A4 - Becker Wrong Answers Flashcards
Which of the following strategies most likely could improve the response rate of the confirmation of accounts receivable?
A. Requesting customers to respond to the confirmation requests directly to the auditor by fax or email. B. Notifying the recipients that second requests will be mailed if they fail to respond in a timely manner. C. Restricting the selection of accounts to be confirmed to those customers with relatively large balances. D. Including a list of items or invoices that constitute the account balance.
Choice “D” is correct. Positive accounts receivable confirmations require a recipient to respond and confirm their account balance. These confirmations may be blank or have the amount owed stated. A recipient is more likely to respond if it is easier for them to verify the balance. A listing of items or invoices that constitute an account balance would be easier to confirm than a confirmation that is blank or one that just shows the total balance owed. (If the total amount of the balance is shown, the recipient may have to take an additional step of adding up all the invoices owed.)
Choice “A” is incorrect. Requesting customers to respond to the confirmation requests directly to the auditor by fax or e-mail might not improve the response rate. Some customers may prefer to respond by mail. In addition, recipients that respond electronically should also be requested to mail the original confirmation to the auditor.
Choice “B” is incorrect. A recipient, who does not want to respond to a confirmation, probably would not be persuaded by a notification that second requests will be mailed if they fail to respond in a timely manner.
Choice “C” is incorrect. Restricting the selection to those customers with relatively large balances might not improve the response rate. For example, customers with large balances may have several invoices that they would have to review and total.
An auditor is in the process of performing substantive procedures on a client’s accounts payable. In order to test the existence and occurrence assertion, the auditor would most likely perform which of the following auditing procedures?
A. Select a sample of vendor statements and agree amounts to the vendor accounts. B. Select cash disbursements made subsequent to year-end and examine supporting documentation to determine if applicable to the prior balance sheet date. C. Vouch selected amounts from the accounts payable listing to the client’s voucher packages. D. Review a sample of voucher packages for the presence of a purchase requisition or receiving report to determine accounts payable ownership.
Choice “C” is correct. By vouching selected amounts from the accounts payable listing to the voucher packages, the auditor would be testing the existence and occurrence assertion.
Choice “A” is incorrect. This audit procedure would be used to test the completeness assertion or the valuation, allocation, and accuracy assertion.
Choice “B” is incorrect. This audit procedure would be used to test the completeness assertion. Specifically, the procedure is searching for unrecorded liabilities.
Choice “D” is incorrect. This audit procedure would be used to test the rights and obligations assertion.
What is the difference between vouching and tracing?
Vouching starts at the financial statements and uses vouchers, invoices, receipts, and other documentary evidence to verify accounting entries.
VOUCHING: FIN STMT —-> SOURCE DOCUMENTS
Vouching is typically used to address the existence assertion.
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Tracing involves starting with the source document and locating the transaction in the financial statement
TRACING: SOURCE DOCS —–> FIN STMT
Tracing is typically used to address the completeness assertion
Which of the following auditing procedures most likely would provide assurance about a manufacturing entity’s inventory valuation?
A. Testing the entity's computation of standard overhead rates. B. Tracing test counts to the entity's inventory listing. C. Reviewing shipping and receiving cutoff procedures for inventories. D. Obtaining confirmation of inventories pledged under loan agreements.
Choice “A” is correct. Testing the entity’s computation of standard overhead rates generally provides assurance about a client’s inventory valuation.
Choice “B” is incorrect. Tracing test counts to the entity’s inventory listing provides assurance about the completeness of the client’s listing.
Choice “C” is incorrect. Reviewing shipping and receiving cutoff procedures for inventories provides assurance about completeness and existence of inventory.
Choice “D” is incorrect. Obtaining confirmation of inventories pledged under loan agreements provides assurance about the appropriate presentation, description, and disclosure of such matters in the financial statements.
According to PCAOB standards which one of the following statements does not reflect a qualitative standard that should be considered when evaluating the materiality of an uncorrected misstatement?
A. The significance of the misstatement relative to the needs of users. B. The effects of misclassifications, for example, between operating and nonoperating. C. The cost of the correction. D. The dollar amount of the error.
Choice “D” is correct. The dollar amount of the error is a quantitative standard, not a qualitative standard.
Choice “A” is incorrect. The significance of the misstatement relative to the needs of users is a qualitative standard that should be considered when evaluating the materiality of an uncorrected misstatement.
Choice “B” is incorrect. The effect of misclassifications is a qualitative standard that should be considered when evaluating the materiality of an uncorrected misstatement.
Choice “C” is incorrect. The cost of the correction is a qualitative standard that should be considered when evaluating the materiality of an uncorrected misstatement.
According to PCAOB standards, which of the following does not represent an example of management bias?
A. Management decreasing the allowance for doubtful accounts when there has been no change in the level of write-offs during the period. B. The identification by management of additional adjusting entries that offset misstatements accumulated by the auditor. C. Selective correction of misstatements brought to management's attention during the audit. D. Management reporting all insurance purchases initially as an expense and then adjusting the unexpired portion into prepaid insurance at the end of the period.
Choice “D” is correct. This is not an example of management bias because at the end of the period the financial statements are fairly presented. Unexpired insurance should be reported as prepaid insurance. This is a correct application of the matching principle.
Choice “A” is incorrect. Management decreasing the allowance for doubtful accounts when there has been no change in the level of write-offs during the period is an example of management bias in accounting estimates.
Choice “B” is incorrect. The identification by management of additional adjusting entries that offset the misstatements accumulated by the auditor is an example of management bias.
Choice “C” is incorrect. Selective correction of misstatements brought to management’s attention during the audit is an example of management bias.
An auditor of a nonissuer should request that management provide written representations regarding uncorrected misstatements in the financial statements that state:
A. The individual and cumulative differences between the auditor's point estimates and the recorded amounts for uncorrected misstatements. B. Management's rationale for not correcting misstatements noted during the course of the audit. C. Management's acceptance of responsibility for the auditor's opinion, if modified due to the uncorrected misstatements. D. Whether management believes that the effects of uncorrected misstatements are immaterial, individually and in the aggregate, to the financial statements as a whole.
Choice “D” is correct. The management representation letter must include a statement that management believes the effects of uncorrected misstatements are immaterial to the financial statements as a whole and a summary of the uncorrected misstatements should be included.
Choice “A” is incorrect. With respect to uncorrected misstatements, management is only required to state that the effects of uncorrected misstatements are immaterial to the financial statements as a whole. Information regarding the support for the uncorrected misstatements is not required.
Choice “B” is incorrect. With respect to uncorrected misstatements, management is only required to state that the effects of uncorrected misstatements are immaterial to the financial statements as a whole.
Choice “C” is incorrect. Management would not accept responsibility for the auditor’s opinion as the opinion is the responsibility of the auditor.
The sampling unit in a test of controls pertaining to the existence of payroll transactions ordinarily is a (an):
A. Clock card or time ticket. B. Employee Form W-2. C. Employee personnel record. D. Payroll register entry.
Choice “D” is correct. To test controls pertaining to the existence of payroll transactions, entries in the payroll register would be the population from which the sample is selected. (To test existence, the auditor needs to start with the accounting records and vouch backward to the source documents.)
Choice “A” is incorrect. After the sample is taken from the payroll register, the selected samples are traced to clock cards or time tickets to verify that payroll transactions really exist/occurred.
Choices “B” and “C” are incorrect. Sampling employee form W-2s and employee personnel records would test controls related to the completeness of recorded payroll, not existence of specific transactions.
Equipment acquisitions that are misclassified as maintenance expense most likely would be detected by an internal control activity that provides for:
A. Segregation of duties of employees in the accounts payable department. B. Independent verification of invoices for disbursements recorded as equipment acquisitions. C. Investigation of variances within a formal budgeting system. D. Authorization by the board of directors of significant equipment acquisitions.
Choice “C” is correct. Equipment acquisitions that are misclassified as maintenance expense most likely would be detected by internal control procedures that provide for investigation of variances within a formal budgeting system.
Choice “A” is incorrect. Segregation of duties of employees in the accounts payable department would not prevent the misclassification of equipment acquisitions as maintenance expense.
Choice “B” is incorrect. Verifying invoices for disbursements already recorded as equipment acquisitions would not include examining invoices for disbursements recorded as maintenance expense.
Choice “D” is incorrect. Since the authorization by the board of directors occurs before the disbursement is recorded, this control would not prevent any misclassification.
Which of the following statements is correct concerning an auditor’s required communication of significant deficiencies in internal control noted during a financial statement audit of a nonissuer?
A. A significant deficiency previously communicated during the prior year's audit that remains uncorrected causes a scope limitation. B. An auditor should perform tests of controls on significant deficiencies before communicating them to the client. C. An auditor's report on significant deficiencies should include a restriction on the distribution of the report. D. An auditor should communicate significant deficiencies after tests of controls, but before commencing substantive tests.
Choice “C” is correct. The report should state that the communication is intended solely for the use of management, those charged with governance, and others within the organization.
Choice “A” is incorrect. Significant deficiencies may represent a conscious decision by management to accept that degree of risk because of cost or other considerations. The auditor may elect to use a primarily substantive approach to test balances, so internal control deficiencies do not necessarily constitute a scope limitation.
Choice “B” is incorrect. No requirement to perform tests of controls exists. Significant deficiencies may be identified through the consideration of internal control, the application of audit procedures to balances or transactions, or otherwise during the course of the audit.
Choice “D” is incorrect. Significant deficiencies may be communicated during or after the audit.
