Audit Evidence- Specific Audit Areas

Question 1

What is meant by the term kiting?

Answer 1

Transfer at year-end from bank 1 to bank 2. Listed as a DIT on bank 2 but not as o/s check on bank 1. Overstatement of cash at the BS date

Question 2

An auditor observes the mailing of monthly statements to a client’s customers and reviews evidence of follow-up on errors reported by the customers. This test of controls most likely is performed to support management’s financial statement assertions of

Answer 2

Existence or occurrence

Question 3

Describe how the auditor performs the “cutoff test” for sales.

Answer 3

Examine the last few transactions before year-end and the first few after year-end. Agree the entries on the sales journal to the shipping documents (existence); and agree the shipping documents to the sales journal (completeness).

Question 4

Describe how the auditor might address the existence assertion of for inventory in the entity’s possession.

Answer 4

Participate in the client’s count of inventory and perform test counts of selected inventory tags to verify the accuracy of the entity’s counts. (Select a sample of items on the entity’s inventory listing and agree them to the auditor’s test counts.)

Question 5

Identify a few audit procedures that address the existence assertion for fixed assets.

Answer 5

1-Verify that detailed (subsidiary) listing supports general ledger account
2-Examine underlying documents to evaluate any additions
3-Trace proceeds from any disposals (retirements) to cash receipts journal and to bank statement.

Question 6

Identify an audit procedure that addresses the rights and obligations assertion for long-term liabilities.

Answer 6

1-Review loan documents for any restrictive debt covenants to be disclosed.
2-Review the loan documents (or inquire of management) to identify the current portion of long-term debt to be reclassified as a current liability.

Question 7

Identify a few audit procedures that address the valuation assertion for long-term liabilities.

Answer 7

1-Trace related cash receipts (for increases) and disbursements (for decreases) from the accounting records to the bank statement for anydebt activities.
2-Examine underlying loan documents for issuance of new debt and scheduled payments.
3-Recalculate the amortization of any discount or premium involved.

Question 8

Give an example of an audit procedure for completeness of Long-term Liabilities.

Answer 8

1-Verify due dates for payments in the loan agreements
2-Trace cash disbursements from the bank statement to the accounting records
3-Examine canceled notes if paid in full.

Question 9

Identify a few audit procedures that address the existence assertion for long-term liabilities.

Answer 9

1-Obtain copies of new loan agreements for the audit documentation.
2-Verify authorization of new debt in minutes of meetings of those charged with governance.
3-Trace the proceeds received from the accounting records to the bank statement.

Question 10

the lower the numerator.. 1

the lower the denominator… 2

Answer 10

1...the lower the ratio
ex>>> 5/10= .5
4/10=.4
2... the higher the ratio
ex>>> 5/9= .55

Question 11

Decreases in the acceptable level of detection risk result in an…

Answer 11

increase in the assurance to be obtained from substantive testing. Performing substantive tests at year-end, rather than at interim, will provide increased assurance.

Question 12

Apply Rights and Obligations to Inventory balances

Answer 12

• Trace inventory to purchase documents
• Perform search, bank confirms if assets are pledged
• Review consignment agreements

Question 13

Apply Allocation and Valuation to Inventory balances

Answer 13

• Determine replacement cost
• Verify that inventory counts match quantities in acct records
• Evaluate obsolete for adjustment
• AP to evaluate reasonableness and relationships to A/P and CGS

Question 14

Apply Completeness to Inventory balances

Answer 14

• Evaluate counting procedures to make sure all is counted
• Trace counts to acct records
• Identify consignees
• AP to evaluate reasonableness of A/R

Question 15

Approach to prepare list of substantive tests:

Answer 15

Procedures- identify one for each categories in ICORRIIA
Assertions- Ensure at least one test related to each assertion in U-PERCV
Related accounts- Include at least one procedure for each
Certain applicable to all- Read F/S and notes, review minutes, mngmt reps, reconcile TB to support

Question 16

Procedures performed when no response to positive confirmations…

Answer 16

1. 2nd request
2. Ask client to contact ER
3. Review related transactions in subsequent periods - cash receipts
4. Inspect supporting documents (PO’s, shipping)
5. Consider audit adjustment

Question 17

Explain lapping of A/R and detection..

Answer 17

• Post the subsequent collection to initial receivables and take the check
• Detected by comparing the name, amount, dates shown on the customer remittance w/ entries in cash receipts journal and related deposit slip

Question 18

If the objective of an auditor’s test of details is to detect a possible understatement of sales, the auditor most likely would trace transactions from the…

Answer 18

Shipping documents to the sales invoices

Question 19

Tracing sales invoices to shipping documents determines that… (what is the opposite too..)

Answer 19

Invoices to shipping = that sales invoiced were actually shipped (seeking overstatement of sales)
Shipping docs to invoice= that any sales were unrecorded (seeking understatement of sales)

Question 20

Before applying principal substantive tests to an entity’s accounts receivable at an interim date, an auditor should

Answer 20

Assess the difficulty in controlling the incremental audit risk

Question 21

In performing which of the following may an auditor not rely on assistance from internal auditors?

Answer 21

Determining whether or not inventory is properly reported at the lower of cost or market
** OK to ascertain whether controls are in place and functioning properly and do sub proc

Question 22

When would substantive testing of accounts receivable before the balance sheet date be most appropriate?

Answer 22

Internal controls during the remaining period are effective