Chapter 4 Deck 4 Flashcards
Which of the following tests of details most likely would help an auditor determine whether accounts payable have been misstated?
Examining vendor invoices for amounts not reported as purchases is a procedure to determine if accounts payable have been understated (completeness assertion). Accounts payable would be understated for the amounts of purchases that were not reported.
An auditor most likely would analyze inventory turnover rates to obtain evidence concerning management’s assertions about:
An auditor most likely would analyze inventory turnover rates to obtain evidence concerning management’s assertions about valuation and allocation (i.e., if the inventory is becoming older, an obsolescence reserve might be required).
During an audit of an entity’s stockholders’ equity accounts, the auditor determines whether there are restrictions on retained earnings resulting from loans, agreements, or state law. This audit procedure most likely is intended to verify management’s assertions related to:
Restrictions on retained earnings are for contractual or legal appropriation of retained earnings. The purpose is to restrict dividends, and such restrictions should be disclosed in the financial statements.
An insignificant portion of a client’s inventory is in public warehouses. Evidence of the existence of this merchandise can most efficiently be acquired through which of the following methods?
confirmation of such inventory is sufficient because it is insignificant
The purpose of tracing a sample of inventory tags to a client’s computerized listing of inventory items is to determine whether the inventory items:
The directional test of tracing is generally used to test completeness. In this case, tracing the inventory tags to the computerized list of inventory items is a test of the completeness of the inventory list.
Which is true about the auditor’s observation of physical inventory counts?
Observation of physical inventory counts provides evidence about both existence and completeness.
Which of the following does not demonstrate an inappropriate segregation of duties?
Preparing invoices and recording the related receivables are both recordkeeping functions that would not be inconsistent with each other.
Which audit procedure is most likely related to the classification and understandability of the financial statements with respect to inventory?
The pledge or assignment of any inventories should be appropriately disclosed in the financial statements.
An auditor tests an entity’s control of obtaining credit approval before shipping goods to customers in support of management’s financial statement assertion of:
By ensuring that credit approval is obtained before goods are shipped to customers, the auditor is testing management’s assertion that accounts receivable are collectible (valuation or allocation).
Which of the following management assertion is most closely related to the audit objective that verifies all sales have been recorded?
The completeness assertion is most closely related to the completeness audit objective that verifies all sales have been recorded.
Which of the following best describes the auditor’s responsibility with respect to fair values?
The auditor’s overall responsibility is to obtain sufficient appropriate audit evidence to provide reasonable assurance that fair value measurements and disclosures are in conformity with GAAP.
Which of the following procedures most likely would assist an auditor in determining whether management has identified all accounting estimates that could be material to the financial statements?
The auditor should inquire of management concerning pending or threatened litigation, and should obtain a letter from the client’s lawyer to corroborate this information. Included in this letter is either an identification of the omission of any pending or threatened litigation, claims, and assessments, or a statement that the list of such matters (as provided by management) is complete.
The refusal of a client’s attorney to provide information requested in an inquiry letter generally is considered:
A lawyer’s refusal to furnish the information requested in an inquiry letter would be a limitation on the scope of the audit sufficient to preclude an unmodified opinion.
A client’s lawyer is unable to form a conclusion about the likelihood of an unfavorable outcome of pending litigation because of inherent uncertainties. If the litigation’s effect on the client’s financial statements could be material but it is properly disclosed in the financial statements, the auditor most likely would:
A lawyer may be unable to respond concerning the likelihood of an unfavorable outcome of litigation, claims, and assessments or the amount or range of potential loss, because of inherent uncertainties. Even if the effect of the matter on the financial statements could be material, if it is properly disclosed (and supported by available evidence), the auditor will ordinarily issue an unmodified opinion
When auditing related party transactions, an auditor places primary emphasis on:
The auditor should view related party transactions within the framework of existing pronouncements, placing primary emphasis on the adequacy of disclosure.
