Introduction to Auditing Individual Areas Flashcards
In verifying the amount of goodwill recorded by a client, the most convincing evidence which an auditor can obtain is by comparing the recorded value of assets acquired with the
Assessed value as evidenced by tax bills.
Seller’s book value as evidenced by financial statements.
Insured value as evidenced by insurance policies.
Appraised value as evidenced by independent appraisals.
Appraised value as evidenced by independent appraisals.
This answer is correct because identifiable assets acquired in a “purchase” business combination should be recorded at their appraised value
Which of the following pairs of accounts would an auditor most likely analyze on the same working paper?
Notes receivable and interest income.
Accrued interest receivable and accrued interest payable.
Notes payable and notes receivable.
Interest income and interest expense.
Notes receivable and interest income.
The requirement is to identify the most likely pair of accounts to be analyzed on the same working paper. Answer (a) is correct because an auditor will often consider interest income with notes receivable because the interest is earned on those notes and therefore closely related. Answer (b) is incorrect because interest receivable relates to an asset account (notes receivable) while accrued interest payable relates to a liability account (notes payable) and accordingly one would expect separate working papers. Answer (c) is incorrect because notes payable and receivable are entirely separate accounts. Answer (d) is incorrect because interest income relates to interest-bearing securities while interest expense relates to debt accounts.
In testing long-term investments, an auditor ordinarily would use analytical procedures to ascertain the reasonableness of the
Completeness of recorded investment income.
Classification between current and noncurrent portfolios.
Valuation of marketable equity securities.
Existence of unrealized gains or losses in the portfolio.
Completeness of recorded investment income.
The requirement is to determine the most likely use of analytical procedures when testing long-term investments. Answer (a) is correct because the predictable relationship between long-term investments and investment income creates a situation in which analytical procedures may provide substantial audit assurance. Answer (b) is incorrect because the classification between current and noncurrent portfolios may be expected to fluctuate in an unpredictable manner as investment goals and the environment change. Answers (c) and (d) are incorrect because the valuation of marketable equity securities at the lower of cost or market and unrealized gains or losses do not result in a predictable relationship on which analytical procedures may provide effective results.
Which of the following is not an assertion associated with account balances at the end of the period?
Valuation and allocation.
Rights and obligations.
Classification.
Existence.
Classification.
“Classification” is included among the five assertions associated with “classes of transactions and events for the period under audit,” as identified by GAAS.
Confirmation procedures applicable to assets (e.g., accounts receivable) fundamentally address which assertion associated with account balances at the end of the period?
Existence.
Completeness.
Presentation and disclosure.
Valuation and allocation.
Completeness.
Presentation and disclosure.
Valuation and allocation.
Existence.
GAAS indicate that external confirmations are frequently used to verify account balances. In doing so, they provide stronger evidence for the existence assertion than for the other assertions identified.
There are certain substantive auditing procedures that might appropriately be performed when auditing any element of the financial statements, particularly balance-sheet elements. Which of the following is not a substantive procedure potentially applicable to every balance-sheet element?
Reviewing the accounting records for anything that appears to be unusual.
Performing tests of control to evaluate the effectiveness of relevant controls.
Making appropriate inquiries of management or other client personnel about matters related to the particular balance-sheet element.
Agreeing the financial statement elements to the underlying accounting records, such as the entity’s general ledger.
Performing tests of control to evaluate the effectiveness of relevant controls.
Tests of control are not a “substantive” procedure.
