AUD 4 Flashcards
An auditor concludes that there is substantial doubt about an entity’s ability to continues a a going concern for a reasonable period of time. If the entity’s disclosure is adequate, the auditor may include:
- Neither a disclaimer or a qualification
- Both a disclaimer or a qualification
- Not a disclaimer but a qualification
- A disclaimer but not a qualification
Choice “4” is correct. Yes - No.
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 may be either:
Unmodified (Unqualified) with emphasis-of-matter (explanatory) paragraph, or
Disclaimed.
(Generally, an unmodified (unqualified) opinion is issued, but the auditor is not prohibited from choosing to issue a disclaimer.)
Choice “1” is incorrect. While an unmodified opinion is generally issued, the auditor is not prohibited from choosing to issue a disclaimer; for example, in areas involving a high degree of uncertainty.
Choice “2” is incorrect. An “except for” qualified opinion would be appropriate if the entity’s disclosures were inadequate.
Choice “3” is incorrect, based on the explanation above.
Which of the following disagreements should be communicated by the auditor to those charged with governance?
- Disagreements about the scope of the audit
- Disagreement regarding management’s judgment about accounting estimates for goodwill
- Disagreement in the application of accounting principles relating to software development costs
- Disagreement of the amount of LIFO inventory layer based on preliminary information
Choice “4” is correct. Disagreements based upon preliminary information need not be communicated by the auditor to those charged with governance.
Choice “1” is incorrect. Disagreements about the scope of the audit have to be communicated by the auditor to those charged with governance.
Choice “2” is incorrect. Disagreements with management regarding the application of accounting principles have to be communicated by the auditor to those charged with governance.
Choice “3” is incorrect. Disagreements in the application of accounting principles relating to software-development costs must be communicated by the auditor to those charged with governance.
To obtain assurance that all inventory items in a client’s inventory listing are valid, an auditor most likely would trace:
- Inventory tags noted during the auditor’s observation to items listed in received reports and vendor’s invoices
- Items listed in receiving reports and vendor’s invoices in the inventory listing
- Inventory tags noted during the auditor’s observation to items in the inventory listings
- Items in inventory listing to inventory tags and the auditor’s recorded count sheet
Choice “4” is correct. Tracing from the inventory listing to the inventory tags and the auditor’s recorded count sheets verifies the validity (existence) of the items.
Choice “1” is incorrect. Tracing inventory tags noted during the auditor’s observation to items listed in receiving reports and vendors’ invoices might be used to verify completeness of purchases or payables.
Choice “2” is incorrect. Tracing from receiving reports and vendors’ invoices to the inventory listing are cut-off procedures used to verify completeness of the inventory listing.
Choice “3” is incorrect. Tracing from inventory tags to the inventory listing schedule verifies the completeness of the schedule, not the existence (or validity) of the items.
When communicating internal control matters noted in a financial statement audit of a nonissuer, an auditor’s report issued on significant deficiencies should indicate that:
- Errors or fraud may occur and not be detected because there are inherent limitations in any internal control
- The issuance of an unmodified opinion on the financial statements maybe dependent on corrective follow-up actions
- A material weakness exists when the deficiencies noted were not detected within a timely period by employees in the normal course of performing their assigned functions
4 . The purpose of the audit is to report on the financial statements and not to provide assurance on internal control
Choice “4” is correct. Any report issued on significant deficiencies should indicate that the purpose of the audit was to report on the financial statements and not to provide assurance on internal control.
Choice “1” is incorrect. A statement that errors or irregularities may occur and not be detected due to inherent limitations in internal control is included in the report when an auditor is engaged to express an opinion on internal control, not when the auditor is reporting as part of an audit.
Choice “2” is incorrect. The issuance of an unmodified opinion on the financial statements is never dependent on corrective follow-up action.
Choice “3” is incorrect. A control deficiency (and not necessarily a material weakness) exists when deficiencies are not detected within a timely period by employees in the normal course of performing their assigned functions.
An auditor most likely would limit substantive testing of sales when control risk is low for the occurrence assertion concerning sales transactions and the auditor has already gathered evidence supporting:
- Opening and closing balances of inventory
- Cash receipts and account receivables
- Shipping and receiving activities
- Cutoff of sales and purchases
Choice “2” is correct. Examination of accounts receivable and cash receipts provides the auditor with evidence with respect to both the completeness and the occurrence of sales transactions, thus limiting the need to test sales transactions.
Choice “1” is incorrect. Examination of beginning and ending inventory balances may provide limited evidence of the occurrence of purchases and the cost of goods sold, but not of sales.
Choice “3” is incorrect. Examination of shipping and receiving activities would not necessarily reduce the testing of sales transactions.
Choice “4” is incorrect. Cutoffs of sales and purchases provides evidence regarding the sales occurring close to year-end, not necessarily all sales for the year.
Which of the following controls would a company most likely use to safeguard marketable securities when an independent trust agent is not employed?
- The investment committee of the board of directors periodically reviews investment decisions delegated to the treasurer
- Two company officials jave joint control of marketable securities, which are kept in a safe-box
- The internal auditor and the controller independently trace purchases and sales of marketable securities from the subsidiary ledger to the general ledger
- The chairman of the board verifies the marketable securities once a year on the balance sheet, that are kept in a safe-box
Choice “2” is correct. Joint custody by two company officials over assets like cash and marketable securities helps safeguard the assets. Under joint custody, collusion is required for a defalcation to occur.
Choice “1” is incorrect. Review of investment decisions made by the treasurer might reduce the probability of poor investment policies, but would not be likely to safeguard marketable securities after purchase.
Choice “3” is incorrect. Tracing purchases and sales from the subsidiary ledger to the general ledger would help ensure that all existing securities are recorded in the financial statements, but would not help safeguard marketable securities.
Choice “4” is incorrect. An annual count by the chairman of the board might provide a small safeguard, but the infrequent performance of the control makes it a fairly weak one.
When an auditor does not receive response to a positive request for year-end receivable confirmation request, the auditor would least likely:
- Send a second positive confirmation request
- Examine shipping documents and sales invoices
- Search for subsequent cash receipts
- Increase the assessed level of detection risk for the valuation assertion
Choice “4” is correct. The auditor would only increase detection risk in response to a decrease in inherent and/or control risks, which is not the case here. Additionally, confirmation relates to the existence assertion, not the valuation assertion.
Choice “1” is incorrect. The auditor would be likely to send a second positive confirmation request.
Choice “2” is incorrect. The auditor might choose to perform alternative procedures to support the receivables balance, including examination of shipping documents and sales invoices.
Choice “3” is incorrect. The auditor might choose to perform alternative procedures to support the receivables balance, including searching for subsequent cash receipts.
