AUDIT 4

Question 1

Which department’s are responsible for preparing the sales order, approving the sales order, preparing the bill of lading, and preparing the invoice?

Answer 1

1. Sales Department: Prepares the sales order
2. Credit Department: Approves the sales order
3. Shipping Department: Prepares the bill of lading
4. Billing Department: Prepares the invoice

Question 2

Which department should approve write-offs of uncollectible accounts?

Answer 2

The treasurer should approve write-offs of uncollectible accounts.

Question 3

A listing of cash receipts should be sent to which three departments?

Answer 3

The cashier, accounts receivable (billing), and general accounting departments should each receive a copy of the cash receipts listing.

Question 4

What are some common audit procedures related to the revenue cycle?

Answer 4

They may include:

1. Trace a sample of shipping docs. to sales invoices and the sales journal (completeness)
2. Vouch a sample of sales transactions from the sales journal to the shipping documents (existence)
3. Examine sales transactions from shortly before and after year-end for recording in the proper period (cutoff)
4. Confirmation of a sample of AR (existence)
5. Testing of the allowance for uncollectible accounts (valuation)

Question 5

Compare and contrast positive, negative, and blank confirmation.

Answer 5

Positive: You are expected to return the confirmation to the auditor. Should be used when accounts are large, errors are expected, or items are disputed.

Negative: Customer is requested to reply only if amount stated by auditor is incorrect. Should be used when: combined assessed level of inherent and control risk is low, a large number of small balances are being confirmed, and recipients are not expected to disregard the confirmations.

Blank: A positive confirmation that does not include the balance, instead requesting the recipient to provide his information. Blank confirmations provide greater assurance and may result in lower response rates.

Question 6

In a purchase transaction, which departments are responsible for preparing the purchase order, preparing the receiving report, recording the payable, approving the invoice, signing the check, and mailing the check?

Answer 6

Purchasing department: Prepares the purchase order

Receiving Department: Prepares the receiving report

Accounts Payable Department: Records the payable and approves the invoice

Treasurer’s department: Signs and mails the check

Question 7

What documents should be compared before an invoice is approved for payment and why?

Answer 7

The purchase order, receiving report, and vendor invoice should be compared before an invoice is approved for payment. This is to ensure that the company does not pay for goods that were ordered but not received.

Question 8

What are some common audit procedures related to the expenditure cycle?

Answer 8

They might include:

1. Performing a search for unrecorded liabilities (Completeness)
2. Accounts payable confirmations (existence)
3. Examination of purchases before and after year-end for recording in the proper period (cutoff)

Question 9

Describe the procedure performed when an auditor is searching for unrecorded accounts payable.

Answer 9

The auditor should select cash disbursements made SUBSEQUENT to year-end and examine supporting documentation (i.e receiving reports, vendor invoices). The auditor is looking for items that should have been recorded at the balance sheet date, but were not.

Note: Cash disbursements made subsequent to year-end may be identified by reviewing the cash disbursements journal, subsequent bank statements, or the voucher register.

Question 10

When might accounts payable confirmations be used, and to whom would they be sent?

Answer 10

AP Confirmations may be used when:

• Internal control is weak
• There are disputed amounts
• Monthly vendor statements are not available

They would be sent to vendors with small or zero balances, because errors often involve unrecorded liabilities.

Note: Confirmation of recorded AP will not provide evidence regarding unrecorded liabilities, but confirmations sent to vendors with zero (or small) balances might provide such evidence.

Question 11

Define lapping.

Answer 11

Lapping is delaying the recording of cash receipts to conceal the theft of cash.

Question 12

Define kitting. Describe an auditing procedure that would detect kitting.

Answer 12

Kitting is an overstatement of bank balances by transferring cash between banks and reporting the amount in both bank balances simultaneously.

The auditor may detect kitting by reviewing each transfer on the bank transfer schedule. The auditor is looking for a disbursement date per books after year-end and a receipt date before year-end.

Question 13

What are the primary audit procedures used to test the existence, completeness, and valuation of cash?

Answer 13

• Standard bank confirmations sent to all banks with which the client has done business during the year
• Testing of the year-end bank reconciliation

Question 14

What are some common audit procedures related to the inventory cycle?

Answer 14

• Observing the physical inventory count
• Performing test counts and tracing into the inventory report
• Performing cutoff testing of purchases and sales
• Verifying appropriate presentation and disclosure
• Inquiring about obsolete or damaged goods

Question 15

What are some common audit procedures related to the investment cycle?

Answer 15

May include:

1. Confirmation of securities
2. Physical inspection of securities (existence)

Question 16

Explain the auditor’s responsibility when auditing fair values

Answer 16

Obtain sufficient appropriate evidence to provide reasonable assurance that the fair value measures discloses by the client are in conformity with the framework

The auditor is not responsible for predicting future conditions, but must base his or her evaluation on information available at the time of the audit.

Question 17

What are some audit procedures related to PPE?

Answer 17

• Vouching additions and reviewing retirements (existence)
• Reviewing repair and maintenance expense (completeness and classification)
• Performing cutoff tests (cutoff)
• Recalculating depreciation and gain or loss on disposals (valuation)

Question 18

What functions should be segregated related to payroll and personnel? ARC

Answer 18

1. Authorization (Hr, staff, time-keeping and cost accounting)
2. Recording keeping (payroll department)
3. Custody of assets (treasurer)

Question 19

List some common audit procedures for payroll.

Answer 19

• Evaluate seg. of duties

- Test direct deposit transfers

Question 20

What are some common audit procedures related to the debt (financing cycle)?

Answer 20

-Agree debt to ledger

Question 21

What are some common audit procedures related o stockholder’s equity and treasury stock?

Answer 21

Vouch stock transaction to supporting doc,

Review minutes

Review articles of incorporation

Analyze RE since the last audit

Question 22

What is the effect on the auditor’s opinion if a client refuses to permit inquiry of its attorney or if the attorney refuses to respond?

Answer 22

If a client does not permit inquiry of its attorney, the auditor would generally disclaim an opinion or withdraw from the audit.

If a lawyer has devoted substantial attention to litigation but refuses to respond to the auditor’s letter of inquiry, a scope limitation sufficient to preclude an unmodified opinion exists (qualified or disclaimer based on severity)

Question 23

What is the going concern period for FS where the applicable reporting framework is under the guidance of the following:

• FASB
• GASB

Answer 23

FASB: One year after the date the FS are issued (or available to be issued, as applicable)

GASB: One year beyond the date of the FS. GASB further requires that, if a governmental entity currently knows information that may raise substantial doubt shortly thereafter, such information should also be considered.

Question 24

Evidence from what auditing procedures may lead the auditor to conclude that there is a significant doubt about an entity’s ability to continue as a going concern?

ADMITS!

Answer 24

1. Analytical procedures
2. Debt compliance
3. Minutes
4. Inquiry of client’s legal counsel
5. Third parties
6. Subsequent events review

Question 25

What conditions and events may indicate substantial doubt about an entity’s ability to continue as a going concern?

Answer 25

1. Financial difficulties
2. Internal matters, such as labor difficulties, substantial dependence on a particular project
3. Negative trends
4. External matters, such as legal proceedings, new legistation, loss of principal customer, natural disaster

Question 26

What phrases must be included in a going-concern additional (emphasis of matter or explanatory) paragraph?

Answer 26

“substantial doubt” and “going concern”

Question 27

What are the auditor’s responsibilities when evaluating estimates?

Answer 27

They are to:

1. Assess management’s written policies and practices
2. Evaluate the degree of estimation uncertainty with the accounting estimate
3. Verify all material estimates have been developed
4. Determine that accounting estimates are reasonable
5. Ensure that accounting estimates are properly disclosed in conformity with GAAP

Question 28

What procedures might an auditor use to evaluate an estimate?

Answer 28

1. Reviewing and testing management’s procedures
2. Developing an independent estimate for comparative purposes
3. Reviewing subsequent events and transactions that corroborate the estimate value

Question 29

What circumstances would increase the likelihood of a misstatement being considered material?

Answer 29

1. Affects trends in profitability, masks trends, or changes a loss to income
2. Affects compliance
3. Increases MGT compensation
4. Affects significant FS elements
5. Can be determined objectively

Question 30

Give examples of management bias.

Answer 30

1. Selective correction of misstatements brought to management’s attention during the audit
2. The identification by management 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

Question 31

What are the three primary purposes for obtaining written representations from management?

Answer 31

1. To confirm representations explicitly given to the auditor
2. To indicate and document the continuing appropriateness of such representations
3. To reduce the possibility of misunderstanding concerning matters that are subject of the representations

Question 32

What general types of item are included in a management representation letter, and who should sign it?

Answer 32

Include information related to:
-Fs, completeness, fraud, related parties, recognition, measurement, disclosre, subsequent events, issues

Should be signed by the CEO, CFO, and any other members of management who are responsible for and knowledgeable about the items contained in the letter.

Question 33

What are the functions of the audit committee?

Answer 33

• Selects and appoints the independent auditor and sets the audit fee
• Reviews the nature and details of the audit engagement
• Reviews the quality of the auditor’s work
• Reviews the scope of the audit
• Determines that nay recommendations made by the auditor are given proper attnetion
• Maintains lines of communication
• Helps solve any disagreements
• Evaluates the internal control of the company with the help of the indepependent auditor

Question 34

List the items that an auditor is required to communicate to those charged with governance.

Answer 34

• The auditor’s responsibility under GAAS

- Significant audit findings

Question 35

What is an integrated audit?

When is an integrated audit required?

Answer 35

An integrated audit requires the auditor to audit both the FS and IC. The two audits must be performed together, and two opinions will be rendered (one on IC and one on FS). It is required for:

1. All audits of issuers
2. When an issuer is engaged to examine the internal control of a nonissuer.

Question 36

What is a control deficiency?

Answer 36

A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect/correct misstatements on a timely basis.

Question 37

What is a significant deficiency?

Answer 37

It is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention to those charged with governance (responsible for oversight of the company’s FR).

Question 38

What is a material weakness?

Answer 38

A deficiency, or a combination of deficiencies, in internal control over FR, such that there is a reasonable possibility that MM of the company’s annual or interim financial statements will not be prevented or detected/corrected on a timely basis.

Question 39

What is the auditor’s responsibility with respect to control deficiencies identified during a financial statement audit of a nonissuer?

Answer 39

• The auditor has a responsibility to evaluate control deficiencies identified during the audit to determine whether they represent significant deficiencies or material weaknesses.
• Significant deficiencies and material weaknesses should be communicated in writing to management and those charged with governance within 60 days of the report release date.
• The communication with management and those charged with governance should be restricted use.

Question 40

How would an auditor report noncompliance of a law or regulation assuming 1) It has a material effect on the FS 2) there is insufficient evidence or 3) the client refuses to accept a modified report.

Answer 40

1) If not adequately reflected in the FS, a qualified or adverse opinion should be issued.
2) If unable to obtain sufficient evidence of a suspected noncompliance, a qualified opinion or disclaimer of opinion should be issued.
3) If the client refuses to accept a modified report, the auditor should withdraw from the engagement and contract, in writing, those charged with governance.