AUD Becker A4 - Performing Further Procedures, Forming Conclusions, and Communications Flashcards
Which of the following is not an audit procedure that the independent auditor would perform
concerning litigation, claims, and assessments?
A. Obtain assurance from management that it has disclosed all unasserted claims that
the lawyer has advised are probable of assertion and must be disclosed.
B. Confirm directly with the client’s lawyer that all claims have been recorded in the
financial statements.
C. Inquire of and discuss with management the controls adopted for identifying,
evaluating, and accounting for litigation, claims, and assessments.
D. Obtain from management a description and evaluation of litigation, claims, and
assessments existing at the balance sheet date.
Choice “2” is correct. The independent auditor would not confirm directly with the client’s lawyer that all claims have been recorded in the financial statements. Management has the responsibility to include all claims in the financial statements, not the lawyers. The purpose of a legal letter is to obtain outside corroboration of the information furnished by management concerning litigation, claims, and assessments.
Choice “1” is incorrect. The auditor should obtain assurance from management that it has disclosed all unasserted claims that the lawyer has advised are probable of assertion and must be disclosed.
Choice “3” is incorrect. The auditor should inquire of and discuss with management the controls adopted for identifying, evaluating, and accounting for litigation, claims, and assessments.
Choice “4” is incorrect. The auditor should obtain from management a description and evaluation of litigation, claims, and assessments existing at the balance sheet date.
A successor auditor discovers a possible misstatement in a client’s financial statements
reported on by a predecessor auditor. Which of the following actions should the successor
auditor take next?
A. Have the client’s internal auditor perform an examination to determine if a
misstatement exists.
B. Require the client to restate its financial statements before proceeding with the audit.
C. Advise the client to inform its audit committee of the possible misstatement.
D. Ask the client to arrange a meeting of the predecessor auditor, management, and the
successor auditor to discuss the matter.
Choice “4” is correct. When a successor auditor discovers a possible misstatement in a client’s financial statements reported on by a predecessor auditor, the successor auditor should ask the client to arrange a meeting of the predecessor auditor, management, and the successor auditor to discuss the matter.
Choice “1” is incorrect. The external auditor (not internal auditor) should perform procedures to determine whether a misstatement exists.
Choice “2” is incorrect. If, after further discussion and evidence has been obtained, there is a misstatement in the prior financial statements, the auditor should advise the client to restate its financial statements. This would occur after the meeting of the predecessor auditor, management, and the successor auditor.
Choice “3” is incorrect. When a successor auditor discovers a possible misstatement in a client’s financial statements reported on by a predecessor auditor, the first step is to arrange a meeting to discuss the matter. The audit committee will typically be notified after the meeting has occurred and after procedures confirm that a misstatement exists.
The sampling unit in a test of controls pertaining to the existence of payroll transactions ordinarily is a (an): A. Employee Form W-2. B. Clock card or time ticket. C. Employee personnel record. D. Payroll register entry.
Choice “4” 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.)
Choices “1” and “3” 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.
Choice “2” 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.
Two assertions for which confirmation of accounts receivable balances provides primary evidence are: A. Completeness and valuation. B. Rights and obligations and existence. C. Valuation and rights and obligations. D. Existence and completeness.
Choice “2” is correct. Two assertions for which the confirmation of accounts receivable balances provides primary evidence are rights and obligations (does the client have a right to the receivable?) and existence (does the receivable really exist?).
Choices “1”, “3”, and “4” are incorrect. Confirmation of receivables does not provide evidence about completeness, since the sample begins with recorded receivables. (To test completeness, we would be looking for unrecorded receivables.) In addition, confirmation of receivables does not necessarily provide evidence related to the valuation assertion. While the existence of the receivables is confirmed, their collectibility is not.
Which is true about the auditor’s observation of physical inventory counts?
I. It can provide evidence supporting the existence assertion.
II. It can provide evidence supporting the completeness assertion.
A. Neither I nor II are true.
B. Both I and II.
C. II only.
D. I only.
Choice “2” is correct. Observation of physical inventory counts provides evidence about both existence and completeness. Observing the inventory provides evidence that it physically exists; observing the actual count provides evidence regarding completeness (i.e., does it appear that the client is doing a careful, accurate, and complete job of counting all of the inventory?).
Choices “4”, “3”, and “1” are incorrect, based on the above explanation.
Which of the following explanations most likely would satisfy an auditor who questions
management about significant debits to the accumulated depreciation accounts?
A. Plant assets were retired during the year.
B. The prior year’s depreciation expense was erroneously understated.
C. Overhead allocations were revised at year-end.
D. The estimated remaining useful lives of plant assets were revised upward.
Choice “1” is correct. A debit to accumulated depreciation decreases the balance in that account. The retirement of plant assets necessitates the removal (decrease) of accumulated depreciation related to the retired asset by debiting accumulated depreciation.
Choice “2” is incorrect. If the prior year’s depreciation expense were understated (i.e., too low), the entry to correct the error would be a credit to accumulated depreciation.
Choice “3” is incorrect. Revision of overhead allocations would not result in a debit to accumulated depreciation.
Choice “4” is incorrect. Remember that correction of an estimate is given prospective, not retroactive, treatment. Therefore, there would not be any decrease in the accumulated depreciation taken in previous years, although future credits would be lower than previous credits had been.
Which of the following procedures represents a weakness in internal controls for payroll?
A. The accounting department wires transfers funds to the payroll bank account. The
transfer is based on totals from the payroll department summary.
B. The payroll clerk distributes signed payroll checks. Undistributed checks are returned
to the payroll department.
C. The payroll department prepares checks using a signature plate. The treasurer
supervises the process before payroll checks are distributed.
D. The payroll department prepares checks. The chief financial officer signs the payroll
checks.
Choice “2” is correct. Unclaimed payroll checks should be returned to an independent party for follow up. Returning such checks (assets) to the payroll department (recordkeeping) represents an inadequate segregation of duties.
Choice “1” is incorrect. It is acceptable for the accounting department to set up the transfer of funds into the payroll account, since the accounting department does not have access to the actual funds.
Choice “3” is incorrect. The treasurer’s supervision is crucial in this choice, serving to separate the recordkeeping function (payroll department) from the custodial function (the treasurer).
Choice “4” is incorrect. It is an appropriate segregation of duties for the payroll department to prepare the checks, while the chief financial officer signs them. This separates the recordkeeping function from the custodial function.
In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely
reviews the entity’s aging of receivables to support management’s financial statement
assertion of:
A. Existence.
B. Valuation and allocation.
C. Rights and obligations.
D. Completeness.
Choice “2” is correct. In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity’s aging of receivables to support the assertion of valuation and allocation (i.e., to determine whether the allowance for doubtful accounts properly adjusts the receivables balance to net realizable value).
Choice “1” is incorrect. Evaluating the adequacy of the allowance for doubtful accounts does not pertain to existence. To support the assertion of existence, an auditor would most likely confirm accounts receivable.
Choice “3” is incorrect. The assertion of rights and obligations relating to accounts receivable would be supported by examining appropriate supporting documentation, not by evaluating the allowance for doubtful accounts.
Choice “4” is incorrect. An auditor would trace from shipping records to the sales journal and the accounts receivable ledger to determine if all shipments were properly recorded as sales (completeness assertion).
Which of the following events occurring in the year under audit would most likely indicate
that internal controls utilized in previous years may be inadequate in the year under audit?
A. The frequency of accounts payable check runs was changed from biweekly to weekly.
B. The chief financial officer waived approvals on all checks to one vendor to expedite
payment.
C. The audit committee chairperson unexpectedly resigned during the year under audit.
D. The entity announced that the internal audit function would be eliminated after the
balance sheet date.
Choice “2” is correct. Vouchers should be approved before payment occurs. Overriding this control to expedite payment may result in unauthorized payments being made. The auditor would need to consider this change in evaluating current controls and determining the nature, timing, and extent of testing.
Choice “1” is incorrect. Changing the frequency of the accounts payable check runs from biweekly to weekly would not automatically imply that controls are inadequate. The auditor would need to review the new procedures to determine whether adequate controls were still in place.
Choice “3” is incorrect. Resignation of the audit committee chairperson would not imply that internal controls are less adequate than in the past, as long as a new, competent person steps up to become chair.
Choice “4” is incorrect. If the internal audit function is being eliminated after the balance sheet date, there would be little effect on the current year’s audit.
An auditor is testing a client’s pension benefit obligation. Which of the following types of
evidence would be most appropriate for determining that the financial statement balance is
fairly stated?
A. A client-prepared schedule showing accounting entries made to the general ledger
balance.
B. An actuarial valuation obtained by an outside firm.
C. Confirmation of payments received by retirees.
D. Analytical procedures that compare last year’s balance to this year’s balance.
Choice “2” is correct. An actuarial valuation obtained by an outside firm would be most appropriate in determining that the pension benefit obligation is fairly stated. An actuarial valuation calculates the fair value of the obligation based on several factors (i.e., projected rate of wage increases, expected retired date, etc.).
Choice “1” is incorrect. A client-prepared schedule showing accounting entries made to the general ledger balance would not be considered the most appropriate evidence for determining that the client’s pension benefit obligation is fairly stated because the evidence is internally produced.
Choice “3” is incorrect. Confirmation of payments received by retirees would not be considered the most appropriate in determining that the client’s pension benefit obligation is fairly stated. Obligations represent amounts owed. Payments made to retirees should no longer be represented as an amount owed by the entity.
Choice “4” is incorrect. Analytical procedures would not be considered the most appropriate evidence in determining that the client’s pension benefit obligation is fairly stated. Analytical procedures often are best used for predictable relationships, such as income statement accounts rather than balance sheet accounts.
An auditor concluded that no excessive costs for idle plant were charged to inventory. This
conclusion most likely related to the auditor’s objective to obtain evidence about the
financial statement assertions regarding inventory, including understandability and
classification, and:
A. Rights and obligations.
B. Existence.
C. Completeness.
D. Valuation and allocation.
Choice “4” is correct. An auditor reviews the overhead allocation to determine that no excessive costs for idle plant were charged to inventory. This is one of the procedures performed by an auditor to determine that the inventory balance is properly valued (assertion of valuation and allocation).
Choice “1” is incorrect. Rights and obligations pertain to ownership of assets and liabilities. The allocation of overhead costs to inventory does not affect this assertion.
Choice “2” is incorrect. Existence relates to whether assets, liabilities, and equity interests exist. The allocation of overhead costs to inventory does not affect this assertion.
Choice “3” is incorrect. Completeness relates to ensuring that all assets, liabilities, and equity interests are properly included in the financial statements. The allocation of overhead costs to inventory does not affect this assertion.
A test of a payroll system involved comparing an individual’s number of overtime hours a
week with an average of weekly overtime during a similar period in a prior year and
evaluating the results. This is an example of what type of test?
A. Reasonableness test.
B. Range test.
C. Category test.
D. Detail test.
Choice “1” is correct. In a reasonableness test, data in two or more fields are checked for consistency. Comparing overtime hours in the current period to a prior period is one type of reasonableness test.
Choice “2” is incorrect. A range test identifies amounts that fall outside a predetermined range.
Choice “3” is incorrect. A category test is not a commonly used term when discussing application controls.
Choice “4” is incorrect. A test of details is one in which specific details are evaluated, whereas in a reasonableness test, two different fields are compared. A test of details with respect to overtime hours might involve looking at time sheets for that week, for example.
To which of the following matters would materiality limits not apply in obtaining written
management representations?
A. Reductions of obsolete inventory to net realizable value.
B. The disclosure of compensating balance arrangements involving related parties.
C. Losses from purchase commitments at prices in excess of market value.
D. The availability of minutes of stockholders’ and directors’ meetings.
Choice “4” is correct. Management’s representations may be limited to matters that are considered either individually or collectively material to the financial statements, provided management and the auditor have reached an understanding of the limits of materiality for this purpose. Such limitations would not apply to those representations that are not directly related to amounts included in the financial statements, such as management’s acknowledgment of its responsibility for the financial statements, availability of financial records, and completeness and availability of minutes.
Choice “1” is incorrect. The reduction of obsolete inventory to net realizable value is directly related to amounts in the financial statements and thus is subject to materiality limits.
Choice “2” is incorrect. The disclosure of compensating balances is directly related to amounts in the financial statements and thus is subject to materiality limits.
Choice “3” is incorrect. Losses from purchase commitments are directly related to amounts in the financial statements and thus are subject to materiality limits.
Which of the following is true regarding significant deficiencies in internal control?
A. Auditors must search for them.
B. They must be included in the financial statements.
C. Auditors must communicate them to management and to those charged with
governance.
D. They must be disclosed in footnotes.
Choice “3” is correct. The auditor is required to communicate to management and to those charged with governance (the audit committee) any significant deficiencies in internal control that the auditor observes.
Choice “1” is incorrect. The auditor is not obligated to search specifically for significant deficiencies in internal control.
Choice “2” is incorrect. Significant deficiencies in internal control are not typically included in the financial statements, as they relate to controls and not to the presentation and disclosure of financial information.
Choice “4” is incorrect. Significant deficiencies in internal control are not typically included in the footnotes to the financial statements, as they relate to controls and not to the presentation and disclosure of financial information.
In searching for unrecorded liabilities, an auditor most likely would examine the:
A. Receiving reports for items received before year-end, but not yet recorded.
B. Cutoff bank statement for deposits recorded in the books, but not by the bank.
C. Files of purchase requisitions for items ordered just before the year-end.
D. Details of accounts receivable confirmations that are classified as “exceptions.”
Choice “1” is correct. In searching for unrecorded liabilities, an auditor most likely would examine the receiving reports for items received before year-end, but not yet recorded.
Choice “2” is incorrect. An examination of a cutoff bank statement for deposits recorded in the books, but not by the bank, is performed to search for overstatement of cash due to kiting. The search for unrecorded liabilities does not include procedures related to deposits recorded in the books. The search for unrecorded liabilities includes looking at cash disbursements after year-end.
Choice “3” is incorrect. Of the answer choices, examining the file of purchase requisitions for items ordered just before year-end is not the best procedure to perform to search for unrecorded liabilities because it may not represent a liability as of year-end. For example, an item may have been ordered but not yet shipped from the vendor as of year-end.
Choice “4” is incorrect. Exceptions on accounts receivable confirmations most likely relate to the accounts receivable and sales accounts rather than unrecorded liabilities.
