Evidence - Purchases, Inventory, and Payroll

Question 1

What substantive test would an auditor conduct when the risk of material misstatement is assessed as low for assertions related to payroll?

Answer 1

Applying analytical procedures and Recalculating payroll accruals

Question 2

What would be considered an effective audit procedure for verification of dividends earned on investments?

Answer 2

Reconciling amounts received with published dividend records

Question 3

What substantive audit procedure would help determine that purchases were properly recorded?

Answer 3

Tracing a sample of purchase orders and the related receiving reports to the purchases journal and the cash disbursements journal

Question 4

What would an continuing auditor do when conducting procedures related to property and equipment when few transactions have occurred during the year?

Answer 4

Obtain an understanding of the related internal controls and perform extensive tests of current year property and equipment transactions

Question 5

How would an auditor obtain evidence related to a company’s equity transactions?

Answer 5

By reviewing the minutes of board of directors meetings

Question 6

What procedure would an auditor use in order to identify unrecorded liabilities?

Answer 6

Vouch a sample of cash disbursements recorded just after year end to receiving reports and vendor invoices

Question 7

What would an auditor do if they are unable to count the securities at the balance sheet date for a client with a large and active investment portfolio?

Answer 7

Request the client to have the bank seal the safe-deposit box until the auditor can count the securities at a subsequent date

Question 8

What is the auditor biggest concern when establishing that dividends are paid to client corporation shareholders?

Answer 8

That dividends are paid to client corporation shareholders who hold stock as of the Record Date

Question 9

What audit procedure would help detect fraud involving an employees manipulation of FICA withholdings?

Answer 9

Multiplication of the applicable FICA rate by each individual’s gross annual taxable earnings

Question 10

What evidence would be most convincing in verifying the amount of goodwill recorded by a client in the current period is correct?

Answer 10

Comparing the recorded amounts of assets acquired and liabilities assumed with the Fair values as evidenced by independent appraisals

Question 11

What procedure should the auditor use involving the audit of a current issue of bonds payable?

Answer 11

Ascertain that the client has obtained the opinion of counsel on the legality of the issue

Question 12

What is the primary concern of an auditor involving capital stock transactions?

Answer 12

That they are properly authorized

i.e. all entries in the capital stock account should be vouched to the minutes of the board of directors’ meetings

Question 13

What explanation would satisfy an auditor who questions management about significant debits to accumulated depreciation?

Answer 13

Plant assets were retired during the current year

i.e. If plant assets were retired during the current year, their carrying amount is removed from the accounts – Accordingly, the asset (plant assets) is credited, accumulated depreciation is debited, and any consideration received and gain or loss are recognized

Question 14

Which one of the management’s financial statement assertion would support an auditors inspection of loan agreements under which an entity’s inventories are pledged?

Answer 14

Classification and Understandability

Question 15

An analysis of what account would best aid in verifying that all fixed assets have been capitalized?

Answer 15

THE Repairs and maintenance account

i.e. the auditor should vouch significant debits from the repairs and maintenance expense account to determine whether any should have been capitalized

Question 16

What ratio would assist in identifying the possible existence of idle equipment or the possibility that equipment has been disposed of without having been written off?

Answer 16

Gross manufacturing equipment cost to units produced

i.e. ratio of gross manufacturing equipment cost to units produced increases if equipment is taken out of production but is not written off

Question 17

How would an auditor gain assurance that all inventory items in a client’s inventory listing schedule are valid?

Answer 17

By vouching items listed in the inventory listing schedule to inventory tags and the auditor’s recorded count sheets

i.e. Validity relates to the existence assertion and the direction of testing should be from the inventory schedule to the inventory tags and ultimately the auditor’s count sheet

Question 18

WHY would an auditor analyze repairs and maintenance accounts?

Answer 18

Primarily to obtain evidence in support of the relevant assertion that all (Expenditures) for property and equipment have not been charged to expense

Question 19

What kind of confirmation should an auditor use when confirming accounts payable?

Answer 19

Positive Confirmation

i.e. Ideally, the blank form of positive confirmation should be used

Question 20

What should the auditor do if statistical sampling methods are used by a client in the taking of its physical inventory?

Answer 20

Observe such test counts as he deems necessary and be satisfied that the sampling plan has statistical validity, that it was properly applied, and that the resulting precision and reliability are reasonable in the circumstances