Mod 4 Wrong Answers Flashcards
One of the deposits in transit does not appear on the cutoff bank statement (the 9/29/05 deposit for $100), accordingly what are 4 substantive procedures that should be performed?
1 deposit should be traced to cash receipts journal
2 reason for delay should be investigated
3 supporting documents should be inspected
4 deposits should be traced to and from bank reconciliation
And cutoff statement
Balance per bank may be traced to a standard form used to…2
1 confirm account balance information with financial institutions
2 to cutoff statement (on which will appear beginning balance)
One of the checks does not appear on the cutoff statement (check # 988 dated 8/31/05 for $2,200). Accordingly, what 4 substantive procedures should be performed?
1 check should be traced to cash disbursements journal
2 reason for delay should be investigated
3 supporting documents should be inspected
4 both deposits should be traced to and from bank reconciliation
And cutoff statement
The credit for the check that was charged by the bank for an incorrect amount should be investigated on both…
The bank credit memo and cutoff statement
Comparison of the details of the cash receipts journal to the details on the daily slips will reveal…
What date cash actually arrived in the account
Examining the major property and equipment items may identify situations in which…2
1 An item has been retired (often due to replacement) and
2 is no longer available for physical examination
AU-C 500 indicates that effective internal control…
Provides more assurance about the reliability of audit evidence
Than ineffective control
Reliability of audit evidence relates to…
The appropriateness of audit evidence
AU-C 500 states that the auditor concentrates on key factors and assumptions that are…5
1 deviations from historical patterns 2 significant to accounting estimate 3 sensitive to variations 4 subjective 5 susceptible to misstatement and bias
An objective of analytical procedures is identification of…4
1 unusual transactions and events
2 amounts
3 ratios
4 trends that might indicate misstatements
As higher levels of assurance are desired from analytical procedures…
More predictable relationships are required to develop he auditor’s
Expectations
Relationships involving income statement accounts tend to be…
More predictable than relationships involving only balance Sheet accounts
In terms of analytical procedure relationships, relationships involving transactions not subject to management discretion are…
Generally more predictable
Interest expense would yield a high level of evidence through the performance of analytical procedures because interest expense…
Relates to the income statement and because interest expense
Is subject to only limited management discretion
Interest expense is subject to only limited management discretion due to…
Existence of related debt
Overall review stage of an audit consists of…2
1 Reading the financial statements and notes and
2 considering the adequacy of evidence gathered in response to unusual or unexpected balances
Tests of transactions to corroborate management’s financial statement assertions are performed when…2
1 Considering internal control and
2 for substantive procedures of transactions
AU-C 520 indicates for analytical procedures that the relationships involving…
Income statement accounts tend to me more predictable than relationships involving balance sheet accounts
Lead schedules
Aggregate major components to be reported in the financial
statements
The standard form to confirm account balance information with financial institution request information on both…
Cash in bank and collateral for loans
What is a reason that the usefulness of the standard bank confirmation request may be limited?
Bank employee who completes the form will not have access to all
Financial relationships the bank has with the client
The bank employee who completes the bank confirmation form, does not need to…
Have access to client’s cutoff bank statement to complete the
Confirmation
The auditor may analyze the completeness of sales using…
Cash receipts and accounts receivable
What is an example of an auditor analyzing the completeness of sales using cash receipts and accounts receivable?
Auditor may add year end receivables to cash receipts and
Subtract beginning receivables
To obtain an estimate of sales
While shipping as of year end will help assure an accurate cutoff of sales, the receiving activity has…
No necessary relationship to the sales figure
Deposits in transit are…
Those that have been sent to the bank prior to year end, but have
Not been received by the bank as of year end
Checks that have been disbursed per books as of year end, but have…
Not yet been received by the bank as of December 31 are deposits
In transit
Timing of performance of auditing procedures, involves the proper…
Synchronization of their application and thus comprehends the
Possible need for simultaneous examination
The timing of the performance of auditing procedures involves the proper Synchronization of their application and thus comprehends the
Possible need for simultaneous examination of, for example…4
1 cash on hand in banks
2 securities owned
3 bank loans
4 other related items
Asking the client to contact customers to ask that confirmation requests be returned may…
Increase response rates
Lack of a reply to a confirmation request does not necessarily indicate…
That the account needs to be written off
Misstatements may have occurred because respondents are not readily able to confirm account balances. AU-C 505 suggests that in such circumstances respondents’ accounting systems may…
Facilitate the confirmation of single transactions (individual invoices)
Rather than of entire account balances
Negative confirmations are used when…3
1 combined assessed level of inherent and control risk is low
2 large number of small balances is involved
3 auditor has no reason to believe recipients of requests are
unlikely to give them consideration
1 combined assessed level of inherent and control risk is low
2 large number of small balances is involved
3 auditor has no reason to believe recipients of requests are
unlikely to give them consideration
Positive confirmations are used when…2
1 Those conditions are not met
2 accounts are in dispute
A negative form of confirming accounts receivable can be used when…2
Small balances are involved and few accounts are in dispute
Negative confirmation should not be used when…
A substantial number of accounts are in dispute
What procedure reduces risks associated with accepting fax responses to requests for confirmations of receivable?
Verification of sources and contents through telephone calls
Verification of sources and contents through telephone calls will address…
Whether the info on the fax (which may have been sent from
anywhere) is correct
Inspection of faxes is unlikely to…
Reveal forgeries and alterations, even when they’ve occurred
What does it mean when an auditor would use the blank form of confirmations rather than positive confirmations?
One which includes no amount and asks the respondent to
Supply the amount due
If a recipient simply signs a blank confirmation and returns it, the confirmation will…
Have no amount on it and the auditor will know additional
procedures are necessary
When the combined assessed level of inherent risk and control risk is low it is…
Unlikely to lead to blank form of confirmation
When risk is low and when adequate other substantive procedures of details have already occurred…
No confirmation may be necessary
What information would be included in a client’s confirmation letter that is being used to confirm account receivable balances rather than individual invoices?
Including details of the account is likely to make it easier for
customer to respond in meaningful manner
In a client’s confirmation letter being used to confirm accounts receivable balances rather than individual invoices, the auditor does not…
Does not enclose a letter requesting information be supplied
What strategy would improve the response rate for confirmation of accounts receivable?
Including list of items or invoices that constitute the account
balance makes it easier for respondent to reply
There is no research available on response rates to confirmations indicating that…
Requesting a fax or email reply or threatening a second request
Is likely to improve response rate
Analysis of inventory turnover rates will provide the auditor with evidence on…5
Slow moving, excess, defective and obsolete items included in
Inventories
These items may be improperly valued
Requiring a client representative acknowledge the receipt of securities will…
Eliminate any question concerning CPA’s responsibility for any
Subsequent missplacement or misappropriation of securities
The client’s representative will generally not help…
The CPA detect fraudulent securities
Identify the best procedure for testing unrecorded retirements of equipment
Selecting items from accounting records and attempting to
Locate them
Selecting items from the accounting records and attempting to locate them will reveal…
Unrecorded retirements when items cannot be located
Beginning with an item is unlikely to reveal…
A situation where an unrecorded retirement has occurred
Experience has indicated that overstated income is more of a risk than…
Understated income
The completeness assertion focuses on whether payables have been omitted, thereby…
Overstating income
Payables are most frequently simply valued at…
Cost of the related acquisition
Comparison of payroll costs with entity standards or budgets will generally be…
Included in the audit program as test of overall payroll
reasonableness
What procedure would an auditor most likely perform when auditing payroll?
Comparison of payroll costs with entity standards or budgets
Observing entity employees during a payroll distribution is generally…
Only included in audit program when internal control is weak
Dividend record books produced by investment advisory services…
Provide summaries of dividends paid for various services
Dividend record books produced by investment advisory services provide summaries of dividends paid for various securities, and an auditor is able to…
Compare the reasonableness of client’s recorded dividend income
From investments with this information
Auditor’s in general do not determine the reasonableness of dividend income by…
Examining stock indentures or stock ledgers
Materiality considerations do not apply to…4
1 management’s acknowledgement of its responsibility for fair
Presentation of financial statements
2 availability of all financial records
3 completeness/availability of all minutes + meeting of
stockholders, directors
4 communication from regulatory agencies
Materiality considerations relate to…3
1 losses from purchase commitments
2 compensating balances
3 obsolete inventory
Professional standards state that management refusal to furnish written representations constitutes…
A limitation on scope of the auditor’s examination sufficient to
Preclude an unqualified opinion in all cases
A management representation letter is meant to…
Reduce the possibility of misunderstanding concerning
Management’s responsibility for financial statements
AU-C 501 states that an attorney may appropriately limit…
His response to matters which he has given substantive attention
In form of legal consultation or representation
It generally will not be possible to determine whether a particular transaction was consummated on terms equivalent to those with unrelated parties. Therefore the auditor…
May be required to express a qualified or adverse opinion
When such an unsubstantiated disclosure is included
Procedure auditor would perform to obtain evidence about occurrence of subsequent events:
An auditor will inquire of officers and other executives having responsibility for financial and accounting matters whether…
Any unusual adjustments have been made during the period
From the balance sheet date to the date of inquiry
Identify an auditor’s responsibility when a client refuses to adjust recently issued financial statements for a subsequent event related to bankruptcy of entity’s principal customer:
If the client refuses to make disclosures, AU-C 560 requires the auditor…
Notify each member of the board of directors of such refusal
Auditor will take further steps to prevent future reliance on audit
Report
Identify an auditor’s responsibility when a client refuses to adjust recently issued financial statements for a subsequent event related to bankruptcy of entity’s principal customer:
If the client refuses to make disclosures, AU-C 560 requires the auditor to notify each member of the board of directors of such refusal and take steps to rely on the audit report. The auditor will then…
Notify the clients and regulatory agencies that the report should
Be associated with financial statements
Identify an auditor’s responsibility when a client refuses to adjust recently issued financial statements for a subsequent event related to bankruptcy of entity’s principal customer:
It is less likely at…
All creditors will be informed
Identify an auditor’s first responsibility upon discovering six months after completion of an audit that engagement personnel failed to confirm several of client’s material accounts receivable balances:
The auditor must first…
assess importance of omitted procedures to Auditor’s ability to
support previously expressed opinion
Considering whether anyone is relying on or is likely to rely on the unqualified opinion is…
Made after assessing the importance of the omitted procedures
