A4 Flashcards
1
Q
The function of cash receipts is part of the treasurer’s department and should be separate from:
A
the role of posting credits to the A/R ledger
2
Q
Failure to separate the recordkeeping function from the custodial function allows an individual to:
A
misappropriate cash and then cover up the theft by posting credits against the related A/R balance
3
Q
Upon receipt of cash, a _______ should be prepared
A
remittance listing (duplicate listing)
4
Q
Computer controls related to pricing and mathematical accuracy will reduce:
A
billing errors
5
Q
Matching shipping documents with approved sales orders ensures that:
A
invoices are properly authorized and only goods ordered have been shipped (reduces billing errors)
6
Q
Comparing shipping totals with sales invoice totals is an effective control to reduce:
A
billing errors
7
Q
Selecting from a population of _______ allows the auditor to test whether corresponding invoices exist for each sale
A
shipping documents
8
Q
Proper authorization for sales involves:
A
obtaining credit approval before filling the order
9
Q
Separation of duties between billing and cash receipts relates to:
A
the prevention of theft of cash
10
Q
The use of an approved price list to determine selling price relates to:
A
the accuracy and appropriateness of selling price
11
Q
Sending copies of approved sales orders to shipping, billing, and accounting provides information necessary to ensure:
A
that the proper goods are shipped, the invoice is prepared appropriately, and the sale and receivable are properly recorded
12
Q
Examination of AR and cash receipts provides the auditor with evidence for __________ assertions of sales transactions, thus limiting the need to test sales transactions
A
occurrence, completeness
13
Q
Examination of beginning and ending inventory balances may provide limited evidence of:
A
the occurrence of purchases and the COGS
14
Q
Cutoffs of sales and purchases provides evidence regarding:
A
the sales occurring close to year-end
15
Q
In order to detect understatements, one must:
A
trace from supporting documentation to accounting records
16
Q
In order to detect overstatements, one must:
A
trace from accounting records to supporting documents
17
Q
Blank forms may result in ______ response rates because:
A
lower, greater effort is required for response
18
Q
Blank forms provide a _____ degree of assurance because:
A
greater, the recipient cannot sign off without checking the balance
19
Q
When using positive confirmation requests, the auditor should generally follow up with a second and sometimes third request to those parties from whom replies have not been received. In addition, _______ may encourage further responses.
A
asking the client to contact its customers
20
Q
Confirmations are designed to provide evidence of _______, so nonresponses would require alternative procedures focused on _____ as well.
A
existence
21
Q
Negative confirmations are used when:
A
- the combined assessed level of inherent and control risk is low
- a large number of small balances is involved
- the auditor has no reason to believe that the recipients of the requests are unlikely to give them consideration
22
Q
If a small number of accounts are involved and a large number of errors are anticipated, _________ should be used
A
positive confirmations
23
Q
By _____________ in the balance being confirmed, the auditor also makes it more likely that those customers will respond
A
making it easier for customers to determine which items are included
24
Q
A copy of the remittance listing is sent to the ______ and used to:
A
AR clerk, update the subsidiary AR records
25
When confirming the total accounts receivable balance, it is beneficial to include a client-prepared statement of account that shows the details of the account balances so that:
the recipients can easily verify the receivable balance
26
Preparing invoices and recording the related recievables are:
recordkeeping functions
27
Because of the significant discrepancies on past confirmations, the auditor would choose to use ________ in the current year's audit
individual invoices
28
By confirming individual transaction detail on the individual invoices, there should be _____ discrepancies than confirmations sent out to customers in the past
fewer
29
the confirmation process typically doesn't focus on overdue balances because:
it is primarily a test of existence, not valuation
30
_______ is primarily a test of existence, or overstatement
confirmation
31
Credit checks help the company determine the likelihood of:
a debtor's ability to pay
32
Tracing transactions from the subsidiary ledger to the general ledger tests:
completeness of AR
33
tracing a sample of invoices to recording in the general ledger tests:
completeness of AR
34
______ ______ and ______ are an input document at the beginning of a credit sales and cash receipts system flowchart
1. sales invoices
2. credit memos
3. Remittance advices (for customer payments)
35
Two assertions for which the confirmation of AR balances provides primary evidence are:
rights and obligations and existence
36
The negative request form of AR confirmation is useful particularly when:
1. assessed level of control risk relating to receivables is low
2. number of small balances is many
3. consideration by the recipient is likely
37
An auditor would consider a cashier's job description to contain compatible duties if the cashier receives remittances from the mailroom and:
also prepares he daily deposit slip
38
The prelist of individual checks is prepared by:
a clerk in the mailroom upon opening the mail
39
the monthly bank reconciliation is prepared by:
an internal auditor or someone else that is independent of the cash receipts and cash disbursement functions
40
A sales cut-off test is used to detect:
unrecorded sales or sales allocated to the wrong period
41
tracing bills of lading to the sales invoice provides assurance that shipments to customers were:
invoiced
42
The auditor is able to detect liabilities not recorded at year-end by comparing cash payments made after the balance sheet date to
related receiving reports and vendor invoices
43
By stamping the voucher "paid", the check signer cancels the voucher so:
it cannot be resubmitted for payment
44
Reconciling the vendor invoice with the related receiving report is typically performed by:
vouchers payable clerk
45
under properly designed internal control, the same employee most likely would match vendors invoices with receiving reports and also:
recompute the calculations on vendors' invoices (authorization)
46
purchase orders should be issued by the:
purchasing department
47
accounts payable is relatively difficult to predict because:
it may fluctuate at management's discretion
48
What procedure would an auditor least likely perform before balance sheet date?
confirmation of AP
49
Who should be responsible for preparing a purchase order, matching the receiving report and invoice with the purchase order, and paying for the related purchase?
1. purchasing department is responsible for preparing the purchase order
2. AP department is responsible for matching documents
3. treasurer is responsible for making payment
50
having the check signer review and cancel the voucher packet is:
preventative control of avoiding duplicate payments
51
An auditor would compare cash payments made after the balance sheet date with the AP trial date in search for:
unrecorded liabilities
52
When testing the completeness assertion for AP, the appropriate population would be:
list of vendors with whom the entity has previously done business
53
Under an effective system of internal control, the accounts payable clerk should ensure that:
supporting documents are in agreement before the voucher is submitted for payment
54
The supporting documentation should be cancelled by _____
the treasurer
55
The ______ would generally obliterate the quantity ordered before sending the PO to receiving
purchase department
56
unrecorded trade accounts payable are best identified by:
reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period
57
When performing a search for unrecorded payables, an auditor most likely would:
compare cash payments occurring after the balance sheet date with the AP trial balance to determine that disbursements that pertain to the prior year's business under audit have been properly accrued. known as out-of-period-search
58
When performing a search for unrecorded payables, an auditor most likely would:
examine cash disbursements recorded after the balance sheet date to determine whether the payables related to the prior period have been included in the AP trial balance
59
For effective internal accounting control, the AP department should compare the info on each vendor's invoice with the receiving report and the purchase order to assure:
that goods were received and that the purchase was properly authorized
60
Because the employee is destroying the invoices and related vouchers, the documentation remaining to test would be:
cash disbursements
61
The most effective control activity to detect vouchers that were prepared for the payment of goods that were not received is to:
match PO, receiving report, and vendors invoice for each voucher in the AP department
62
The internal control procedure of prenumbering receiving reports and periodically reconciling them to the inventory records most likely addresses the:
completeness assertion for inventory
63
The most effective control in assuring that recorded purchases are free of material errors is the:
independent matching of the purchase order, receiving report, and vendor invoices in preparing the vouchers on which the disbursement check is based
64
When nonconforming goods are returned to a vendor, the purchasing department should send _____ to the accounting department to ensure that the AP balance is reduced appropriately
debit memo
65
a credit memo is generally used to reduce:
AR
66
In a well designed internal control, employees in the purchasing department most likely would approve POs and:
negotiate terms with vendors
67
_______ authorize requisition of goods
the store department
68
______ occurs when a check drawn on one bank is deposited in another bank and no record is made of the disbursement in the balance of the first bank
Kiting
69
Frequent kiting may result in a high level of deposits coupled with:
low average balance
70
The standard aicpa bank confirmation form includes:
cash balances on deposit at the bank and collateral pledged on loans originating from the bank
71
A bank employee may not have access to all info about transactions with the audit client and thus may be:
unaware of all the financial relationships the bank has with the client
72
Since the disbursement was not recorded until Jan 2002 while the receipt was recorded in December 2001, cash will be _______ at Dec 2001
overstated
73
Good internal control for cash includes:
the separation of cash handling, recordkeeping, and reconciliation of bank statements.
74
when ______ occurs, an employee uses current remittances to conceal remittances that have been stolen previously
lapping
75
what internal control would reduce the risk of diversion of customer receipts by employees?
bank lockbox system
76
Performance of monthly bank reconciliations would be effective at:
detecting a theft that has already occurred
77
An auditor would identify a contingent liability by obtaining a __________
bank confirmation, it has a exceptions and comments box specifically to disclose as endorser of loans, for open letters of credit
78
Transfer agent confirmations relate to:
purchase and sale of securities
79
On receiving a client's bank cutoff statement, an auditor most likely would trace:
prior year checks or deposits listed in the cutoff statement to the year end checklist
80
The standard cash confirmation request seeks info on:
contingent liabilities and security agreements in addition to info related to deposit account balances
81
A bank cut off statement is used to detect _____ activities that may not otherwise be discovered
kiting
82
The primary evidence regarding year-end cash balances in the FS is documented in the bank reconciliation, which:
reconciles the balance per bank to that per the financial statements
83
the interbank transfer schedule provides evidence about:
bank transfers over a period of time used to detect kiting
84
a ________ is a schedule that summarizes all the various balances that comprise cash
cash lead schedule
85
the primary purpose of sending a standard confirmation request to financial institutions is to:
corroborate info regarding deposit and loan balances
86
an auditor should trace bank transfers for the last part of the audit period and first part of subsequent period to:
detect whether cash balances over overstated because of kiting (concealing a cash shortage by depositing in one bank an unrecorded check of another disbursement bank, recording the same funds in both bank accounts)
87
In a ________ system, the remittances are mailed directly to the bank where they are immediately deposited. The bank sends the remittances and deposit detail to the entity on a daily basis
lockbox system
88
lapping can be deterred by appropriate segregation of duties between:
receiving cash and posting to the AR ledger
89
The controller may have responsibilities relating to cash, such as:
authorization of expenditures
90
internal auditor is independent of functions relating to cash and should be able to receive:
the monthly bank statement from the bank
91
failure to record _________ would result in actual inventory quantities being greater than those recorded in the perpetual inventory records
sales returns
92
failure to record _________ would result in actual inventory quantities being less than those recorded in the perpetual inventory records
sales or purchase returns
93
failure to record _________ would result in a difference in recorded costs
purchase discounts
94
Testing the computation of standard overhead rates relates to:
the accumulation of costs during the manufacturing process
95
during a tour of the manufacturing plant or production facility, the auditor should be alert for:
items that appear to be old, obsolete, or defective
96
review of inventory experience and trends may indicate:
slow-moving, defective, or obsolete inventory items
97
comparisons of inventory balances with anticipated sales volume might indicate:
higher inventory levels than would be expected, perhaps due to slow-moving, defective, or obsolete inventory items
98
tracing totals from the inventory listing to the general ledger inventory account provides evidence of:
completeness
99
what condition may an auditor's observation procedure for inventory be performed during or after the end of the period under audit?
when well-kept perpetual inventory records are checked by the client periodically by comparisons with physical counts
100
the completeness assertion is focused on:
unrecorded transactions
101
Tracing items from the tag listing back to the physical inventory quantities is a test for:
existence of the inventory on the tag listing
102
tracing items from the physical inventory quantities to the tag listing is a test for:
completeness
103
An auditor would analyze inventory turnover rates to obtain evidence concerning management's assertions about:
valuation and allocation (if the inventory is becoming older, an obsolescence reserve might be required)
104
The auditor should _____ the physical inventory count of goods held in public warehouses if the inventory held is significant;
observe
105
The auditor should _____ the physical inventory count of goods held in public warehouses if the inventory held is insignificant:
confirm
106
tracing from the inventory schedule to the inventory tags and auditor's recorded count sheets verifies the:
existence (validity) of the items
107
Observation of physical inventory counts provides evidence about;
existence and completeness
108
Inspecting loan agreements under which an entity's inventories are pledged provides evidence regarding completeness with respect to:
presentation and disclosure, since it should be disclosed on the FS
109
in order to maintain accurate perpetual inventory records, _______ should be used to adjust perpetual records
periodic inventory counts
110
By comparing perpetual inventory records to current costs, the company ensures that:
inventory is appropriately valued at the lower of cost or market
111
Consignment agreements should be examined to ensure that:
the entity has ownership rights to the inventory
112
Inventories should be reduced, when appropriate, to ___________ or _________, and this is related to the valuation of inventory
to replacement cost or net realizable value
113
The auditor's overall responsibility is to obtain sufficient appropriate audit evidence to provide reasonable assurance that fair value ______ and ______ are in conformity with GAAP
measurements and disclosures
114
______ should make fair value measurements and disclosures in accordance with GAAP and should identify and support any significant assumptions used
management
115
After performing a count of negotiable securities, the auditor would generally obtain:
an acknowledgement from the client that the securities were returned intact
116
a description of the client's procedures that prevent the negotiation of securities by just one person is included in:
audit documentation
117
an evaluation of the client's internal control concerning physical access to the securities is included in:
audit documentation
118
an analysis of realized gains and losses from the sale of securities during the year is included in:
audit documentation
119
Joint custody by two company officials over assets like cash and marketable securities helps:
safeguard the assets
120
The auditor would ________ to establish the existence and ownership of a long-term investment in publicly traded securities
confirm the number of shares held by an independent custodian
121
When an entity uses a trust company as custodian of its marketable securities, the possibility of concealing fraud would be reduced if:
the trust company deals only with the person reconciling the accounts, and not employees responsible for maintaining investment records
122
Investments may be classified as:
trading, available for sale, or held to maturity
123
name the assertions. auditor scans clients investment records for the period just before and just after the year end to determine that any transfers between categories of investments have been properly recorded.
understandability and classification, valuation and accuracy. (classification of each investment in one of the categories determines how it will be shown on the balance sheet and whether it will be valued at market or amortized cost)
124
In auditing investments in securities and derivatives, the auditor must assess the reasonableness and appropriateness of:
assumptions, market variables, and valuation models
125
the generally accepted accounting principles require transactions and events to be reported in accordance with _________, even if this differs from their form
economic substance
126
generally accepted accounting principles specify that, in order to qualify for hedge treatment, the entity must:
demonstrate and disclose a number of transaction features including risk exposure.
127
To test management's assertions of fair value, the auditor would:
obtain quoted market prices from financial publications, the exchanges, the National association of securities dealers automated quotations system (NASDAQ), or pricing services. if quoted market prices weren't available, estimates based on valuation models would be used
128
obtaining a current value appraisal of the collateral is an audit procedure to test:
valuation of the collateral of a delinquent loan receivable
129
under equity method accounting, the amortization of the excess of the investor's cost over the investment's underlying book value reduces the investor's income for the equity method investment. if amortization is too _____, this could lower the return on the investment
high
130
equity method investments ______ reported at fair value
are NOT
131
equity method investments are accounted for separate from investments classified as:
trading or available for sale
132
dividend income from investments is tested by:
referring to the dividend record books produced by investment advisory services such as "moody's dividend record". these books state the dividend that was declared and paid by the investee
133
Stock ledgers maintained by independent registrars indicate:
how many shares of stock are issued and outstanding, and identify the shareholders of record
134
______ is generally used to ascertain the reasonableness of investment income in relationship to the amount invested
analytical review / procedures
135
______ and _____ is generally evaluated by inspection of securities, review of brokerage statements, or confirmation with an outside independent custodian
existence and ownership
136
To satisfy the valuation assertion when auditing an investment accounted for by the equity method, an auditor would:
examine the audited FS of the investee company, including performing recalculations of prorate share of income/loss
137
what would satisfy the valuation assertion for marketable equity securities: under cost method. under equity method.
obtaining market quotations from financial newspaper or periodicals under cost method
examine the audited FS of the investee company under equity method
138
analytical procedures to ascertain the reasonableness of the completeness of recorded investment income
comparison of recorded investment income with the expected amount (based upon the related interest rate, dividends declared), and the income balance audited in the prior year
139
To identify and quantify the existence of unrealized gains and losses in the portfolio, an auditor would: for cost method. for equity method.
1. examine trading prices in WSJ for those long-term investments carried under the cost method
2. review the audited financial statements of the investee company under equity method
140
classification between balance sheet portfolios would most likely be tested by:
confirming the terms of the investment, making inquires of management regarding how long they intend to hold the securities
141
If the auditor is unable to count the securities at the balance sheet date, the auditor should:
request the client to have the bank seal the safe deposit box until the auditor can count the securities
142
The auditor would expect the client to use a valuation model in the current year that: (name all 3 levels) (which one is priority)
Level 1: uses observable quoted prices in the active market
Level 2: use of inputs other than quoted market prices
Level 3: unobservable inputs (most likely used in prior year)
143
The auditor would evaluate whether the valuation model is:
1. appropriately applied based on GAAP
2. appropriate for the debt security being valued
3. appropriate for the environment in which the entity operates
144
An auditor reviews the reconciliation of payroll tax forms that a client is responsible for filing in order to:
identify potential liabilities for unpair payroll taxes
145
payroll deductions are verified by:
inspecting the payroll register and tracing deductions back to employee authorization forms held in the personnel department
146
Verifying the preparation of the monthly payroll account bank reconciliation would provide significant evidence for:
the accuracy assertion for payroll transactions
147
Testing to see whether equipment listed in the accounting records is physically present in the plant and still in service is an effective way to test:
whether unrecorded disposals occurred
148
the retirement of plant assess necessitates the removal (decrease) of accumulated depreciated related to the retired asset by ________ accumulated depreciation
debiting
149
If control risk is assessed low for assertions related to payroll, substantive tests of payroll balances would be limited to:
applying analytical procedures, and recalculating year end accruals
150
questions relating to ________ would not be a part of a questionnaire related to controls over the initiation and execution of equipment purchases
access controls for assets
151
what questions would be included on a questionnaire related to controls over initiation and execution of equipment purchases?
1. about controls related to competitive bids
2. controls related to the authorization of major repairs
3. about the existence of prenumbered POs
152
determining that proper amounts of depreciation are expensed provides assurance with _____&_____ related to the asset and ______ in terms of FS presentation
valuation, allocation, and accuracy
153
In auditing long-term bonds payable, an auditor would:
1. compare interest expense with the bond payable amount for reasonableness
2. examine documentation of the bond instruments to determine the existence of any liens on the assets
3. recalculate bond premiums and discounts
4. confirm the outstanding bonds payable balance
154
In auditing the granting of stock options, the auditor would:
trace the transactions to approval by the board of directors
155
converted stock options may be distributed from ________
authorized common shares
156
Unclaimed payroll checks (assets) should be returned to _______ for follow up.
independent party not related to payroll department (who is in charge of recordkeeping)
157
If a client uses a stock transfer agent, confirmations should be used to provide evidence of:
shares authorized, issued, and outstanding, provide evidence of the individual transactions
158
proper authorization of stock rights and warrants would best be verified by:
reviewing the minutes of board of director meetings
159
The auditor would review asset records for old assets, or observe assets that aren't being used to determine:
whether assets that cannot be repaired have been properly written off
160
in a _____ test, data in two or more fields are checked for consistency
reasonableness
161
a _____ test identifies amounts that fall outside a predetermined range
range
162
Restrictions on retained earnings are for _____ or _____ of retained earnings. the purpose is to restrict dividends, and the restrictions should be:
contractual or legal appropriation, disclosed in the FS
163
the auditor determines whether there are restrictions on retained earnings resulting from loans, agreements, or state law. this audit procedure is intended to verify assertions related to:
understandability and classification
164
The analytical procedure comparing payroll to standards or budgets is ____ likely to be used when auditing payroll then observing entity employees during payroll distribution
most, (with electronic payroll distribution it isn't as likely to be performed)
165
analysis of repair and maintenance expense provides assurance with regard to management's assertion that:
expenditures for PPE have been capitalized and have not been charged to expense
166
an auditor's purpose in reviewing the renewal of a note payable shortly after the balance sheet date most likely is to obtain evidence about the assertion:
understandability and classification (classification of the note as current or noncurrent)
167
to test controls pertaining to the existence of payroll transactions, entries in the ______ would be the population from which the sample is selected
payroll register
168
when assessed level of control risk is low, auditor would perform _______ to test related payroll balances
analytical procedures
169
when assessed level of control risk is high, auditor would perform _______ to test related payroll balances
substantive test of details
170
An auditor would perform ________ when analytical procedures indicate unusual fluctuations in recurring payroll entries
substantive test of details
171
An auditor would extend substantive tests of payroll when _______ are discovered in performing test of details
significant errors (overpayments)
172
investigation of variances in a formal budget might show: ________ or ________, either would trigger an investigation
maintenance costs over budget or acquisition costs under budget
173
if an auditor discovers that the original insurance policy on plant equipment isn't available for inspection, this indicates that there is:
a lien on the plant equipment, since the original policy would likely be in the possession of the lien holder
174
FAS 107 requires
- disclosure of fair values of financial instruments.
- auditor needs to audit year end market values of long-term debt.
- does not require that debt securities be written down to a lower market value
175
auditor should trace corporate stock issuances and treasury stock transactions to _____________ to make sure they were authorized
the minutes of the board of directors
176
articles of incorporation include:
shares authorized and their par value
177
numbered stock certificates for shares that are issued and outstanding would be in the hands of:
stockholders
178
The number of shares subject to agreements to repurchase should be in:
board minutes and any repurchase agreements
179
restrictions on the payment of dividends should be in:
board minutes or confirmed by the bank if restrictions are due to outstanding loans
180
guarantees of preferred stock liquidation value should be in:
board minutes or stock redemption agreement
181
large companies often use a registrar to provide registration services and maintain the stockholder list. The primary responsibility of the registrar is to:
verify that stock is used only with proper authorization
182
_________ bears responsibility for proper declaration of dividends
board of directors
183
until checks are actually signed, they do not represent:
assets
184
the adverse effects of evens causing an auditor to believe there is a substantial doubt about an entity's ability to continue as a going concern would be lessened by:
evidence relating to the marketability of assets that management plans to sell. (by providing evidence that there is a ready market for assets that could be converted to cash, management has demonstrated that the company could remain in operation for a longer period of time)
185
Evidence regarding the ability to expand operations into new product lines, the feasibility of plans to purchase leased equipment at less than market value, or committed arrangements to convert preferred stock to longterm debt would not be sufficient to lessen doubts about an entity's ability to continue as a going concern, unless:
it could also demonstrate that the events would provide adequate cash flow to fund operations for at least the next year
186
the auditor considers any of managements plans that might _________ the adverse effects of particular conditions and events
serve to lessen
187
plans to increase ownership equity, to borrow money, to restructure debt, to sell assets, and reduce or delay expenditures might all be considered:
mitigating factors (lessen substantial doubt to continue as a going concern)
188
inadequate disclosure of the substantial doubt about an entity's ability to continue as a going concern is a:
departure from GAAP resulting in either a qualified or adverse opinion
189
indications of possible financial difficulties may cause an auditor to:
have substantial doubt to continue as a going concern
190
the lack of payment of preferred, cumulative dividends might cause:
auditor to have substantial doubt to continue as a going concern
191
if auditor concludes that there is substantial doubt to continue as a going concern, the emphasis of matter paragraph would include:
"substantial doubt of the entitys ability to continue as a going concern"
possibily but not required the phrase "possible discontinuation of operations"
192
reasonable period, not to exceed one year is implied in:
the definition of going concern. (so is implied in reporting)
193
If substantial doubt about the entity's ability to continue as a going concern has been removed in the current period, the emphasis of matter paragraph included in the prior period auditor's report:
should not be repeated, and no description of the reasons or plans for recovery need be included
194
negotiating reductions in required dividends would conserve cash, which would be:
a mitigating factor in auditors concerns about entity's ability to continue as going concern
195
if an auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern and that the entity's disclosures are adequate, then the audit report opinion may be:
unmodified with emphasis of matter paragraph or disclaimed (generally unmodified is issued but the auditor isn't prohibited from choosing to issue a disclaimer for example areas involving a high degree of uncertainty)
196
the independent auditor's procedures with respect to litigation, claims, and assessments should indicate discussing with management:
the controls adopted for identifying, evaluating, and accounting for litigation, claims and assessments
197
leasing rather than purchasing operating facilities results in reduced (or delayed) expenditures, which is:
a mitigating factor in a going concern situation
198
A lawyers refusal to furnish the info requested in an inquiry letter is not a reason to withdraw from the engagement, as long as:
the lawyers refusal isn't based on the clients request
199
A lawyers refusal to furnish the info requested in an inquiry letter would be:
limitation on the scope of the audit
200
in evaluating the reasonableness of an accounting estimate, the auditor should first:
obtain an understanding of how management developed its estimate
201
after first obtaining an understanding of how management developed its estimate, the auditor should use one or a combination of the following approaches:
1. review and test the process used by management to develop the estimate
2. develop an independent expectation of the estimate to corroborate the reasonableness of management's estimate,
3. review subsequent events
202
in evaluating the reasonableness of an estimate, an auditor would normally concentrate on key factors and assumptions that are:
1. significant to the accounting estimate
2. sensitive to variations
3. deviations from historical patterns
4. subjective and susceptible to misstatements and bias
203
a letter of audit inquiry to the clients lawyer is the auditor's primary means of:
obtaining corroboration of the info furnished by management concerning litigation, claims and assessments
204
________ is best able to corroborate the description and evaluation of contingencies provided by management
legal counsel
205
the letter of inquiry to the clients attorney is a request made by __________
client management. they would request the attorney to respond directly to the auditor
206
procedures that may be effective in an audit of contingent liabilities:
1. reviewing board minutes
2. discussing long-term purchase commitments with the purchasing agent
3. reviewing long-term leases
4. obtaining a client rep letter
5. standard bank confirmation (contains confirm of discounted drafts and guarantees of notes and other open letters of credit)
207
The scope of an audit is not restricted when an attorneys response is limited:
to matters to which the attorney has given substantive attention in the form of legal rep. the attorney can limit her response to matters that are considered individually or collectively to be material
208
The scope of an audit may be restricted when an attorneys response is limited to:
1. an evaluation of the likelihood of an unfavorable outcome of the matter disclosed by the entity.
2. the attorney's opinion of the entity's historical experiences in recent similar litigation
3. the probable outcome of asserted claims and pending or threatened litigation
209
The scope of an audit may be restricted when an attorneys response is limited to an evaluation of the likelihood of an unfavorable outcome of the matter disclosed by the entity. the attorney's response should also address:
the nature of the claim, the progress to date, and the intended response
210
The scope of an audit may be restricted when an attorneys response is limited to the attorney's opinion of the entity's historical experiences in recent similar litigation. the attorney's response should also address:
the current situation, which may not parallel historical experience
211
The scope of an audit may be restricted when an attorneys response is limited to the probable outcome of asserted claims and pending or threatened litigation. the attorney's response should also address:
the nature of the claim, the progress to date, intended response, and unasserted claims
212
The auditor may accept the letter from external counsel identifying pending claims even though the CPA didn't get:
a specific amount of loss
213
an auditor of a nonissuer is most likely to conclude that a misstatement identified during an audit that is below the quantitative materiality limit is qualitatively material if it _______ managements incentive compensation for the period
increases
214
if control accounts in the general ledger don't reconcile to the subsidiary ledgers, there may be a problem in:
the way transactions were recorded and posted
215
in response to discovering a deviation from a prescribed control procedure, the auditor should make inquires to:
understand the potential consequence of the deviation
216
the other side of the journal entry for AP is typically:
expense
217
If expenses are not recorded, this means that income is:
overstated
218
misstatements recorded on the summary should be supported by additional evidence such as:
inspection of documents, observations. inquiry alone is NOT enough
219
Immaterial misstatements from prior years ________ considered in the evaluation of audit findings in the current year.
should be
220
auditors focus on correcting misstatements existing in the balance sheet, regardless of: .
the years that misstatements originated.
221
an immaterial error from prior years needs to be considered because:
at some point it may become material
222
when determining whether uncorrected misstatements are material, an auditor of a nonissuer would not consider:
the cost of correcting the misstatements
223
the qualititative factor that the auditor considers when the client gives the explanation that it is "too costly to correct" which relates to correcting the system that created the error. this factor is considered if the auditor believes that management had _______ to intentionally _____ a system to calculate an amount that represents an immaterial misstatement
motivation, design
224
if employees have the opportunity to change their time worked after their time cards are approved, this represents a deficiency in:
the design of the control
225
control deficiencies may be noted in the:
design of controls or in the failure in operation of an effectively designed control
226
The representation letter should include management's belief that the effects of any uncorrected FS misstatements aggregated by the auditor during the current engagement and pertaining to the latest period presented are:
immaterial to the FS taken as a whole
227
what matters would materiality limits not apply in obtaining written management representations?
acknowledgement of its responsibility for the FS, availability of financial records, management fraud, and completeness and availability of minutes
228
it is appropriate for the __________ to contain a statement regarding subsequent events
representation letter
229
the representation letter typically includes information in four categories:
1. FS
2. completeness;
3. recognition, measurement and disclosure
4. subsequent events
230
management acknowledges its responsibility for the design of controls to detect and prevent fraud in its:
representation letter
231
______________ obtained by the auditor should include a statement that the significant assumptions used by management in making accounting estimates are reasonable
written representations
232
immaterial fraud involving _________ must be included in the representation letter.
management or employees who have significant roles in internal control
233
material fraud involving _________ must be included in the representation letter.
employees
234
management representation letters need to address _______ being covered in the report
all of the years
235
the group engagement team should communicate to the component auditors the __________ that are relevant to the work of the component auditor. (group assumes no responsibility)
significant risks of MM of the group FS
236
the component auditor should communicate to the group engagement team when they are assuming responsibility for the work of the component auditor:
1. list of corrected and uncorrected misstatements of the financial info of the component
2. the responses to significant risks of MM
237
the group engagement team should communicate to the component auditors the __________ that are relevant to the work of the component auditor. (group assumes responsibility)
the component materiality and threshold above which misstatements cannot be regarded as clearly trivial to the group FS
238
according to the AICPA code of professional conduct, a member CPA generally is required to obtain client consent before disclosing confidential client info to a third party service provider when:
the member doesn't enter into a confidentiality agreement with the provider
239
because timely communication may be important, the auditor may choose to communicate significant deficiencies:
during the course of the audit rather than after the audit is concluded
240
all material weaknesses are significant deficiencies, but:
not all significant deficiencies are material weaknesses
241
an auditor's required report on communication of significant deficiencies in internal control should state:
is intended solely for the use of management, those charged with governance, and others within the organization
242
any report issued on significant deficiencies should indicate that:
1. the purpose of the audit was to report on FS and not provide assurance on internal control
2. definition of material weakness and if applicable significant deficiency
3. restriction on use
243
a control deficiency exists when deficiencies are not:
detected within a timely period by employees in the normal course of performing their assigned functions
244
a material weakness is a deficiency, or combination of deficiencies, such that there is a ________ possibility that a material misstatement of the entity's FS will not be prevented or detected/corrected
reasonable
245
the auditor is required to communicate what to management and those charged with governance? material weakness? significant deficiencies?
Yes, yes, also a definition of material weakness, definition of significant deficiencies, and a list of weaknesses/deficiencies noted
246
the auditor is required to communicate to _______ regarding management consultation with other auditors
those charged with governance
247
if those charged with governance are not involved with managing the entity, the auditor should communicate:
material, corrected misstatements brought to managements attention as a result of the audit
248
for the audits of issuers, the communication with governance must be made:
before the auditor's report is filed with the SEC
249
for the audits of nonissuers, the communication with governanace is not required to occur before the issuance of the auditor's report as long as the communication occurs:
on a timely basis
250
communication regarding independence must be made:
in writing prior to accepting the engagement
251
unless all of those charged with governance are also involved with managing the entity, the auditor is required to communicate:
1. significant audit adjustments
| 2. significant matters relating to consultation with other accountants
252
the auditor is always required to communicate ________ to those charged with governance
changes in significant accounting policies
253
according to the SEC, members of an issuer's audit committee may not accept any:
consulting, advisory, or other compensatory fee from the registrant for services other than as a member of the board
254
deficiency in operation exists when:
properly designed control is either not executed as designed or the person performing the control doesn't have either the authority or the skill to perform the control
255
audit risk of noncompliance is:
planning concept that represents the risk the auditor might express an inappropriate audit opinion on the entity's compliance when material noncompliance exists
256
inherent risk of noncompliance is:
the susceptibility of a requirement to noncompliance and is a component of the risk of material noncompliance
257
during planning, an auditor of a nonissuer should communicate to those charged with governance that the audit doesn't relieve:
management of its responsibilities for the FS
258
cash flow hedge gains or losses are recorded in the appropriate account: assertion and audit procedure
assertion: classification
procedure: evaluate the assumptions and valuation models used by management
259
trading and available for sale securities are valued at the appropriate amount: assertion and audit procedure
assertion: valuation
procedure: obtain evidence of the quoted year end FV from published sources
260
equity investments are valued at the appropriate amount: assertion and audit procedure
assertion: valuation
procedure: obtain the audited FS of the investee
261
determine that classification of marketable securities is correct: assertion and audit procedure
assertion: classification
procedure: inspect approved records of client's investment strategies
262
correction of errors for Year 1 statements should not:
affect the Year 2 income statement (debit or credit to retained earnings)
263
an observed deviation rate that exceeds the auditor's expected rate is an example of a deficiency in:
operation of controls
264
a control deficiency in design occurs when:
a neccessary control is missing or when an existing control doesnt achieve the desired objective
265
For nonissuers, previously communicated significant deficiencies and material weaknesses that have not been corrected should be:
communicated again, in writing, during the current audit by referring to the previously issued written communication and the date of that communication
266
For nonissuers, if an auditor has communicated other deficiencies in a prior period and management has chosen not to correct the deficiencies for cost or other reasons, the auditor:
doenst have to repeat communication in the current period
267
for nonissuers, written communication of significant deficiencies should include:
- defintion of significant deficiency
- description of the significant deficiency that includes an explanation of the potential effect
- sufficient info to enable those charged with governance and mangement to understand the context of the communication
- restriction on the use of the communication to managment, those charged with governance, others in the organization, and any other governmental authority to which the auditor is required to report
268
the auditor is (required/not required? to report the absence of significant deficiencies or material weaknesses during the integrated audit of a nonissuer
not required
269
evidence of failure in the operation of internal controls:
- undue bias or lack of objectivity
- misrepresentation by client personnel to the auditor
- managment override of controls
270
insufficient control consciousness is an example of:
deficiency in the design of controls
271
The SEC has strongly recommended that companies establish audit committees, but:
not required
272
reasons why companies have audit committees:
- large accounting firm
- new york stock exchange requires listed companies
- strengthen the public's sense of the independence of the external auditor
273
the main function of an audit committee is to:
- enhance IC by creating a means of direct communication between the outside directors and the independent auditor
- select and appoint independent auditor, set the audit fee, assures independence of auditor and reviews the scope of the audit
- helps solve disagreements relating to the accounting treatment of only material items in FS
274
The auditor is not responsible for requesting mangament's _____ for uncorrected MM, but is responsible for requesting management's ____ of uncorrected MM
explanation, correction
275
When communicating findings to mangement during the audit of an issuer, the auditor is responsible for:
- requresting management's correction of uncorrected material misstatements
- communication of frequently occuring misstatements indicating bias in the prep of FS
- communication of uncorrected, nontrival misstatements and their possible effect on the audit opinion, including the effect of uncorrected misstatements related to prior periods
276
a nonresponsive and or inadequate response from those charged with governance is an example of:
inadequate two way communication and may be indicative of an unsatisfactory control environment, which may affect the auditor's assessment of risk of MM
277
As a result of the SOX, auditors of issuers are required to report to the audit committee:
- all critical accounting policies
- all material alternative GAAP accounting treatements
- significant communications with mangement (including the schedule of unadjusted differences)
278
examining a sample of sales invoices for proper classification into the appropriate revenue accounts is an audit procedure used to test:
understandability and classification assertion for sales transactions
279
AP confirmations are used if:
- monthly vendor statements are not available
- if there are disputed amounts
- if the client's IC over AP is weak
280
If an auditor performs tests on year end bank recs or sends standard bank confirmations to all banks where the client has transacted business during the year, the auditor would be testing the _____ assertions pertaining to client's cash balance
completeness and valuation and allowance
281
postivie confirmations would be inappropirate if:
majority of AR accounts are small (negative confirmations should be used)
282
The auditor is required to determine if the client's accounting estimates are reasonable, which may include a comparison with industry standards. However, the auditor is not required to determine if the accounting estimates are consistent with the client's primary competitors. although in the same industry, the client's bussinesses could have unique features that may impact:
the rationale behind the accounting estimates used by the client
283
derivativies that are actually refleted on the client's BS at quarter end are not contingencies. why?
the amount is provided and there is no possible or probable outcome
284
reviewing any type of transaction that is already recorded on the BS will not identify:
contingencies
285
what may identify contingencies:
- client rep letter
- discussing sales contracts with the sales manager (may be pertaining to the client's future revenue recognition)
- review the status of long term leases (related to leases)
286
when is not using AR confirmations allowed?
- inherent and control risk are very low and other procedures can be used to reduce audit risk to a low level
- it would be ineffective
- AR is immaterial
287
By ensuring that all required disclosures related to PPE are adequately disclosed in the footnotes, the auditor would be testing the ____ assertion
completeness
288
assuming the client discloses their derivative transactions at fair value, the auditor should perform:
- whether the client specifices in their reporting framework the method used to determine FV
- evaluate if the client's determination of FS is consistent with their specified valuation method
- when FS is obtained from broker-dealter, sttempt to gain an understanding of the method used by the broker-dealer to determine FS
289
The auditor should ensure that the footnotes to the FS disclose any specific restrictions on cash,:
- any compensating balance requirements
| - a policy exists that defines the client's cash and cash evivalents account/transactions
290
Even though the entire litigation loss will be covered by insurance, XYZ company still needs to:
accrue for the loss and disclose the litigation in a footnote. Note: Insurance recoveries are not recorded until received. In addition, insurance recoveries are not allowed to be netted against insurance losses.
