Chapter 4 Set 1 Flashcards
Which of the following is a true statement regarding documentation requirements for analytical procedures?
When an analytical procedure is used as the principal substantive test of a significant financial statement assertion, the auditor is required to document both the auditor’s expectation and the factors considered in developing that expectation.
Which of the following comparisons would an auditor most likely make in evaluating an entity’s costs and expenses?
The most likely analytical review procedure involving costs and expenses would be to compare the current year’s payroll expense (average amount per employee) to the prior year, taking into consideration an average increase in wage rates. This is a very effective technique in auditing payroll expense.
An auditor’s analytical procedures most likely would be facilitated if the entity?
An auditor’s analytical procedures are facilitated when an entity uses a standard cost system with variance reports because the comparison of actual to budget will already have been performed. In addition, it is likely that management will already be aware of significant variations from budget and will be better able to address any questions the auditor may have.
In auditing intangible assets, an auditor most likely would review or recompute amortization and determine whether the amortization period is reasonable in support of management’s financial statement assertion of?
Assertions about valuation and allocation deal with whether assets, liabilities, and equity interests have been included in the financial statements at appropriate amounts. Recalculation of the amortization and review of the amortization period would test the valuation and allocation assertion.
What are analytical procedures?
Analytical procedures involve comparison of recorded amounts, or ratios developed from recorded amounts, to expectations developed by the auditor. (An analytical procedure involves comparison of an independently developed expectation to a recorded amount) Comparing an estimate of sales (developed based on a trend analysis) to the recorded amount is an analytical procedure
From most reliable to least reliable, list the types of audit evidence:
1) Auditor’s direct personal knowledge (obtained through observation, examination, inspection, or recalculation)
2) External evidence (exp. confirmation of account information)
3) Internal evidence
4) Oral evidence (inquiries of management)
Auditors try to identify predictable relationships when applying analytical procedures. Relationships involving transactions from which of the following accounts most likely would yield the highest level of evidence?
Income statement accounts tend to be more predictable than balance sheet accounts, and therefore interest expense would likely yield a higher level of evidence than the allowance for doubtful accounts, accounts receivable, or accounts payable.
Which of the following documents are examples of audit evidence generated by the client?
Shipping documents and receiving reports are internally-generated evidence, since they are created by the client rather than received from independent sources outside the enterprise.
In determining whether transactions have been recorded, the direction of the audit testing should be from the?
To determine whether transactions have been recorded (completeness assertion), the auditor should trace from the source documents to the accounting records (general ledger, trial balances, etc.).
The objective of tests of details of transactions performed as substantive tests is to?
Detect Material Misstatement (Dollar$ amounts) in the Financial Statements
Analytical procedures are most appropriate when testing which of the following types of transactions?
Relationships involving income statement accounts tend to be more predictable than relationships involving only balance sheet accounts because income statement accounts represent transactions over a period of time, whereas balance sheet accounts represent amounts as of a point in time. As a result, analytical procedures are more appropriate for operating expense accounts.
Which of the following procedures would an auditor most likely perform when auditing the statement of cash flows?
To audit the statement of cash flows, the auditor reconciles the amounts on the statement to amounts on other financial statements.
When applying analytical procedures during an audit, which of the following is the best approach for developing expectations?
Identifying reasonable explanations for unexpected differences before talking to client management helps the auditor in assessing if management’s explanation is reasonable. Management’s explanation should always be corroborated with other evidence.
Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?
A change in capital stock that is recorded after the year end is an example of a subsequent event that might require disclosure in the footnotes to the financial statements.
What do Rights and Obligations refer to?
Assertions about rights and obligations deal with whether assets are the rights of the entity and liabilities are the obligations of the entity.
