SU 13: Other Assets, Liabilities, and Equities

Question 1

Which combination of procedures to obtain evidence re FA additions

Answer 1

Inspecting documents and physically examining assets. The auditor’s direct observation of FA is one means of determining whether additions have been made, tracing records determines whether assets have been recorded. Inspection of deeds, lease agreements, ins policies, invoices, cancelled checks and tax notices may also reveal addtions

Question 2

In testing PPE equipment balances, an auditor may inspect new additions listed on the analysis of PPE. This procedures is designed to obtain evidence concerning relevant assertions about but not

Answer 2

Existence, assertions about existence address whether assets or liabilities of the entity exist at a particular date. Assertions about classification and understandability concern whether f/s components are appropriately presented, described and disclosed (AU 326). Thus, inspection by an auditor provides direct evidence that new plant and equip assets exist but is irrelevant to the classification. Reading f/s and related notes provides evidence about that assertion.

Question 3

Internal Control weakness in recording the retirement of equipment would cause the auditor to

Answer 3

In the search to find retired assets still on the books the auditor would select certain items of equipment from accounting records and locate them in the plant. Failure to record retirements resulting in overstating equipment in sub records because the physical assets are not in entity’s possession. Thus, vouching items from the accounting records by locating the physical assets they represent provides evidence of whether the retirements are unrecorded.

Question 4

Process of searching for unrecorded retirements

Answer 4

Inspect ledger, ins and tax records then tour client’s plant. This is a test of the completeness assertion, the completeness assertion addresses whether all transactions that s/b present are included in the statements. However, in this case, the completeness assertion is closely related to the existence assertion.

Question 5

Which explanation would satisfy the accountant re: significant debits to accum dep account

Answer 5

Retirement of assets.

Question 6

When auditing PrePaid Ins, an auditor discovers the original policy is not available for inspection. Absence possibly indicates what

Answer 6

A possibility of a lien against PPE, due the liens the title holder will have the policy even though the client is responsible to pay.

Question 7

In auditing intangible assets, the auditor would recompute the amortization and determine whether it is reasonable compared to what is stated. This is to support what assertion

Answer 7

Valuation and Allocation - Amortization is an allocation process that the auditor tests by recomputing the amount based on recorded assets and useful lives.

Question 8

Which pairs of accounts would be analyzed on the same working paper

Answer 8

Notes receivable and interest income.

Question 9

Auditor would most likely verify interest earned on a bond by

Answer 9

The audit plan for LT investments includes making independent computation of revenue. The auditor may use information from certificates to recalculate interest income

Question 10

Client has large/active investment portfolio that is in a safe-deposit box. If auditor unable to count at bal sht date the auditor would request

Answer 10

The client have bank seal safe-deposit box until auditor can count at later date. Securities s/b inspected simultaneously with the verification of cash and count of other liquid assets to prevent transfers among other categories for the purpose of concealing shortages.

Question 11

An Auditor testing LT investments would use analytical procedures to ascertain the reasonableness of

Answer 11

Completeness of recorded investment income. The auditor may develop expectations regarding the completeness assertion for recorded investment income thru various way (public stock info, bond certificates, etc). Thus, applying expected stated rate of return to the net invest income may be effective means of estimating total investment income.

Question 12

In confirming w/ outside agent that is holding securities in client’s name an auditor most likely gathers evidence in support in support of relevant f/s assertions about existence or occurrence and

Answer 12

Rights and obligations
Confirmations may be designed to test any f/s assertion (AU 330). However, a given confirmation does not test all assertions equally well. Example: completeness assertions is not adequately addressed by confirmation because other agents may be holding securities. Moreover, the agent may be holding securities not included in request. Thus, the request tends to be most effective for testing existence and rights and obilitgations.

Question 13

Inspection of of client’s investment records to determine that nay transfers between categories are properly recorded. The purpose of procedure is to obtain evidence about which assertions

Answer 13

Classification and Understandability and Valuation and Allocation.  
Auditing stds state that assertions about C&U address whether presentation, description and disclosure are in accordance w/ GAAP.  GAAP may require that debt security be reclassified as avail for sale if entity (1) does not have positive intent and ability to hold it to maturity (2) does not intend to sell in near term.  Inspecting client records just prior or just after y/e could help auditor determine invest class are approprirate.  Assertions about V&A address reported amounts conform with GAAP.  Classification affects Valuation - Held to maturity securities are measured at FV. Thus inspecting transferrs between categories also helps determine whether investments are reported at proper amounts. (AU 332)

Question 14

In auditing unrecorded non-current bond premiums an auditor would likely test

Answer 14

Non-current interest expense. If it appears excessive compared to non-current bond payables non-current liabilities may exist.

Question 15

Auditor vouched data for sample employees in P/R register to approved clock card data. This provides assurance to what

Answer 15

Employee worked the hours they were paid for, to test P/R events actually occurred an auditor would vouch a sample of transaction recorded in P/R related balances to supporting documents, including approved time cards, time tickets, and notations in personnel records

Question 16

When risk of RMM is assessed as low for assertions related to payroll substantive tests of P/R balances would be limited to applying analyitcal procedures and

Answer 16

Recalculating payroll accurals
When controls are judged to be effective, the auditor’s procedures are typically limited to anal proced and testing for completeness and cutoff of the y/e accurals

Question 17

Common procedures during p/r audit

Answer 17

Compare p/r costs with entity standards or budgets.

Question 18

1.) The auditor tested the equipment balance by evaluating large debits recorded in the repairs and maintenance to determine whether any should be capitalized

Answer 18

a. A, Completeness – Evaluating large debits recorded in repairs and maintenance to determine whether any should have been capitalized tests the completeness assertion for the equipment balance.

Question 19

2.) The auditor tested depreciation related to equipment to determine that it is generally accepted and consistently applied.

Answer 19

a. C, Valuation and Allocation – Testing depreciation to determine that methods are generally accepted and consistently applied relates primarily to valuation and allocation

Question 20

3.) The auditor examined titles of related to vehicles reported in the equipment account

Answer 20

a. F, Rights and Obligations – Examining titles related to vehicles reported in equipment relates to ownership

Question 21

4.) The auditor determined that equipment was displayed in the noncurrent asset category on the Balance Sheet

Answer 21

a. H, Classification and Understandability – The proper balance sheet presentation of equipment relates primarily to the classification assertion

Question 22

5.) The auditor applied an analytical procedure to noncurrent debt by comparing the current year’s balance with that of the previous year.

Answer 22

a. A, Completeness – Analytical procedures are the primary test for completeness assertion

Question 23

6.) The auditor examined purchase transactions for equipment for several days before and after year end to determine that they were recorded in the proper year

Answer 23

a. E, Cutoff – Examining purchase transactions for equipment several days before and after year end to determine that they were recorded in the proper year test cutoff

Question 24

7.) The auditor reconciled the amounts of debt in the subsidiary ledger with the total in the GL account

Answer 24

a. A, Completeness – Reconciling amounts of debt in subsidiary ledger with total in the GL account is the primary test for completeness

Question 25

8.) The auditor confirmed shares of common stock issued and outstanding with the registrar and transfer agent of the client

Answer 25

a. D, Existence – Confirmations are the primary test for existence

Question 26

9.) The auditor determined that restrictions on issuance of dividends were properly recorded in the f/s notes

Answer 26

a. H, Classification and Understandability – Determining restrictions on the issuance of dividends were properly described in the f/s notes relates primarily to the understandability assertion

Question 27

10.) The auditor determined that the loss associated with the sale of treasury stock was appropriately calculated.

Answer 27

a. B, Accuracy – Verifying calculations primarily tests the accuracy assertion

Question 28

1.) Investments are properly presented and described

Answer 28

a. D, Classification of available-for-sale securities relates to the assertion about proper presentation and description of investments (the classification and understandability assertion)

Question 29

2.) Recorded investments represent investments actually owned at the date of Balance Sheet

Answer 29

a. B, Confirmations – are most effective for the existence and rights and obligations assertions.

Question 30

3.) Available-for-sale securities are properly measured at FV at the date of Balance Sheet

Answer 30

a. C, impairment of investments means that their FV is less than the recorded amount. If available-for-sale securities are subject to any other-than-temporary impairment, their cost basis is written down, and the change is included in earnings, not in other comprehensive income. The valuation and allocation assertion about assets is that (a) they are reported at appropriate amounts (b adjustments are appropriately recorded

Question 31

4.) A/R represent amounts owed to the entity up to the Balance Sheet date

Answer 31

a. C, Cutoff tests determine that all transactions occurring during a period are recorded in that period. Thus, they address the cutoff assertion

Question 32

5.) The entity has a legal right to all A/R at Balance Sheet date

Answer 32

a. D, Pledging receivables as a security for a loan or selling receivables means that the rights have been conveyed to a creditor or a buyer, respectively. Accordingly, reviewing loan agreements test the rights and obligations assertion about balances.

Question 33

6.) A/R are stated at net realizable value

Answer 33

a. A, aging of receivables analyzes the probability of collection of receivable and is therefore related to the valuation and allocation about balances. A/R should be reported at net realizable value.

Question 34

7.) A/R are properly presented and described in the f/s

Answer 34

a. B, A/R should be presented as a current assets with any significant issues disclosed. One required disclosure is the existence of related party transactions. Thus, material amounts due from officers and employees should be disclosed.

Question 35

8.) Procedures to test PPE The entity has a legal right to property and equipment acquired during the year

Answer 35

a. C, deeds and title insurance provide evidence supporting the rights and obligations assertion about balances

Question 36

9.) Procedures to test PPE Recorded property and equipment represent assets that actually exist at the Balance Sheet date

Answer 36

a. B, physical examination of property provides strong evidence supporting the existence assertions about balances. The auditor usually inspects all major additions of property recorded during the year

Question 37

10.) Procedures to test PPE Net property and equipment are properly measured at the Balance Sheet date

Answer 37

a. PPE, should be recorded at cost and depreciated over their useful lives. The auditor reviews depreciation procedures during the testing of the valuation and allocation assertion about balances

Question 38

1.) Noncurrent Debt Occurrence

Answer 38

a. I, vouch to contracts. Vouching form the recording of debts back to contracts tests that the transaction has occurred.

Question 39

2.) Noncurrent Debt Cutoff

Answer 39

a. G, Consider year-end transactions. Considering year-end transactions to determine if they were recorded in the proper period test cutoff.

Question 40

3.) Noncurrent Debt Accuracy

Answer 40

a. F, Making inquiries of management. Inquiries to management help the auditor determine if accuracy in recording was achieved.

Question 41

4.) Noncurrent Debt Classification and Understandability

Answer 41

a. A, Inspection of disclosures. Note disclosures in the f/s relate directly to the understandability assertion

Question 42

5.) Noncurrent Debt Valuation and Allocation

Answer 42

a. E, test amortization. Testing amortization is related to the valuation and allocation assertion

Question 43

6.) Noncurrent Debt Completeness

Answer 43

a. B, perform analytical procedures. Analytical procedures are the primary test used to test completeness

Question 44

7.) Noncurrent Debt Existence

Answer 44

a. J, confirm debt. Confirmation are the primary test to test existence

Question 45

8.) Noncurrent Debt Rights and Obligations

Answer 45

a. H, examine bond documents. Examining bond indentures (contracts) relates to the rights and obligations of the parties.

Question 46

reporting entity that has participated in related party transactions that are material, disclosure in the GAAP-based financial statements should include

Answer 46

The nature of the relationship and the terms and manner of settlement.
GAAP-based financial statement should include (1) the nature of the relationship; (2) a description of the transactions; (3) the dollar value of the transactions; (4) the amounts due from or to related parties; and (5) if not otherwise apparent, the terms and manner of settlement.

Question 47

auditor will usually trace the details of the test counts made during the observation of the physical inventory taking to a final inventory schedule. This audit procedure is undertaken to provide evidence that items physically present and observed by the auditor at the time of the physical inventory count are

Answer 47

Included in the final inventory schedule.
Tracing the details of test counts to the final inventory schedule assures the auditor that items in the observed physical inventory are included in the inventory records. The auditor should compare the inventory tag sequence numbers in the final inventory schedule to those in the records of his or her test counts made during the client’s physical inventory.

Question 48

An analysis of which of the following accounts would best aid in verifying that all fixed assets have been capitalized?

Answer 48

Repairs and maintenance.
To determine whether all transactions affecting fixed assets for the period are correctly reflected in the balance of the account, the auditor should (1) perform analytical procedures, (2) reconcile subsidiary and general ledgers, and (3) analyze repairs and maintenance. The auditor should vouch significant debits from the repairs and maintenance expense account to determine whether any should have been capitalized.

Question 49

In a manufacturing company, which one of the following audit procedures provides the least assurance of the existence of the general ledger balance of investment in stocks and bonds at the audit date?

Answer 49

Examination of paid checks issued in payment of securities purchased.
Paid checks issued in payment for securities do not provide assurance that the investments are in existence and still owned by the client at the balance sheet date.

Question 50

During an audit of a company’s equity accounts, the auditor determines whether restrictions have been imposed on retained earnings resulting from loans, agreements, or state law. This audit procedure most likely is intended to verify relevant assertion about

Answer 50

Classification and understandability.
The presentation and disclosure assertions include assertions about classification and understandability. Financial information should be properly presented and disclosed, and disclosures should be clear (AU-C 315 and AS 1105). Hence, when restrictions have been placed on retained earnings, the auditor should determine that they are properly disclosed in the notes to the financial statements.