Auditing Flashcards
During an engagement to prepare financial statements, an accountant was precluded by management from including a statement on each page of the financial statements indicating that no assurance was provided. Which of the following actions would be appropriate?
Issue a disclaimer making clear that no assurance is provided.
It is the document used as the basis for recording sales transactions and updating the accounts receivable master file.
Sales invoice
Which of the following is an audit procedure on cash to test the assertion “existence or occurrence?
Bank confirmation
An auditor is auditing a mutual fund company that uses a transfer agent to handle accounting for shareholders. Which of the following actions by the auditor would be most efficient for obtaining information about the transfer agent’s internal controls?
Review reports on internal control placed in operation and its effectiveness produced by the agent’s auditor.
On January 1, 20X1, Grand Company acquired 460,000 coupons of bonds with a face value per coupon of P100 and a nominal annual interest rate of 2% for P94 each. Issue costs amount to P22,600 in total. The redemption value of the zero-coupon bonds is higher than the par value, giving rise to an implicit interest rate of 5%. The bonds are measured at amortized cost, and interest is received in arrears. What is the carrying value of the bonds as of December 31, 20X1?
P44,507,730
Which of the following procedures would most likely help an auditor identify events after the date of the financial statements that should be disclosed?
Inquire about changes in capital shares that were issued or repurchased.
The following Investment in Trading Securities account appears in the books of SANTIAGO, INC.
DATE
EXPLANATION
DEBIT
CREDIT
2023
Jan. 1
Balance
P5,349,000
Jan. 31
Sold Alvaro Corp. Ordinary Shares
P640,920
March 31
Bought Wilma Corp. Ordinary Shares
365,000
August 1
Sold Bautista Corp. Bonds
675,000
The audit working papers of the preceding year show that the account balance as of January 1, 2023, consisted of the following information regarding Bautista Corp. Bonds.
Bautista Corp. 15% Bonds
600 bonds, P1,000 each, purchased in July 2022, at par Interest dates February 1 and August 1
P600,000
Your examination discloses that on August 1, 2023, SANTIAGO, INC. sold its Bautista Corp. 5% bonds at 110 plus accrued interest.
What is the gain on the sale of Bautista Corp. bonds on August 1, 2023?
P60,000
The unadjusted balance of the Foronda Merchants’ inventory account as of December 31, 20X1, is P8,871,622. A physical inventory count was conducted simultaneously in all stores on December 29 and 30, 20X1. Your review of the list submitted by the accountant disclosed the following:
o Some deliveries made in December 20X1 have not been invoiced and recorded as of year-end. These items had a selling price of P263,824 with a term of 15 days. The corresponding cost was already deducted from the ending inventory.
o Goods on consignment to Foronda Merchants totaling P521,963 were included in the inventory list.
o Some appliances worth P299,966 were recorded twice in the inventory list.
o Goods costing P484,557 were purchased and paid on December 26, 20X1 was received on January 4, 20X2. The supplier shipped the goods on December 28, 20X1, FOB shipping point.
What is the adjusted balance of inventory as of December 31, 20X1?
P8,534,250
Which of the following statements is CORRECT about the performance of audit sampling during the audit of a client?
The level of sampling risk that the auditor is willing to accept affects the sample size.
It is the account that the auditor should examine to ensure that the credits represent all unclaimed wages following each payroll distribution and that the debits only permit payments to workers or transfers back to general cash funds via approved methods.
Unclaimed salaries and wages
The audit objective that states “To determine whether all transactions relating to long-term debts are properly recorded” addresses which of the following assertions?
Completeness
The auditor should insist that a representative of the client be present during the physical examination of securities to:
Acknowledge the receipt of securities returned
On January 1, 20X4, Alejandro Company reported accounts receivable of P2,000,000 and allowance for doubtful accounts of P100,000. The entity provided the following data:
Credit Sales
Write-Offs
Recoveries
20X1
P11,100,000
P260,000
P22,000
20X2
12,250,000
295,000
37,000
20X3
14,650,000
300,000
36,000
20X4
15,000,000
200,000
50,000
The collections from customers during 20X4 totaled P14,000,000, excluding recoveries. Doubtful accounts are provided for as a percentage of credit sales. The entity calculated the percentage annually using the experience of the three (3) years before the current year. What amount should be reported as doubtful accounts expense for 20X4?
P28,000
It is used to generate a flowchart of the logic of a program.
Flowcharting software
Which of the following should a predecessor auditor perform before reissuing a report on financial statements when those financial statements are to be presented on a comparative basis with financial statements audited by another auditor?
Obtain representation letters from management of the former client and the successor auditor.
Evaluate the following cases with respect to the Code of Ethics:
Case I: Ms. Candy, a CPA, is a tenured teacher who is very popular among students. Despite the COVID-19 pandemic, she has diligently provided online consultations to students, including Boy. During that time, communication between Ms. Candy and Boy was done using official email addresses and learning management system accounts. At first, the exchanges were very general, sometimes unrelated to schoolwork (e.g., asking Boy about a sick family member or how he got along with online learning). One day, Boy texted Ms. Candy about more personal feelings, which Ms. Candy politely did not entertain. Ms. Candy immediately informed the Dean about this.
Case II: Mr. Bing, a CPA and Basic Accounting teacher, emails parents using the school’s email to notify them that he is available on weekends and after school to tutor Basic Accounting students online at a reasonable hourly rate. Several of his students have struggled with their lessons, especially adjusting journal entries. Mr. Bing feels that the extra time out of school will benefit the students.
Only Mr. Bing violated the code.
Using laptop computers in conducting financial statement audits may affect the methods used to review the work of staff assistants because:
Working paper documentation may not contain readily observable details of calculations.
Which of the following is correct concerning requirements for auditor communications about fraud?
Fraud that involves senior management should be reported directly to the audit committee regardless of the amount involved.
An auditor established materiality at P40,000 in planning an audit. The auditor received an attorney’s letter indicating that it was probable that each of the three (3) lawsuits would be settled for P30,000. Which of the following actions should the auditor take?
Ask the client to record the liability for the three contingencies
Additions to equipment are sometimes understated. Which of the following accounts would be reviewed by the auditor to gain reasonable assurance that additions are not understated?
Repairs and maintenance expense
When an auditor is unable to inspect and count a client’s investment securities until after the end of the reporting period, the bank where the securities are held in a safe deposit box should be asked to:
Confirm that there has been no access to the box between the end of the reporting period date and security count date.
This procedure entails learning about the entity’s internal control systems and assessing the level of control risk.
Consideration of internal control
Statement 1: Valuation refers to the initial and subsequent measurement of an asset or liability.
Statement 2: Allocation pertains to the distribution of the assets to respective departments.
Which of the following best describes the above statements?
Statement 1 is TRUE, while statement 2 is FALSE.
This program restricts computer access to authorized workers by employing tactics such as granting select users “read-only” access or employing encryption.
Access control and security software
