2.5.19 Flashcards
How should an auditor verify the valuation of marketable securities at the balance sheet date?
Compare the prices of the securities to published closing prices at the balance sheet date.
The auditor should vouch recorded amounts for equity securities, trading debt securities, and available-for-sale debt securities to market quotations if available. When market quotations are unavailable, the auditor can obtain fair-value estimates from broker-dealers and other third-party sources who derive the fair value of a security by using modeling or a similar method. The auditor should evaluate the appropriateness of the valuation model and the variables and assumptions used in the model.
Which of the following best characterizes an auditor’s exercise of professional skepticism?
Having an attitude that includes a questioning mind.
Professional skepticism is an attitude that includes (1) a questioning mind, (2) alertness to conditions that may indicate material misstatement, and (3) critical assessment of audit evidence.
To reduce the risks associated with accepting fax responses to requests for confirmations of accounts receivable, an auditor most likely would
Verify the sources and contents of the faxes in telephone calls to the senders.
Because establishing the source of a fax is often difficult, the auditor should ensure that the confirmations returned by fax are genuine. One way is to verify the sources by following up with telephone calls to the senders.
Which of the following statements is correct regarding accounting estimates?
The auditor’s objective is to evaluate whether accounting estimates are reasonable in the circumstances.
The auditor is responsible for evaluating the reasonableness of accounting estimates and the adequacy of disclosure.
For the fiscal year ending December 31 of the previous year and for the current year, Justin Co. has net sales of $1,000,000 and $2,000,000; average gross receivables of $100,000 and $300,000; and an allowance for uncollectible accounts receivable of $30,000 and $50,000, respectively. If the accounts receivable turnover and the ratio of allowance for uncollectible accounts receivable to gross accounts receivable are calculated, which of the following best represents the conclusions to be drawn?
Accounts receivable turnovers are 10.0 and 6.7, and the ratios of uncollectible accounts receivable to gross accounts receivable are 0.30 and 0.17, respectively. Examine allowance for possible understatement of the allowance.
The accounts receivable turnover equals sales divided by average gross receivables. Thus, it equals 10.0 ($1,000,000 ÷ $100,000) and 6.7 ($2,000,000 ÷ $300,000) for the prior year and current year, respectively. The ratio of allowance for uncollectible accounts receivable to gross accounts receivable is .30 ($30,000 ÷ $100,000) for the prior year and .17 ($50,000 ÷ $300,000) for the current year. The gross accounts receivable tripled in the second year, yet the allowance for uncollectible accounts receivable increased by only 67%. This could be an indication that the allowance for uncollectible accounts receivable is understated.
An auditor should vouch corporate stock issuances and treasury stock transactions to the
Minutes of the board of directors.
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 vouched to the minutes of the board of directors’ meetings. The articles of incorporation, by-laws, and minutes of shareholders’ meetings should also be reviewed.
Which of the following is an effective audit planning and control procedure that helps prevent misunderstandings and inefficient use of audit personnel?
Arrange a preliminary conference with the client to discuss audit objectives, fees, timing, and other information.
A preliminary conference with the client to discuss various audit objectives, fees, timing, the reports to be prepared, the use of client personnel, etc., is an appropriate procedure to prevent misunderstandings during the audit. The arrangement should be documented in the engagement letter.
Which of the following auditing procedures most likely would provide assurance regarding a manufacturing entity’s relevant assertions about inventory valuation?
Testing the entity’s computation of standard overhead rates.
Manufactured goods should be recorded at cost, including direct materials, direct labor, and an allocation of overhead. The overhead allocation rate should be tested for reasonableness.
An audit program for the retained earnings account should include a step that requires verification of the
Authorization for both cash and stock dividends.
The auditor should determine from the minutes of the board of directors’ meetings that proper authorization has been made for both cash and stock dividends. All dividends require transfers from (debits to) retained earnings. Thus, dividends should be audited in conjunction with retained earnings.
An internal auditor would least likely provide direct assistance to the auditor in
Evaluating accounting estimates.
The auditor has the ultimate responsibility to express an opinion on the financial statements. Judgments about (1) assessments of the risks of material misstatement, (2) materiality of misstatements, (3) sufficiency of tests performed, (4) evaluation of significant accounting estimates, and (5) other matters affecting the auditor’s report always should be those of the auditor.
When performing a substantive test of a random sample of cash disbursements, an auditor is supplied with a photocopy of vendor invoices supporting the disbursements for one particular vendor rather than the original invoices. The auditor is told that the vendor’s original invoices have been misplaced. What should the auditor do in response to this situation?
Reevaluate the risk of fraud and design alternate tests for the related transactions.
Several issues should cause the auditor to be suspicious. First, how could the client lose the original? Second, how did the client obtain a photocopy if the original was lost? Finally, and most importantly, photocopies are much less credible given the ease with which they can be altered. Thus, the auditor should reevaluate the risk of fraud.
When planning an audit, an auditor should
Determine materiality for the financial statements as a whole.
Planning involves establishing an overall audit strategy. For this purpose, the auditor determines materiality for the financial statements as a whole. Circumstances also may indicate that misstatements of classes of transactions, balances, or disclosures of lesser amounts could influence the economic decisions of users. In those cases, the auditor also determines materiality for particular classes of transactions, balances, and disclosures.
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.
Which of the following statements regarding the audit of negotiable notes receivable in bearer form is not correct?
Confirmation by the debtor is an acceptable alternative to inspection.
Negotiable notes in bearer form are highly liquid assets because they are negotiable by transfer of possession alone. Thus, they should be inspected to determine whether the entity has custody. External confirmation also does not establish collectibility. For this purpose, the auditor should examine cash receipts records to determine promptness of interest and principal payments.
Tracing bills of lading to sales invoices provides evidence that
Shipments to customers were invoiced.
Comparing the seller’s copies of shipping documents (such as bills of lading) with billing documents (sales invoices) provides evidence that the amounts shipped were billed to customers. The absence of invoices for goods shipped would suggest that the related sales were unrecorded at the balance sheet date.
