AUD 5 Flashcards
Which of the following is a management assertion regarding account balances at the period end?
A. Transactions and events that have been recorded have occurred and pertain to the entity.
B. Transactions and events have been recorded in the proper accounts.
C. The entity holds or controls the rights to assets, and liabilities are obligations of the entity.
D. Amounts and other data related to transactions and events have been recorded appropriately.
C. The entity holds or controls the rights to assets, and liabilities are obligations of the entity.
Explanation - There are 4 assertions applicable to account balances at the period end: (1) existence; (2) completeness; (3) rights or obligations; and (4) valuation and allocation.
Which of the following presumptions is correct about the reliability of evidential matter?
A. Information obtained indirectly from outside sources is the most reliable evidential matter.
B. To be reliable, evidential matter should be convincing rather than persuasive.
C. Reliability of evidential matter refers to the amount of corroborative evidence obtained.
D. An effective internal control structure provides more assurance about the reliability of evidential matter.
D. An effective internal control structure provides more assurance about the reliability of evidential matter.
Explanation - The effectiveness of the internal control structure directly impacts the reliability of the accounting data and financial statements. The more effective the internal control structure, the greater the assurance provided as to the reliability of evidential matter.
An auditor tests an entity's policy of obtaining credit approval before shipping goods to customers in support of management's financial statement assertion of A. Valuation or allocation. B. Completeness. C. Existence or occurrence. D. Rights and obligations.
A. Valuation or allocation.
Explanation - Testing credit approval before shipping goods to customers tests the valuation assertion. This test addresses the collectibility of accounts receivable.
An auditor would most likely review an entity's periodic accounting for the numerical sequence of shipping documents and invoices to support management's financial statement assertion of A. Existence or occurrence. B. Rights and obligations. C. Valuation or allocation. D. Completeness.
D. Completeness.
Explanation - Reviewing the use of and accounting for prenumbered shipping documents and invoices supports management’s financial statement assertion of completeness. The numbering helps assure that transactions do not get lost and thus that all transactions are properly included.
In assessing control risk for purchases, an auditor vouches a sample of entries in the voucher register to the supporting documents.
Which assertion would this test of controls most likely support?
A. Completeness.
B. Existence or occurrence.
C. Valuation or allocation.
D. Rights and obligations.
B. Existence or occurrence.
Explanation - Tests from the accounting record (the voucher register) to the detail are tests of existence/occurrence.
Before applying principal substantive tests to an entity’s accounts receivable at an interim date, an auditor should:
A. Consider the likelihood of assessing the risk of incorrect rejection too low.
B. Project sampling risk at the maximum for tests covering the remaining period.
C. Ascertain that accounts receivable are immaterial to the financial statements.
D. Assess the difficulty in controlling the incremental audit risk.
D. Assess the difficulty in controlling the incremental audit risk.
Explanation - The auditor would consider the difficulty in controlling the incremental audit risk, i.e., the risk that material misstatements will not be detected due to the early testing at interim. This difficulty would be impacted by the effectiveness of internal controls, the presence of rapidly changing business conditions or circumstances, and the availability of relevant information.
An auditor of a nonissuer should design tests of details to ensure that sufficient audit evidence supports which of the following?
A. The planned level of control risk.
B. Management’s assertions that internal controls exist and are operating efficiently.
C. The effectiveness of internal controls.
D. The planned level of assurance at the relevant assertion level.
D. The planned level of assurance at the relevant assertion level.
Explanation - The auditor should consider whether the assessments of the risks of material misstatement at the relevant assertion level in engagement planning are appropriate in light of the auditor’s substantive procedures.
Although the quantity and content of audit documentation vary with each particular engagement, an auditor’s permanent files most likely include
A. Schedules that support the current year’s adjusting entries.
B. Prior years’ accounts receivable confirmations that were classified as exceptions.
C. Documentation indicating that the audit work was adequately planned and supervised.
D. Analyses of capital stock and other owners’ equity accounts.
D. Analyses of capital stock and other owners’ equity accounts.
Explanation - A permanent file contains information that is referred to for more than one audit period. Therefore, an auditor’s permanent files most likely would include analyses of capital stock and other owners’ equity accounts.
An auditor’s documentation should
A. Not be permitted to serve as a reference source for the client.
B. Not contain critical comments concerning management.
C. Show that the accounting records agree or reconcile with the financial statements.
D. Be considered the primary support for the financial statements being audited.
C. Show that the accounting records agree or reconcile with the financial statements.
Explanation - The audit documentation must show that the accounting records have been agreed to or reconciled with the financial statements.
Under which of the following circumstances would the use of the blank form of confirmations of accounts receivable most likely be preferable to positive confirmations?
A. The recipients are likely to sign the confirmations without devoting proper attention to them.
B. Subsequent cash receipts are unusually difficult to verify.
C. Analytical procedures indicate that few exceptions are expected.
D. The combined assessed level of inherent risk and control risk is low.
A. The recipients are likely to sign the confirmations without devoting proper attention to them.
Explanation - Using the blank form of confirmation of accounts receivable provides greater assurance that the recipient of the confirmation has verified that the information is correct. It is more likely to be used when the auditor is concerned that recipients will not devote proper attention to the confirmations.
Which of the following procedures most likely would assist an auditor in determining whether management has identified all accounting estimates that could be material to the financial statements?
A. Inquire about the existence of related party transactions.
B. Determine whether accounting estimates deviate from historical patterns.
C. Confirm inventories at locations outside the entity.
D. Review the lawyer’s letter for information about litigation.
D. Review the lawyer’s letter for information about litigation
Explanation - If the auditor is concerned about identifying all material accounting estimates, the auditor is seeking to discover unrecorded estimates. The auditor is most likely to review the lawyer’s letter for information about litigation. Litigation losses is an area that commonly requires estimates and one in which estimates could be material to the financial statements.
It is also an area that falls outside of the normal financial reporting process and, thus, is more likely to be missed.
Control risk should be assessed in terms of A. Specific control procedures. B. Types of potential irregularities. C. Financial statement assertions. D. Control environment factors.
C. Financial statement assertions.
Explanation - The auditor assesses control risk for the assertions present in the financial statements. Such assertions may be found in the account balance, transaction class, or disclosure components. Based upon the understanding of internal control and the control risk assessments, the auditor determines the nature, timing, and extent of the auditing procedures to be performed.
The scope of an audit is not restricted when an attorney’s response to an auditor, as a result of a client’s letter of audit inquiry, limits the response to
A. Matters to which the attorney has given substantive attention in the form of legal representation.
B. An evaluation of the likelihood of an unfavorable outcome of the matters disclosed by the entity.
C. The attorney’s opinion of the entity’s historical experience in recent similar litigation.
D. The probable outcome of asserted claims and pending or threatened litigation.
A. Matters to which the attorney has given substantive attention in the form of legal representation.
Explanation - A lawyer may appropriately limit the response to matters to which the lawyer has given substantive attention in the form of legal consultation or representation.
A lawyer’s response to an auditor’s inquiry concerning litigation, claims, and assessments may be limited to matters that are considered individually or collectively material to the client’s financial statements. Which parties should reach an understanding on the limits of materiality for this purpose?
A. The auditor and the client’s management.
B. The client’s audit committee and the lawyer.
C. The client’s management and the lawyer.
D. The lawyer and the auditor.
A. The auditor and the client’s management.
Explanation - The client and the auditor should reach an understanding about materiality. This understanding is then communicated to the attorney who will limit his/her response accordingly.
In obtaining written representations from management, materiality limits ordinarily would apply to representations related to
A. Amounts concerning related party transactions.
B. Fraud involving members of management.
C. The availability of financial records.
D. The completeness of minutes of directors’ meetings.
A. Amounts concerning related party transactions
Explanation - The reporting requirements applicable to related party issues implicitly involve materiality considerations in evaluating the fairness of the financial statements.
