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Flashcards in 12.4 Deck (20)
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1
Q

In testing plant and equipment balances, an auditor physically examines new additions listed on an analysis of plant and equipment. This procedure most likely obtains evidence concerning management’s assertion of

A

Existence.

When an auditor inspects assets identified as new additions, (s)he determines whether the assets recorded in the balance actually exist.

2
Q

An auditor most likely would perform substantive tests of details on payroll transactions and balances when

A

Analytical procedures indicate unusual fluctuations in recurring payroll entries.

The auditor should evaluate significant unexpected differences revealed by analytical procedures. The first step is to reconsider the methods and factors used in developing the expectations and to make inquiries of management. If a suitable explanation is not received, additional procedures to investigate the differences are necessary.

3
Q

During an audit, Mr. Wick learns that the audit client was granted a 3-month waiver of the repayment of principal on the installment loan with Blank Bank without an extension of the maturity date. With respect to this loan, the audit program used by Mr. Wick is least likely to include a verification of the

A

Balloon payment.

The auditor’s primary concern is that the liability is reported correctly at the balance sheet date. The balloon payment pertains to the next period’s results of operations, financial position, and cash flows.

4
Q

The auditor can best verify a client’s bond sinking-fund transactions and year-end balance by

A

Confirmation with the bond trustee.

The bond trustee is an outside, independent agent responsible for maintaining subsidiary ledgers and paying dividends. (S)he also often keeps the sinking-fund accounts. Consequently, the auditor should verify bond sinking-fund transactions with this trustee.

5
Q

If statistical sampling methods are used by a client in the taking of its physical inventory, the auditor must

A

Observe such test counts as (s)he deems necessary and be satisfied that the sampling plan has statistical validity, that it was properly applied, and that the resulting precision and reliability are reasonable in the circumstances.

When the client uses statistical sampling to determine inventory quantities, the auditor should become satisfied by performing alternative audit procedures. Attending a year-end inventory count is obviously impractical when the entity measures its inventory using statistical methods. The auditor is required to attend and observe at least some counts and should evaluate whether the methods applied and results are appropriate.

6
Q

In auditing payroll when control risk is assessed as low, an auditor most likely will

A

Compare payroll costs with entity standards or budgets.

Comparing payroll costs with budgeted amounts is a standard analytical procedure that is performed in most audits of payroll.

7
Q

Inquiries of warehouse personnel concerning possible obsolete or slow-moving inventory items provide assurance about management’s assertion of

A

Valuation.

The audit objective of identifying slow-moving, excess, defective, and obsolete items pertains to the valuation or allocation assertion. Among the audit procedures that may help achieve this audit objective are (1) examining an analysis of inventory turnover, (2) reviewing industry experience and trends, (3) analytically comparing the relationship of inventory and sales volume, (4) observing the count of the physical inventory, and (5) inquiring about possible excess or obsolete items.

8
Q

An audit assistant found a purchase order for a regular supplier in the amount of $5,500. The purchase order was dated after receipt of the goods. The purchasing agent had forgotten to issue the purchase order. Also, a disbursement of $450 for materials did not have a receiving report. The assistant wanted to select additional purchase orders for investigation but was unconcerned about the lack of a receiving report. The audit director should

A

Disagree with the assistant because the lack of a receiving report has a greater risk of loss associated with it.

The risk of a material fraud is greater for the missing receiving report than for the postdated purchase order. In the latter case, the goods were received, and the company has obtained what it paid for. Because the goods come from a regular supplier, the likelihood is that the purchase was actually authorized. However, the lack of a receiving report in support of a disbursement is a much more serious matter. It suggests potential fraud because an approved payment voucher should be accompanied by a purchase order, supplier’s invoice, and a receiving report. One possibility is that duplicate payments are being made.

9
Q

An auditor usually determines whether dividend income from publicly-held investments is reasonable by computing the amounts that should have been received by referring to

A

Records produced by investment services.

Standard investment advisory services publish dividend records for all listed stocks. They show amounts and payment dates for dividend declarations and permit the auditor to independently recompute the client’s reported dividend income.

10
Q

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?

A

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.

11
Q

An auditor usually obtains evidence of a company’s equity transactions by reviewing its

A

Minutes of board of directors’ meetings.

Equity transactions are typically few and large in amount. They require authorization by the board of directors. Thus, an auditor reviews the minutes of the board meetings to identify transactions.

12
Q

The element of the audit-planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the

A

Timing of inventory observation procedures to be performed.

The client is responsible for taking the physical inventory. The auditor is responsible for observing this process and performing test counts. The audit procedures are dependent upon management’s plans. Thus, the auditor must coordinate the collection of this evidence with management.

13
Q

The auditor is concerned with establishing that dividends are paid to client corporation shareholders who hold stock as of the

A

Record date.

Persons who hold stock in the corporation as of the record date are entitled to payment of the dividend. The auditor should test the dividend payment list to gather evidence that dividends were paid to the appropriate shareholders. The integrity of the dividend payment process is enhanced when an independent agent (usually a financial institution) is used to pay dividends.

14
Q

An auditor testing investments would ordinarily use analytical procedures to ascertain the reasonableness of the

A

Completeness of recorded investment income.

The auditor may develop expectations regarding the completeness assertion for recorded investment income from stocks by using dividend records published by standard investment advisory services to recompute dividends received. Interest income from bond investments can be calculated from interest rates and payment dates noted on the certificates. Income from equity-based investments can be estimated from audited financial statements of the investees. Thus, applying an expected rate of return to the net investment amount may be an effective means of estimating total investment income.

15
Q

When performing procedures to test assertions about purchases, an auditor vouches a sample of entries in the voucher register to the supporting documents. Which relevant assertion would this procedure most likely support?

A

Occurrence.

A voucher signifies a liability. Its issuance is recorded in the voucher register after comparison of the vendor’s invoice with the purchase requisition, purchase order, and receiving report. The direction of testing is an important consideration in addressing the RMMs. Selecting a sample of recorded entries in the voucher register to vouch to the supporting documentation provides evidence that the transactions occurred.

16
Q

In auditing a manufacturing entity, which of the following procedures would an auditor least likely perform to determine whether slow-moving, defective, and obsolete items included in inventory are properly identified?

A

Test the computation of standard overhead rates.

Testing the computation of standard overhead rates is relevant to the costing of inventory. It does not determine whether the underlying items are slow-moving, etc.

17
Q

While observing a client’s annual physical inventory, an auditor recorded test counts for several items and noticed that certain test counts were higher than the recorded quantities in the client’s perpetual records. This situation could be the result of the client’s failure to record

A

Sales returns.

Failure to record sales returns for goods returned to the physical inventory will result in test counts greater than the quantities reported by the perpetual inventory system.

18
Q

Which of the following ratios would an engagement partner most likely consider in forming an overall audit conclusion?

A

cost of goods sold/ average inventory.

Near the end of the audit, the auditor performs analytical procedures to assist in forming an overall conclusion about whether the statements are consistent with the auditor’s understanding of the entity (AU-C 520). The inventory turnover ratio is a good indicator of unusual or unexpected balances because this amount is usually very predictable.

19
Q

In the audit of property, plant, and equipment, the auditor tries to do all of the following except to

A

Assess the adequacy of replacement funds.

In performing the attest function, the external auditor does not directly evaluate the soundness of the client’s business practices or financial prospects. Whether replacement funds are adequate is not relevant to whether the financial statements are fairly presented in accordance with the applicable reporting framework.

20
Q

An auditor usually tests the reasonableness of dividend income from investments in publicly held companies by computing the amounts that should have been received by referring to

A

Dividend record books produced by investment advisory services.

Investment advisory services, such as Dun & Bradstreet, publish dividend amounts and payment dates for publicly traded entities. The auditor can obtain this information to test whether the client has properly recorded investment income.