2.2.19 Flashcards
An auditor obtains a digital file that contains the dollar amounts of all client inventory items by style number. The auditor is aware that the client holds certain inventory styles on consignment for others. The auditor can best ascertain that the client’s inventory is not overstated by using a computer program that
Tests for and accumulates all amounts for items with style numbers indicating consigned merchandise.
Given that items on the inventory file are marked appropriately with style numbers, the auditor can best determine whether consigned merchandise is included by using a program that identifies and accumulates those items with style numbers corresponding to consigned merchandise.
Which of the following tests of controls most likely will help assure an auditor that goods shipped are properly billed?
Examine shipping documents for matching sales invoices.
The proper starting point to determine whether all goods shipped were properly billed is the shipping documents. Tracing the shipping documents to the matching sales invoices provides assurance that controls worked effectively to ensure that all goods shipped were billed.
Most of the auditor’s work in forming an opinion on financial statements consists of
Obtaining and evaluating audit evidence.
According to AU-C 500, Audit Evidence, most of the auditor’s work in forming an opinion on financial statements consists of obtaining and evaluating audit evidence. Audit evidence is the information used by the auditor in drawing the conclusions on which the auditor’s opinion is based. It includes the information contained in the accounting records and sources of information other than accounting records.
A corporate balance sheet indicates that one of the corporate assets is a patent. An auditor will most likely obtain evidence regarding the continuing validity and existence of this patent by obtaining a written representation from
A patent attorney.
A patent is an intangible asset representing a governmental grant of rights to an invention for a specified time. The lack of physical substance makes verifying its existence and ownership difficult. To obtain evidence of the continuing validity and existence of a patent, the auditor should obtain a written representation from an auditor’s specialist. A patent attorney is an auditor’s external specialist who has expertise not normally possessed by auditors. The attorney can perform the necessary research and express an opinion on which the auditor may reasonably rely.
In an audit of internal control over financial reporting, which deficiencies in control should be communicated in writing to those charged with governance?
Both material weakness and significant deficiencies.
The auditor should communicate, in writing, to management and to those charged with governance all material weaknesses and significant deficiencies identified during the audit. The written communication should be made prior to the report release date. The auditor also should communicate to management, in writing, all lesser deficiencies in internal control and inform those charged with governance when such a communication has been made.
Misstatements in a batch computer system caused by incorrect programs or data may not be detected immediately because
There are time delays in processing transactions in a batch system.
Transactions in a batch computer system are grouped together, or batched, prior to processing. Batches may be processed either daily, weekly, or even monthly. Thus, considerable time may elapse between the initiation of the transaction and the discovery of an error.
Which of the following would not necessarily be a related party transaction?
A sale to another corporation with a similar name.
A related party is a party defined as such in the applicable financial reporting framework. For example, U.S. GAAP define related parties to include (1) affiliates; (2) equity-method investees or investees that would be equity-method investees if the fair value option had not been elected; (3) employee trusts; (4) management, principal owners, and their immediate families; (5) other parties with which the entity may deal if one party controls or can be significantly influenced by the other to the extent that a party may be prevented from pursuing its separate interests; and (6) other parties that can significantly influence the transacting parties to the extent that a party may be prevented from pursuing its separate interests. A corporation that merely has a similar name is not necessarily related.
Under the Sarbanes-Oxley Act of 2002, exactly how many consecutive years may an audit partner lead an audit for an issuer?
Five years.
The lead and concurring (reviewing) audit partners must rotate every 5 years, with a 5-year time-out period.
In the audit of which of the following general ledger accounts will tests of controls be particularly appropriate?
Sales.
In auditing the sales or revenue account, tests of controls are particularly appropriate, provided the auditor believes that the risks of material misstatement at the relevant assertion level can be assessed at a low level. Because of the large volume of transactions, examining all items will seldom be cost-effective.
Which of the following is a management assertion regarding account balances at the period end?
The entity holds or controls the rights to assets, and liabilities are obligations of the entity.
Assertions about account balances reported in the balance sheet at period end include those related to (1) rights and obligations, (2) existence, (3) completeness, and (4) valuation and allocation. The assertions about rights and obligations are that the entity holds or controls the rights to assets, and liabilities are its obligations (AU-C 315).
Which of the following statements ordinarily is true concerning the content of audit documentation?
It is appropriate to use calculator tapes with names or explanations on the tapes rather than writing separate lists onto working papers.
Audit documentation provides evidence of compliance with GAAS. But the auditor need not document every matter considered or judgment made. Moreover, the auditor need not document separately (e.g., in a checklist) compliance with matters for which compliance is demonstrated by documents in the audit file (AU-C 230). If calculator tapes containing names or explanations achieve the purposes of documentation, separate lists need not be written onto working papers.
An independent auditor asked a client’s internal auditor to assist in preparing a standard financial institution confirmation request for a payroll account that had been closed during the year under audit. After the internal auditor prepared the form, the controller signed it and mailed it to the bank. What was the major flaw in this procedure?
The form was mailed by the controller.
The AICPA Standard Form to Confirm Account Balance Information with Financial Institutions is used for specific deposits and loans. A confirmation is signed (requested) by the client, but it should be sent by the auditor. Thus, the auditor should control confirmation requests and responses. Control means direct communication between the intended recipient and the auditor to minimize possible bias of the results because of interception and alteration of the requests or responses.
Which of the following most likely would give the most assurance concerning the valuation assertion about accounts receivable?
Assessing the allowance for uncollectible accounts for reasonableness.
Assertions about valuation concern whether balance sheet components have been included at appropriate amounts. One such assertion is that trade accounts receivable are stated at net realizable value (gross accounts receivable minus allowance for uncollectible accounts). Hence, assessing the allowance provides assurance about the valuation of the account.
In reporting on an audit of an issuer’s internal control over financial reporting, an auditor should include a statement that describes the
Limitations inherent to internal control.
The auditor’s report states that because of its inherent limitations, internal control over financial reporting may not prevent, or detect and correct, misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that (1) controls may become inadequate because of changes in conditions or (2) the degree of compliance with the policies or procedures may deteriorate (AU-C 940).
Audit evidence can come in different forms with different degrees of persuasiveness. Which of the following is the least persuasive type of evidence?
Prenumbered purchase order forms.
When documentation, such as purchase order forms, is prepared solely by client personnel, its persuasiveness will be less than that prepared by the auditor or an independent party. Ordinarily, the most reliable documentation is created outside the entity and has never been within the client’s control.
