Performing Specific Procedures to Obtain Evidence -- Recalculation and Re-performance

Question 1

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

A. Valuation and allocation

B. Existence

C. Completeness

D. Rights and obligations

Answer 1

A.

Amortization allocates the cost of the intangible to the periods in which the benefit is received and yields an appropriate valuation of the intangible in those periods.

Question 2

Which of the following auditing procedures most likely would provide assurance about a manufacturing entity’s inventory valuation?

A. Testing the entity’s computation of standard overhead rates

B. Obtaining confirmation of inventories pledged under loan agreements

C. Reviewing shipping and receiving cutoff procedures for inventories

D. Tracing test counts to the entity’s inventory listing

Answer 2

A.

The procedure in answer a. helps provide assurance about valuation of inventory. The procedures in answers b., c., and d. provide assurance regarding existence.

Question 3

When control risk is assessed as low for assertions related to payroll, substantive tests of payroll balances most likely would be limited to applying analytical procedures and

A. Observing the distribution of paychecks

B. Footing and cross-footing the payroll register

C. Inspecting payroll tax returns

D. Recalculating payroll accruals

Answer 3

D

Substantive tests of payroll balances when control risk is assessed as low most likely would be limited to applying analytical procedures and recalculating payroll accruals to assure the accuracy of the payroll liabilities. Observing the distribution of paychecks, recomputing the payroll register and inspecting payroll tax returns would be of greater importance if control risk related to payroll was assessed as high. In such a case, these procedures would be required to assure the accuracy and other assertions related to payroll accounts.

Question 4

Which of the following procedures would an auditor most likely perform in auditing the statement of cash flows?

A. Reconcile the amounts included in the statement of cash flows to the other financial statements’ amounts

B. Vouch a sample of cash receipts and disbursements for the last few days of the current year

C. Reconcile the cutoff bank statement to the proof of cash to verify the accuracy of the year-end cash balance

D. Confirm the amounts included in the statement of cash flows with the entity’s financial institution

Answer 4

A.

Reconciling the amount included in the statement of cash flows to other statements is a basic proce­dure (i.e. recalculating the differences in current-year/prior-year accounts payable, accounts receivable, total depreciation, etc). Relationships among elements of financial information within the period are one source of expectations regarding relationships that reasonably are expect to exist. The other procedures generally are involved in audit­ing the balance in the cash accounts, not necessarily the statement of cash flows.

Question 5

Which of the following procedures would yield the most appropriate evidence?

A. A scanning of trial balances

B. An inquiry of client personnel

C. A comparison of beginning and ending retained earnings

D. A recalculation of bad debt expense

Answer 5

D.

Appropriate evidence is both valid and relevant. The validity of audit evidence is highly dependent upon the circumstances under which it is obtained. The independent auditor’s direct personal knowledge, obtained through physical examination, observation, computation, and inspection, is more persuasive than information obtained indirectly (an audit inquiry would require corroboration, versus a recalculation which is done independently by the auditor, hence why answer choice ( C ) is incorrect).

Question 6

An auditor is testing the reasonableness of dividend income from investments in publicly-held companies. The auditor most likely would compute the amount that should have been received and recorded by the client by

A. Reading the details of the board of directors’ meetings

B. Confirming the details with the investee companies’ registrars

C. Electronically accessing the details of dividend records on the Internet

D. Examining the details of the client’s most recent cutoff bank statement

Answer 6

C.

Published dividend records provide the strongest evidence supporting dividends earned on market­able equity securities.