4.11 - FIN STATEMENT ACCTS: PP&E AND CURRENT LIABILITIES Flashcards
4.11 - FIN STATEMENT ACCTS: PP&E AND CURRENT LIABILITIES
An auditor has decided to select certain items recorded as accounts payable and trace them to the original transaction documentation.This will provide evidence about all of the assertions related to accounts payable except which of the following?
A) Existence
B) Valuation and allocation
C) Rights and obligations
D) Completeness
D) Completeness
Tracing payable to the original transaction documentation will provide evidence that the entity actually entered into the transaction and received the goods or services ordered, supporting existence and rights & obligations.
The documentation will show amounts which supports the valuation and allocation assertion.
To obtain evidence about completeness, the auditor would trace items from the original documentation to the accounting records.
4.11 - FIN STATEMENT ACCTS: PP&E AND CURRENT LIABILITIES
An auditor observes new equipment while walking around a client’s factory and traces the new equipment to schedules of property, plant, and equipment that support the information in the financial
statements. Which assertion is supported by the evidence obtained?
A) Existence
B) Rights and obligations
C) Valuation and allocation
D) Completeness
D) Completeness
Vouching equipment that has been observed by the auditor to its inclusion in the accounting records provides the
auditor with evidence that the accounting records are complete and include all equipment that the entity has.
To support existence, the auditor will trace items from the records to observations.
To support rights and obligations, the auditor may look at purchase documents and insurance policies.
To support valuation and allocation, the auditor will likely look at purchase documents.
4.11 - FIN STATEMENT ACCTS: PP&E AND CURRENT LIABILITIES
An auditor was satisfied that the carrying value of factory equipment was fairly stated as of the beginning of the
period.During the period, the entity had several transactions involving the purchase and disposal of equipment.Which of the following would be the most effective in providing evidence that all equipment reported
in the financial statements actually exists?
A) Evaluate the entity’s policies for capitalizing and expensing costs related to the acquisition of equipment.
B) Select items on the factory floor
and trace them to the accounting records.
C) Select items from the accounting records and trace them to purchase documents.
D) Select items from the accounting records and observe them in the entity’s factory.
D) Select items from the accounting records and observe them in the entity’s factory.
By selecting items from the accounting records and observing them in the entity’s factory, the auditor can determine
that items that are included in the accounting records actually do exist.
Tracing items seen on the factory floor to the accounting records provides evidence that the accounting records are complete.
Tracing items from the accounting records to purchase documents provides evidences of rights and obligations and valuation and allocation.
Evaluating the entity’s policies for
capitalizing and expensing costs related to equipment acquisitions provides evidence about valuation and allocation.
4.11 - FIN STATEMENT ACCTS: PP&E AND CURRENT LIABILITIES
Which of the following tests of details most likely would help an auditor determine whether accounts payable
have been misstated?
A) Examining vendor statements for amounts not reported as purchases.
B) Examining reported purchase returns that appear too low.
C) Reviewing bank transfers recorded as cash received from customers.
D) Searching for customer-returned goods that were not reported as returns.
A) Examining vendor statements for amounts not reported as purchases.
When amounts on vendors statements are not recorded as purchases, accounts payable will be understated.
Examining vendor statements to make certain all amounts are recorded as purchases will be helpful in detecting misstatements of accounts payable.
If purchase returns are too low, it will be detected by looking for unrecorded returns, not by examining reported returns.
Customer returns and cash received from customers affect accounts receivable, not accounts payable
4.11 - FIN STATEMENT ACCTS: PP&E AND CURRENT LIABILITIES
Which of the following is a substantive test that an auditor most likely would perform to verify the existence and
valuation of recorded accounts payable?
A) Investigating the open purchase order file to ascertain that pre-numbered purchase orders are used and
accounted for.
B) Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving
reports.
C) Receiving the client’s mail, unopened, for a reasonable period of time after the year-end to search for
unrecorded vendor’s invoices.
D) Confirming
accounts payable balances with known suppliers who have zero balances.
B) Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports.
When vouching selected entries in the accounts payable listing to purchase orders and receiving reports, the auditor is
verifying amounts and that the recorded items were authorized and received by the entity.
Evaluating the accounting for prenumbered
purchase orders, searching for unrecorded liabilities and confirming zero balances with known suppliers are performed to test the completeness of accounts payable records.
