A4 - Performing Furhter Procedures, Forming Conclusions, and Communications

Question 1

What are the tests of details that are performed as test of controls?

Answer 1

1. Completeness.
2. Cutoff = sales were recorder in correct period.
3. Valuation, allocation and accuracy = appropriate amt.
4. Existence and occurrence = sales are valid.
5. Understandability of presentation and class.

Question 2

What is a characteristic of blank positive AR confirmations?

Answer 2

a. Provide > assurance bc customer tells you the $.

b. Result in lower response bc customers are lazy and don’t want to find out how much $ they owe.

Question 3

What is a characteristic of negative AR confirmations?

Answer 3

a. Lack of response is not super indicative of ARs.

Question 4

What should an auditor do when there are no responses on AR confirmations?

Answer 4

1. Ask customers again (2nd and even 3rd time).

2. If no response at 2nd time, then ask the client to contact their customer.

Question 5

When are negative AR confirmations used?

Answer 5

When:

1. Combined inherent and control risk is low.
2. A lof of tiny balances are being confirmed.
3. You don’t expect to be ignored.

Question 6

What’s the key to tracing invoices back and forth to shipping docs?

Answer 6

• Tracking invoices to docs = verifies invoiced items were shipped.
• Tracking docs to invoices = verifies shipped items were billed.

Question 7

How should you trace a sales transaction when testing for existence?

Answer 7

From GL to source docs.

Question 8

How should you trace a sales transaction when testing for completeness?

Answer 8

From source docs to GL.

Question 9

How should you trace a sales transaction when testing for ficticious sales?

Answer 9

From invoices to shipping docs.

Question 10

When will the auditor focus on primarily on management’s assertion of existence?

Answer 10

On an asset account.

Question 11

When will the auditor focus on primarily on management’s assertion of completeness?

Answer 11

On an liability account.

Question 12

What’s the process to pay an invoice?

Answer 12

• Purchasing/procurement preps the PO.
• AP matches receiving report with PO and invoice.
• Treasury pays invoice.

Question 13

What information is confirmed on the AICPA bank confirmation form?

Answer 13

1. Cash balances.

2. Loan collaterals.

Question 14

What is the primary purpose of bank confirmations?

Answer 14

To corroborate information regarding deposit and loan balances.

Question 15

What is another purpose of bank confirmations?

Answer 15

To seek information on contingent liabilities, security agreements, and deposit account balances.

Question 16

How do you prevent EEs to steal checks?

Answer 16

Have a bank lockbox!

Question 17

How can you detect kiting on a bank transfer schedule?

Answer 17

Receipt date per bank comes before disbursement date.

Question 18

What assertion does the inventory turnover ratio help obtain evidence for?

Answer 18

Valuation and allocation.

Question 19

What would the auditor do when assessed level of control risk on the inventory cycle is high?

Answer 19

Ask the client to make an inventory count at YE.

Question 20

How should the auditor verify the existence of inventory?

Answer 20

By observation.

If the inventory is immaterial, then confirmation is enough.

Question 21

What does the auditor do when it tests LT investments?

Answer 21

The auditor would use Analytical Procedures to ascertain the reasonableness of the completeness of recorded investment income.

Question 22

What information is included in a security count worksheet?

Answer 22

1. Details of the count.

2. Acknowledgement from client that securities were returned intact.

Question 23

How does the auditor verify the reasonableness of dividend income?

Answer 23

By checking online, or checking dividend records produced by investment advisory services.

Question 24

How does the auditor test for occurrence/existence of hours worked regarding payroll?

Answer 24

By vouching to time card data.

Question 25

How does the auditor test for completeness of equipment?

Answer 25

By tracing from source to book. You are trying to see if the books are complete.

Question 26

What is a reasonable test?

Answer 26

When different data is checked for consistency.

Question 27

Whats the difference between a reasonable test and a test of details?

Answer 27

A reasonable test tests data in two or more fields for consistency, and a test of details tests specific details.

Question 28

What is the primary responsibility of a bank acting as a registrar of capital stock?

Answer 28

Verify that stock is issued in accordance with the authorization of the BOD and the articles of incorporation.

Question 29

How do you test for unrecorded retirements?

Answer 29

Inspect the GL, then go check facilities.

Question 30

Regarding retirements, what are you testing if you check the facilities first?

Answer 30

Completeness.

Question 31

Regarding retirements, what are you testing if you check the GL first?

Answer 31

Existence.

Question 32

Regarding PP&E, what is a good control that would reduce assessed control risk?

Answer 32

Periodic inspections by the internal auditor.

Question 33

What is capital and treasury stock traced to?

Answer 33

To BOD minutes/meetings.

Question 34

What’s the relationship between Low/High control risk and substantive testing?

Answer 34

Low level of control risk = Test of controls, limited substantive test because you have proved that controls are effective.

High control risk = No test of controls (since they don’t work anyway), and lots of substantive testing.

Question 35

Why would the insurance policy of an equipment not be available for the auditor to review?

Answer 35

Because the equipment may be subject to a lien, and the lien holder might have the policy with them.

Question 36

What should the auditor do if management plans do not alleviate substantial doubt about going concern?

Answer 36

Add a section called “Substantial Doubt About an Entity’s Ability to Continue as a Going Concern” in the auditor’s report.

Question 37

What should the auditor do if management plans alleviate substantial doubt about going concern?

Answer 37

Auditor MAY (optional) add an EOM paragraph.

Question 38

What should you do if management refuses to allow you to talk to external legal counsel?

Answer 38

Provide a disclaimer of opinion, or withdraw from the audit (if still in the planning phase).

Question 39

What should you do if the client’s attorney refuses to give you information?

Answer 39

Provide a disclaimer of opinion, or withdraw from the audit if the refusal is at the client’s request.

Question 40

What is the auditor objective when evaluating client’s estimates?

Answer 40

To determine if the estimates are reasonable and in conformity with GAAP.

Question 41

How does the auditor evaluate the reasonableness of an accounting estimate?

Answer 41

1. By understanding how management developed the estimate.
2. Review and test management’s procedures.
3. Develop and independent estimate to compare.
4. Review subsequent events for corroborative purposes.

Question 42

What are the factors that may indicate substantial doubt about an entity’s ability to continue as a going concern?

Answer 42

FINE!

1. Financial difficulties.
2. Internal matters.
3. Negative trends.
4. External mattters.

Question 43

What are the factors that an auditor would concentrate on when evaluating the reasonableness of an accounting estimate?

Answer 43

1. Factors thate are significant to the accounting estimate.
2. Sensitive to variations.
3. Deviations from historical patterns.
4. Subjective and susceptible to misstatements and bias.

Question 44

What are the mitigating factors to the substantial doubt about an entity’s ability to continue as a going concern?

Answer 44

Entity:

1. Plans to borrow money or restructured debt.
2. Plans to sell assets.
3. Plans to delay or reduce expenses.
4. Plans to increase ownership equity.

Question 45

When would an auditor conclude that a misstatement below the quantitative materiality limit is qualitatively material?

Answer 45

If it results in a favorable balance. Ex: Misstatement makes Net loss becomes Net Income.

Question 46

What should the auditor do regarding PY immaterial misstatements?

Answer 46

Consider those misstatements for CY evaluation of audit findings. They might be material this time around.

Question 47

How can auditor note a control deficiency?

Answer 47

1. In the design of controls.

2. In the failure of the effectively designed control.

Question 48

What is the date of the management representation letter?

Answer 48

The same date as the auditor’s report.

Question 49

What does the management representation letter contain?

Answer 49

Information in 4 categories:

1. FS.
2. Completeness.
3. Recognition, measurement, and disclosure.
4. Subsequent events.

Question 50

What management representations must be obtained?

Answer 50

1. Uncorrected misstatements identified by the auditor.
2. Unrecorded transactions.
3. Instances of immaterial fraud by EEs in Internal Control.

Question 51

What is the material weakness riddle?

Answer 51

All material weaknesses are significant deficiencies, but not all significant deficiencies are material weaknesses.

Question 52

What is a material weakness?

Answer 52

A material weakness is a significant deficiency that results in a reasonable likelihood that a material misstatement in the FS will not be prevented, detected, or corrected.