A4 - Performing further procedures, forming conclusions and communications

Question 1

What control helps ensure that all sales transactions are recorded?

Answer 1

Pre-numbering the shipping documents and matching them to the sales journal. The sales order form should be pre-numbered when created.

Question 2

How to test a revenue control to identify overstatement (occurrence)?

Answer 2

You do a backward test starting from the sales invoice to the shipping documents (bill of lading) to verify all sales billed to customers and recorded had goods shipped.

Question 3

How to test a revenue control to identify understatement (completeness)?

Answer 3

You do a forward test starting from the shipping documents (bill of lading) to the sales invoice or sales journal to verify that for all shipped goods to customer there was a sales billed and recorded.

Question 4

What happens if the auditor finds shipping docs but a sales invoice was not recorded?

Answer 4

1. The auditor assumes potential theft (misappropriation of assets)
2. The goods were probably shipped on consignment.

Question 5

What are the 3 main documents in the revenue cycle?

Answer 5

1. Sales order - created by sales department and approved by the credit department
2. Bill of lading - Shipping documents to evidence shipping of goods (beginning of transaction)
3. Sales Invoice - created by the billing department.

Question 6

How can the auditor obtain comfort and evidence to ensure the controls around accounts receivables are operating effectively?

Answer 6

The auditor can observe the entity’s employee prepare the schedule of past due accounts receivable.

Question 7

What is the process to account for cash receipts to clear accounts receivable?

Answer 7

Incoming receipts (mail) are listed in the remittance detail and 3 copies are sent to the following personnel:
1. Cashier receives actual receipt and prepares bank deposit
2. AR department enters receipt in AR subsidiary records and matches bank deposit ticket with details from the remittance advices.
3. Accounting enters receipt into the accounts receivable account.

Question 8

How does segregation of duties need to be applied when testing sales controls?

Answer 8

Authorization: Sales orders and credit, treasurer
Record Keeping: Billing/Accounts Receivable/Accounting
Custody: Warehouse and shipping

Question 9

How does segregation of duties need to be applied when testing cash receipt controls?

Answer 9

Record Keeping: Accounts receivable/accounting
Custody: Mail room and cashier (treasurer)

Question 10

How does the auditor test the valuation assertion for the revenue cycle?

Answer 10

1. observes the credit granting policy (relates to allowance)
2. reviews the aging schedule
3. Anything related with the allowance for doubtful account and how it’s valued (e.g., write-offs of AR and bad debt expense)

Question 11

How does the auditor test the existence assertion for accounts receivables?

Answer 11

By sending confirmations to the customers to ascertain that balances shown on the company’s records actually do exist, and customer is real.

Question 12

When is a positive confirmation to confirm AR balance sent to the client’s customer?

Answer 12

The auditor sends a positive confirmation to the client’s customer when the auditor wants the customer to confirm if it owns the balance or not, and if the balance is correct or not. This type of confirmation is sent to customers that are high risk and have large AR balances outstanding.

Question 13

When is a negative confirmation to confirm AR balance sent to the client’s customer?

Answer 13

The auditor sends a negative confirmation to the client’s customer when the auditor only wants the customer to confirm if the AR balance is incorrect. This sent to the customer when there is a small audit risk and AR balances outstanding are small.

Question 14

When is a blank confirmation to confirm AR balance sent to the client’s customer?

Answer 14

Blank confirmations should be sent to the customer if the recipients are likely to sign other types of positive confirmations without careful investigation. Blank confirmation requires the recipient to fill in the AR balance.

Question 15

When does the auditor confirms the client’s accounts receivable balances?

Answer 15

When the account receivable balances are deemed material to the balance sheet. This is required by GAAS.

Question 16

What happen if the auditor does not receive a response to the first confirmation?

Answer 16

The auditor should send a second or even third confirmation request if necessary. The client may be asked to intervene.
If no response, the auditor can use alternative procedures by inspecting the shipping documents to ensure the goods were actually sold to the debtor (existence) and check the cash collection balance for the account.

Question 17

What are the documents used in the expenditure cycle?

Answer 17

1. Purchase Requisition - issued by the department that needs the goods
2. Purchase Order (same as sales order) - issued and approved by purchasing department
3. Receiving Report - Created by the Receiving department when goods arrive (same as bill of lading)
4. Purchase Invoice (same as sales invoice) received from the vendor

Question 18

What is the function of the purchasing department?

Answer 18

issue and approve the purchase order and negotiate vendor terms.

Question 19

What is the function of the accounts payable/Voucher department?

Answer 19

Matches the four documents to ensure they were received, checks for authorizations, and prepares the voucher. this is the approval for payment.

Question 20

What is the role of the cash disbursement department (Treasurer)?

Answer 20

To sign the check for payment and mail it.

Question 21

When is a debit memo issued?

Answer 21

A debit memo is issued when nonconforming goods are returned to the vendor and sent to accounting to reduce the AP balance.

Question 22

When is a credit memo issued?

Answer 22

A credit memo is issued when goods are returned by the customer and sent to accounting to reduce the AR balance.

Question 23

How does segregation of duties need to be applied when testing expenditure and cash disbursement controls?

Answer 23

Authorization: Purchasing/requisitioning Dept
Record Keeping: Accounts Payable/Accounting
Custody: Receiving (purchased item) and treasurer (cash)

Question 24

How will the auditor identify unrecorded liabilities (cutoff assertion)?

Answer 24

1. The auditor will review the receiving reports to confirm if any of the inventory received before year-end was not recorded as purchased.
2. The auditor can compare cash payments occurred after B/S date to the AP trial balance in the correct period
3. The auditor can verify unmatched invoices and unbilled receiving reports as they may indicate an unrecorded liability exist.

Question 25

How can the auditor test if accounts payable is understated?

Answer 25

The auditor can examine vendor invoices for amounts not recorded as purchased (completeness assertion)

Question 26

When are confirmations issued to vendors to confirm AP balances?

Answer 26

Confirmations are sent to vendors to confirm AP balances after year end or subsequent period

Question 27

What is the purpose of the cut off bank statement?

Answer 27

To verify the reconciling items related to cash in the year end bank reconciliation.

Question 28

What is lapping of cash?

Answer 28

Lapping is when cash is received from a customer, but the cash is not applied by the bookkeeper into the customer account, instead it is stolen. Subsequently, cash received from another customer is applied (credited) to the first customer’s account so an overdue bill will not be mailed to the customer.

Question 29

How can a company prevent from lapping?

Answer 29

One of the best methods to guard against lapping is use of a “lockbox” system.

Question 30

What are safeguards to prevent from lapping?

Answer 30

1. Independent comparison of recorded cash receipts with funds actually deposited.
2. Separation of incoming receipts from subsidiary accounts receivable remittance advice.
3. comparison of bank deposit details and remittance credit details.
4. Provision of timely statements
5. Confirmation of customer balances.

Question 31

What is Kitting?

Answer 31

Kitting occurs when a check is written out of a bank account#1 and deposited into bank account#2. The disbursement from bank account#1 is not recorded until a few days after the end of the year.

Question 32

What happens when there is frequent kitting?

Answer 32

Frequent kitting may result in a high level of deposits coupled with a low average balance.

Question 33

How is kitting detected?

Answer 33

A bank transfer schedule should be prepared. For any bank-to-bank transfers that occur near year-end, the disbursement date on the check and in the ledger for the disbursing account should precede the receipt date noted by the bank and in the ledger for the receiving account.

Question 34

What balances are verified at year-end with the Bank confirmations?

Answer 34

Balances from the following:
1. actual loans
2. contingent liabilities
3. discounted notes
4. pledged collateral
5. guarantee or security agreements

Question 35

What does footing means?

Answer 35

Verifying the mathematical accuracy of an invoice or bank statement.

Question 36

Who is responsible to review the monthly bank statement?

Answer 36

The internal auditor as is independent of other cash functions.

Question 37

How does the auditor verifies the completeness of the outstanding check list at year end?

Answer 37

1. Auditor verifies that checks dated prior to year end cleared in the cutoff period
2. Auditor trace the checks to the outstanding check list for completeness

Question 38

What does the cut-off statement includes?

Answer 38

1. it starts with the year-end statement balance
2. includes all deposits and checks that clear within 10-15 days following year end and any other account activity.

Question 39

What internal control is helpful to maintain accurate inventory records?

Answer 39

Periodic inventory counts are used to adjust perpetual inventory records.

Question 40

When should the auditor observe the inventory of goods held off-site in public warehouses or in consignment?

Answer 40

When the inventory held therein is significant; otherwise, confirmation of such inventory is sufficient.

Question 41

What would least likely help the auditor determine whether inventory slow-moving, defective, and obsolete?

Answer 41

Testing the computation of standard overhead rates related to the accumulation of costs.

Question 42

When should an auditor perform inventory procedures during or after the end of the period under audit?

Answer 42

If the company maintains a well-kept perpetual inventory system and perform physical cycle count throughout the year to ensure accuracy, the auditor may observe the inventory before or after year-end if necessary.

Question 43

How can the auditor perform a test for completeness of the inventory?

Answer 43

1. Overstatement: Auditor goes from inventory tagging to the inventory report
2. Understatement: Auditor compares items in the test count to the inventory report.
3. Performing cutoff procedures provides assurance that goods in transit (shipped or received) are appropriately included or excluded from inventory.

Question 44

How can the auditor perform a test for rights and obligations of the inventory?

Answer 44

1. Auditor examines vendor invoices to ensure the inventory belongs to the client.
2. Auditor ascertains that consigned inventory on hand is excluded from the physical count
3. Goods shipped to others on consignment need to be included in inventory-rights.
4. Inspect agreements to determine whether inventory is pledged as collateral or subject to any liens

Question 45

How does the auditor perform a test for existence of the inventory?

Answer 45

1. Overstatement: Auditor goes from inventory report to find/vouch tags in the actual inventory. If tags are not found, this means overstatement
2. Auditor selects inventory items from the inventory report and match the items to the test count.

Question 46

What information should be included in the inventory disclosures?

Answer 46

1. Cost method (LIFO, FIFO, weighted average)
2. Raw materials, WIP, finished goods inventory balances
3. Consigned inventory
4. Pledged or assigned inventory
5. Significant losses from inventory write-downs or purchase commitments.
6. Warranty obligations

Question 47

What type of disclosure would be mostly related to understandability of presentation and classification in the inventory cycle?

Answer 47

Confirming inventory pledged under loan agreements, as this has to be disclosed in the F/S.

Question 48

When are analytical procedures performed in the investment cycle?

Answer 48

Analytical procedures are used to test the predictable relationship between long-term investments and investment income. Analytical procedures are mostly used to predict income statement accounts.

Question 49

What control is most effective in assuring proper custody of assets in the investing cycle?

Answer 49

If investment held by the company, the investments should be periodically counted and reconciled with the investment subsidiary ledger by a party not associated with the investments.

Question 50

What control helps safeguarding against loss of marketable securities?

Answer 50

An independent trust company has no direct contact with the employees who have recordkeeping responsibilities has procession of the securities.

Question 51

How is dividend income from investments tested by the auditor?

Answer 51

Reconcile amounts of dividends received to dividend records (from the internet) to verify the completeness and accuracy of investment income.

Question 52

If a safe-deposit box is used, when are the securities counted by the auditor?

Answer 52

The securities should be counted on the B/S date, or the bank should be requested to seal the box until the count is later completed.

Question 53

How would an auditor assess the valuation assertion when auditing investments accounted under the equity method?

Answer 53

An auditor will examine the audited financial statements of the investee company, including performing recalculations of prorata share of income/loss.

Question 54

What should the auditor consider when testing fair value measurement and disclosures?

Answer 54

The auditor should review subsequent events and transaction (occurring before the date of the auditor’s report) for evidence regarding fair value measurements at the balance sheet date.

Question 55

How can the auditor test to identify unrecorded retirements of fixed assets (overstatement of fixed assets and existence assertion)?

Answer 55

1. The auditor will trace proceeds from the sale of fixed assets to the cash receipt journal and look for the deposits in the bank statement.
2. Analyze the insurance expense account, a big drop in insurance expense, could detect unrecorded retirement of fixed assets as the insurance policy is modified when assets are retired.
3. Select certain items of equipment from the accounting records and locate them in the plant.

Question 56

How does the auditor test the completeness assertion for fixed assets?

Answer 56

The auditor would review repair and maintenance expense account for the year looking for big items that were expensed that maybe should have been capitalized.

Question 57

What is the purpose of segregating the duties of hiring personnel and distributing payroll checks?

Answer 57

To separate the authorization of transactions (hiring, pay rates, etc. are authorized by the personnel department/human resources) from the custody of related assets (cash or checks are held in the treasurer’s department)

Question 58

What control activity would help ensure employees are only paid for the work performed?

Answer 58

All pay base data (hours, absence, time off, etc.) should be approved by an employee’s immediate supervisor.

Question 59

When would the auditor perform substantive test of detail in payroll transactions and balances?

Answer 59

When analytical procedures indicate unusual fluctuations in recurring payroll entries.

Question 60

How can the auditor test for the existence assertion related to payroll transactions?

Answer 60

The auditor selects a sample of employees from the payroll register and trace them to the approved clock/time card data. This procedure also helps test for overstated payroll.

Question 61

What type of test data would the auditor least likely use to test computerized payroll transactions?

Answer 61

Control and distribution of unclaimed checks since these controls are not automated. These controls rely on proper segregation of duties, which auditor test through observation.

Question 62

How can the auditor test for the occurrence assertion related to payroll transactions?

Answer 62

The auditor test to ensure that the payroll transaction actually occurred (i.e., that all payroll checks were issued to valid employees for hours actually worked). Segregation of duties between personnel and payroll departments is an important control to ensure that only valid employees receive paychecks.

Question 63

What test of details can be performed by the auditor to test the valuation, allocation, and accuracy assertion for payroll transactions?

Answer 63

1. Compare total recorded payroll with total payroll checks issued
2. Test extensions and footings of payroll
3. Verify pay rates and payroll deductions with employee records
4. Recalculate gross and net pay on a test basis.
5. Compare payroll costs with standard or budgets
6. Recompute the mathematical accuracy of a sample of paychecks.

Question 64

How does the auditor test the understandability of presentation and classification of retained earnings (equity)?

Answer 64

The auditor checks for any restrictions in retained earnings related to appropriation of retained earnings that results from loans, agreements, or state laws.

Question 65

What are ways to prevent lapping?

Answer 65

1. Segregation of duties (employee opening mail and depositing checks should not record, post or write off AR transactions)
2. lockbox system
3. Mandatory vacation

Question 66

How can the auditor perform test of detail for the cutoff assertion of fixed assets?

Answer 66

The auditor should examine dates of fixed asset purchases and sales made shortly before and after year-end to ensure fixed assets were recorded in the correct time period.

Question 67

What action should the auditor take when a positive confirmation is sent to the client and the client does not agree/disagree with the outstanding balance?

Answer 67

If the client does not respond confirming the account balance, it will be considered sufficient appropriate evidence and no further audit tests would be deemed necessary.

Question 68

Who is the primary source of information regarding litigation, claims and assessments?

Answer 68

Management is the auditor’s primary source

Question 69

Who is the primary method to corroborate information regarding litigation, claims and assessments?

Answer 69

The client’s attorney are the primary method to corroborate information

Question 70

How does the auditor corroborates information?

Answer 70

The auditor sends the attorney a “letter of inquiry”

Question 71

What does the auditor receives from the attorney?

Answer 71

1. The attorney will respond to the “letter of inquiry, by sending the “lawyer letter or “attorney letter”
2. The lawyer responds if there are legal matters related to asserted or unasserted claims.

Question 72

What are asserted claims?

Answer 72

Someone has already filed a claim against the entity or has at least announced the intention to file the claims. Include both pending and threatened litigations

Question 73

What should the lawyer do with asserted claims?

Answer 73

The lawyer should inform the auditor directly about the omission to any asserted claims in the layer’s letter

Question 74

What are unasserted claims?

Answer 74

Unasserted claims represent potential litigations from certain exposure but no one has sued yet or even threatened to sue.

Question 75

What are the conditions to qualify as an unasserted claim?

Answer 75

Unasserted claims should be disclosed according to GAAP if both conditions apply:
1. it is probable that a claim will be asserted
2. It is at least reasonably possible that a material unfavorable outcome will occur.

Question 76

What should the lawyer do with unasserted claims?

Answer 76

The lawyer will NOT inform the auditor directly regarding omissions of unasserted claims, but it will communicate management so they can inform the auditor. The management rep letter should include a statement saying “all unasserted claims required to be disclosed are disclosed”

Question 77

What would the auditor do if it has a substantial doubt that the entity will continue as a going concern?

Answer 77

The auditor should include a separation section in the auditor’s report with the heading “Substantial Doubt About the Entity’s Ability to Continue as a Going Concern” that includes the terms “substantial doubt” and “going concern.” the time periods is not mentioned in the auditor’s report.

Question 78

What audit evidence should the auditor obtain for actual or potential litigations, claims, and assessments?

Answer 78

1. The period in which the underlying cause for legal action occurred.
2. The degree of probability of an unfavorable outcome
3. The amount or range of potential loss.

Question 79

What happens if an attorney does not respond the auditor’s letter of inquiry?

Answer 79

Refusal to respond a letter of inquiry were the attorney devoted substantial attention to litigation matters is a limitation in the scope of the auditor and might require a modified opinion.

Question 80

What would cause a CPA not to accept an audit engagement?

Answer 80

The prospective client’s unwillingness to permit inquiry of its legal counsel

Question 81

When can the scope of the audit be restricted when attorney’s response is limited to?

Answer 81

Limited to:
1. An evaluation of the likelihood of an unfavorable outcome of the matter disclosed by the entity (address nature of claim, progress, intended response)
2. Attorney’s opinion of the entity’s historical experience in recent similar litigations (address current situation)
3. Probable outcome of asserted claims and pending or threatened litigation (address nature of claim, progress, intended response, and unasserted claims)

Question 82

Who is responsible for drafting the letter of inquiry and sending it to the attorney?

Answer 82

1. Client management drafts the letter of inquiry and signs it
2. Auditor reviews letter and sends it (mail it) to the lawyer.

Question 83

How can the auditor identify litigations, claims, and assessments?

Answer 83

1. attorney’s confirmation to letter of inquiry
2. Inspecting letters from taxing authorities indicating balances due from unpaid payroll tax, sales tax, unemployment tax. If letter indicates taxes are overdue, then liabilities need to be recorded.
3. Read the board of director’s minutes

Question 84

What are the procedures performed that point to a going concern issue (ADMITS)?

Answer 84

A - Analytical procedures (looking for negative trends/adverse financial ratios or attorney’s letters for pending litigation
D - Debt compliance (violation of debt covenant requirements)
M - Minutes of the Board of Directors Meetings
I - Inquiries of management regarding whether they evaluated going concern
T - Talk to 3rd parties offering financial support
S - Subsequent events - Uninsured disasters

Question 85

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

Answer 85

F - Financial difficulties
I - Internal matters
N - Negative trends
E - External matters

Question 86

What are mitigating factors that help reduce substantial doubts about the entity’s ability to continue as a going concern?

Answer 86

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

Question 87

If the auditor determines the issuer has a substantial doubt to continue as a going concern, how can the auditor report it?

Answer 87

1. Add a explanatory paragraph to the unqualified opinion
2. Disclaim an opinion

The decision between an unqualified opinion with explanatory paragraph or a disclaimer is based on auditor’s judgment.

Question 88

What is an accounting estimate?

Answer 88

1. Measures the effects of past transactions that cannot be determined in a timely cost-effective manner.
2. Have an inherent lack of precision
3. Be used to approximate an account pending the outcome of a future event (e.g., uncollectible accounts receivable)

Question 89

How does the auditor determines the accounting estimate is reasonable?

Answer 89

The auditor considers the following significant assumptions:
1. Significant to estimate
2. Sensitive to variation’
3. Deviations from historical patterns
4. Based on unobservable data
5. company’s intent and ability to carry out specific courses of action
6. Subjective and susceptible to misstatement or management bias.

Question 90

What are the auditor’s procedures to ensure accounting estimates are reasonable?

Answer 90

1. Review and test procedures used by management
2. Obtain an understanding of how management analyzes sensitivity to change its significant assumptions for complex estimates
3. develop independent estimates for comparative purposes
4. Evaluate subsequent events and transactions (occurring prior to the date of the auditor’s report) for comparison with the value of the estimate.
5. Consider the use of specialist for complex estimates (e.g., FV estimates, actuarial valuation)

Question 91

What is considered management bias about misstatement amounts and disclosures?

Answer 91

1. Selective correction of misstatements brought to mgmt’s attention during the audit
2. Identification by mgmt of additional adjusting entries that offset misstatements accumulated by the auditor.
3. Bias in the selection and application of accounting principles
4. Bias in accounting estimates (e.g., decrease in allowance for doubtful accounts).

Question 92

What is a representation letter?

Answer 92

To confirm management’s oral evidence supplied during the engagement. Final piece of evidential matter.

Question 93

What are the main purposes of the rep letter?

Answer 93

1. Confirm representation made by the client to the auditor regarding inquiries
2. To indicate and document the continuing appropriateness of such representations
3. Reduce the possibility of misunderstanding concerning matters subject to representation.

Question 94

What happens if management fails to provide the rep letter?

Answer 94

There is a scope limitation and auditor should withdraw or disclaim

Question 95

What is the date of the rep letter?

Answer 95

Same date as auditor’s report

Question 96

When does the auditor apply materiality limits to management representation letter?

Answer 96

1. Significant assumptions used in accounting estimates
2. losses from sales commitments
3. Un-asserted claims and assessments
4. noncompliance with contractual agreements such as debt covenants
5. restrictions in cash such as compensating balances
6. disclosure of related party transactions
7. Violations of laws such as labor laws.

Question 97

How are members of the audit committee compensated?

Answer 97

Members of the audit committee can only be compensated for providing services as a member of the board. They cannot accept any consulting, advisory, or other compensatory fee.

Question 98

When does deficiency in operations exist?

Answer 98

When properly designed is either not executed as designed or the person performing the control does not have either the authority or the skill to perform the control.

Question 99

When does deficiency in design exist?

Answer 99

When noncompliance occurs even when the control operates as designed. Occurs when a necessary control is missing or when an existing control does not achieve the desired objective.

Question 100

How should the auditor treat significant deficiencies and material weaknesses?

Answer 100

The auditor should separately identify those significant deficiencies that are considered to be material weaknesses.

Question 101

How does the auditor report no deficiencies to management and governance?

Answer 101

The auditor should NOT issue a report indicating no material weaknesses/significant deficiencies were not found.

Question 102

What is a material weakness?

Answer 102

a deficiency or combination of deficiencies in internal controls over financial reporting that can result in “material misstatement” and it will not be prevented in a timely manner.

Question 103

What is a significant deficiency?

Answer 103

A deficiency or combination of deficiencies in internal controls over financial reporting that is less severe than a material weakness but important enough to be communicated to those responsible.

Question 104

When does the CPA gives an opinion as to whether there are any material weaknesses in internal controls over financial reporting?

Answer 104

“as of date” identified in management’s assessment of their own internal controls

Question 105

What should the auditor do if there are deficiencies that are less severe than material weaknesses?

Answer 105

The auditor is not required to perform procedures to search for deficiencies that are less severe than material weaknesses

Question 106

Who does the auditor communicate significant deficiencies and material weaknesses?

Answer 106

The auditor communicates significant deficiencies and material weaknesses to those charged with governance and management in writing, by the report release date.

Question 107

What is the best population used to ensure the revenue cycle is operating effectively?

Answer 107

Selecting samples from a population of shipping documents as this is where the transaction is initiated.

Question 108

What would be considered a correction of misstatement?

Answer 108

A change from an accounting principle not in accordance with the applicable reporting framework to an accounting principle in accordance with the reporting framework.

Question 109

What are indicators of material weaknesses?

Answer 109

1. Discovery of any fraud involving senior management, whether material or not
2. Restatements of previously issued F/S to correct material misstatement
3. Identification of any material misstatement during the audit that was not detected by internal control
4. Ineffective oversight of reporting and controls by those charged with governance

Question 110

How would the auditor test the cutoff assertion to ensure sales were recorded in the correct period?

Answer 110

The auditor will analyze invoices issued for the last few days prior to the cutoff period and the first few days following the cutoff period, and verify that all sales transactions were recorded in the proper period. This also helps record unrecorded sales at year-end.

Question 111

When is a contingent liability recognized in the B/S?

Answer 111

If the contingent liability (e.g., unasserted claims) can be estimated and it’s probably, the it can be accrued and recognized in the B/S.

Question 112

When is a contingent liability disclosed only?

Answer 112

if the contingent liability (e.g., unasserted claim) is reasonably possible, then you disclose the nature of the loss and range of estimate or best estimate

Question 113

What is the treatment of a contingent liability where loss is remote?

Answer 113

No disclosure is required for a contingent liability where the loss is remote. If it’s a “guarantee-type” remote loss contingency, then disclosure is required.

Question 114

What are types of guarantee-type remote loss contingencies?

Answer 114

1. Debts of others guaranteed (officers/related party)
2. Obligations of commercial banks under standby letter of credit
3. Guarantees to repurchase receivables (or related property) that have been sold or assigned.

Question 115

What would be the best approach to detect or prevent a control deficiency in the expenditure cycle?

Answer 115

Segregate duties and assign different responsibilities to the AP personnel each quarter within the AP department.

Question 116

What is a procedure performed to determine a control deficiency?

Answer 116

Walk through the process with the process owner. Example select an unpaid invoice and ask to walk through the invoice payment process.

Question 117

How can the auditor test the understandability of presentation and disclosure assertion for the revenue cycle?

Answer 117

1. Examine sample of invoices for proper classification into the appropriate revenue accounts.
2. Auditor reviews trial balance to identify any amounts due from affiliates, such as officers or employees of the company, as this requires specific disclosure.

Question 118

When are disagreements with management and significant audit adjustments communicated to those charged with governance?

Answer 118

The auditor should communicate to those charged with governance any disagreements with management and significant audit adjustments made, whether resolved or not.

Question 119

How can the auditor test fixed assets additions (existence)?

Answer 119

1. The auditor vouch additions to the fixed asset accounts by examining internal documents (e.g., asset requisition form), external evidence (e.g., invoice), and by inspecting the actual asset.
2. The auditor should also consider selecting old fixed assets from the subsidiary ledger and locating those assets to test unrecorded retirements

Question 120

How would the auditor test retained earnings to ensure appropriations comply with loan covenants?

Answer 120

The auditor analyze the retained earnings account since last audit

Question 121

How does the auditor test the rights and obligations assertion of inventory?

Answer 121

The auditor examines paid vendors’ invoices, consignment agreements, and contracts and obtaining confirmation of inventories at locations outside the entity.

Question 122

How can the auditor test that an interest rate swap contract is properly valued at FV in the B/S?

Answer 122

The auditor will test the data used to arrive at the fair value of the interest rate swap contract.

Question 123

How can the auditor verify the interest rate swap contract was properly approved?

Answer 123

The auditor can inspect the minutes of the board of directors’ meeting for approval

Question 124

When are material weaknesses also considered significant deficiencies?

Answer 124

A material weakness is a significant deficiency that results in a reasonable likelihood that a material misstatement in the financial statements will not be prevented or detected/corrected. Not all significant deficiencies will be material weaknesses.

Question 125

What is a Sarbanes-Oxley Act requirement related to the board of directors’ audit committee?

Answer 125

The board of directors must have an audit committee composed entirely of members who are independent and not influenced by management.
independence criteria:
1. cannot accept compensation for consulting or advisory services
2. May not be an affiliated person of the company (a person with the ability to influence financial decisions).

Question 126

When are confirmation of payables performed?

Answer 126

Confirmation of payables are performed in the subsequent period.

Question 127

Is the auditor required to re-communicate significant deficiencies communicated in prior years?

Answer 127

Yes, the auditor is obligated to re-communicate significant deficiencies each year, even if management has acknowledged its understanding of such deficiencies.