Auditing 2 Flashcards
Restrictions imposed by a client prohibit the observation of physical inventories, which account for an extremely significant portion of total assets (65%). Alternative audit procedures can’t be applied, although the auditor was able to examine satisfactory evidence for all other items in the financial statements. What kind of opinion should the auditor issue?
A disclaimer of opinion.
Scope limitations relating to such a pervasive portion of the financial statements are likely to result in a disclaimer of opinion.
Negative assurance is not permissible in?
Reports based upon an audit of the interim financial statements of a closely held business entity.
When an audit is performed, negative assurance is not to be provided, regardless of whether the financial statements are for a fiscal or interim period.
Analytical procedures used in risk assessment for an audit should focus on identifying?
Areas that may represent specific risks relevant to the audit.
The objectives of analytical procedures during risk assessment are to identify aspects of the entity of which the auditor was unaware and assist in assessing the risks of material misstatement (to help determine the nature, timing and extent of audit tests).
Proper segregation of functional responsibilities calls for separation of the?
Authorization, recording, and custodial functions.
Proper segregation of the functional responsibilities requires separation of (1) authorization, (2) recording, and (3) custodial functions. Incompatible functions are those that place any person in a position both to perpetrate and to conceal errors and irregularities. Thus, those that authorize transactions must be separated from those who have custody of any related assets.
Before reissuing a report which was previously issued on the financial statements of a prior period, a predecessor auditor should?
Obtain a letter of representation from the successor auditor.
The professional standards state that a predecessor auditor should obtain a letter of representation from the successor auditor. The predecessor auditor must also read the current financial statements and compare them to the prior period statements.
Comfort letters are ordinarily addressed to?
Underwriters of securities.
Comfort letters, also referred to as letters for underwriters, are ordinarily addressed to underwriters.
After making inquiries about credit granting policies, an auditor selects a sample of sales transactions and examines evidence of credit approval. This test of controls most likely supports management’s financial statement assertion(s) of ?
Valuation or allocation
A lack of approval may lead to a question as to the value of receivables (valuation)
An auditor’s purpose in reviewing the renewal of a note payable shortly after the balance sheet date most likely is to obtain evidence concerning management’s assertions about ?
Presentation and disclosure
The renewal of the note may provide an auditor with information on whether the note should be presented as a current or noncurrent liability.
If the auditor believes that required disclosures of a significant nature are omitted from the financial statements under examination, the auditor should decide between issuing?
A qualified opinion or an adverse opinion.
Material disclosures required by GAAP, if omitted, cause the financial statements to be in violation of GAAP. When the financial statements are materially affected by a departure from GAAP, the auditor should express a qualified or an adverse opinion.
Some firms which dispose of only a small part of their total output by consignment shipments fail to make any distinction between consignment shipments and regular sales. What would suggest that goods have been shipped on consignment?
Large debits to accounts receivable and small periodic credits.
When consignment sales are shipped as regular sales, accounts receivable would be debited for large amounts. However, because the consignee is under no obligation to pay for the goods until they are sold, accounts receivable would be credited in small periodic amounts.
The audit working papers often include a client-prepared, aged trial balance of accounts receivable as of the balance sheet date. This aging is best used by the auditor to?
Estimate credit losses.
Aging accounts receivable evaluates the adequacy of the allowance for doubtful accounts (i.e., to estimate credit losses).
