factor?
Purchases are made from parties related to buyers or other company officials.
Purchasing from parties related to buyers or other entity officials is a risk factor because it suggests the possibility of fraud. Such conflicts of interest may result in transactions unfavorable to the company.
Which of the following audit procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity’s ability to continue as a going concern?
Reading the minutes of meetings of the shareholders and the board of directors.
Auditors should evaluate whether substantial doubt exists about an entity’s ability to continue as a going concern for a reasonable period of time. For U.S. GAAP, the reasonable period is 1 year after the date that the financial statements are issued or are available to be issued. The evaluation is based on the auditor’s knowledge of relevant conditions and events. Such knowledge is obtained from performing procedures to achieve audit objectives related to financial statement assertions. Thus, an auditor is not required to design specific procedures. An example is reading the minutes of meetings of the shareholders, the board of directors, and its committees (AU-C 570).
Under which of the following circumstances should an auditor consider confirming the terms of a large complex sale?
When the combined assessment of inherent and control risk over the sale is high.
The assessed risk of material misstatement (RMM) is the combined assessment of inherent and control risk. If the entity has entered into an unusual or complex transaction, and the assessed RMM is high, the auditor should consider confirming the terms of the transaction with the third parties in addition to examining documents.
A CPA had the management of Paper Plate Corp. prepare a letter requesting Paper Plate’s external counsel to identify any pending and/or unasserted claims against Paper Plate. The CPA received a letter from the external counsel with the following response:
“We are only aware of the following: Paper Plate was named as the defendant in a class action lawsuit for an alleged defective product manufactured 2 years ago. There is a remote possibility that Paper Plate will suffer any damages, because this firm has successfully defended similar cases in the past. However, similar cases that have been brought against competitors were settled between $1.5 and $2 million.”
Should the CPA accept the letter from the external counsel?
Yes, even though the CPA did not give a specific amount of loss.
No specific amount of loss is required. The external counsel believes the possibility is remote that the company will suffer any damages.
When using statistical sampling for testing the effectiveness of internal controls, an auditor’s evaluation would include a statistical conclusion concerning whether
Procedural deviations in the population were within an acceptable range.
The auditor uses attribute sampling to test the effectiveness of controls. The auditor considers the occurrence rate of deviations in the population. Attribute sampling enables the auditor to estimate the occurrence rates of deviations and to determine whether the estimated rates are within acceptable ranges.
When companies use information technology (IT) extensively, evidence may be available only in electronic form. What is an auditor’s best course of action in such situations?
Use generalized audit software to extract evidence from client databases.
In a largely IT environment, generalized audit software (GAS) is useful for both tests of controls and substantive procedures. It is software that is written to interface with many different client systems. In this case, assuming the control environment is effective, GAS provides the best means for gathering substantive evidence.
In which of the following situations would an auditor ordinarily choose between expressing a qualified opinion and an adverse opinion?
Conditions that cause the auditor to have substantial doubt about the entity’s ability to continue as a going concern are inadequately disclosed.
When the auditor concludes that substantial doubt exists about an entity’s ability to continue as a going concern for a reasonable period of time, (s)he should include an emphasis-of-matter paragraph (following the opinion paragraph) in the auditor’s report to describe the uncertainty. By itself, this doubt does not require a modification of the opinion. However, if the entity’s disclosures about the issue are inadequate, the misstatement may result in a qualified or an adverse opinion.
