Must know refreshers not covered in the AUD Text

Question 1

The equity method:

MUST REVIEW :

Financial 3 lecture in the Becker Financial materials.

Answer 1

Under equity method accounting, dividends are recorded as a reduction of the investor’s investment in the balance sheet,

the amortization of the excess of the investor’s cost over the investment’s underlying book value reduces the investor’s income from the equity method investment. If amortization is calculated incorrectly (i.e., the amortization is too high), this could lower the return on the investment.

Question 2

Which procedures would be most appropriate for testing the completeness assertion as it applies to inventory?

Answer 2

Performing cutoff procedures provides assurance that goods in transit (shipped or received) are appropriately included or excluded from inventory and this procedure is most appropriate for testing the completeness assertion.

Scanning perpetual inventory, production, and purchasing records would only include transactions that have been recorded. The completeness assertion is focused on unrecorded transactions.

Question 3

Whats an example of a procedure to test the completeness of A/P for understatement?

Answer 3

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.

Question 4

Some equity account questions are about disclosure assertions, NOT account balance disclosures. 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

Answer 4

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.

Question 5

Does observation of physical inventory counts gives evidence for which assertions?

Answer 5

Observation of physical inventory counts provides evidence about both existence and completeness.