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Flashcards in Deck 23 Deck (7)
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1

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

Reconcile the amounts included in the statement of cash flows to the other financial statements' amounts.
Vouch a sample of cash receipts and disbursements for the last few days of the current year.

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

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

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

The statement of cash flows converts the income statement and changes in balance sheet items into cash receipts and disbursements. The auditor should be able to reconcile amounts on the statement of cash flows to the other financial statements. The auditor may vouch a sample of cash receipts and disbursements to obtain evidence about revenues, expenses, or internal controls, but not to evaluate the statement of cash flows. A reconciliation of the bank cutoff statement will provide information about the bank balance but not cash flows. The auditor may confirm the ending balance with the entity’s financial institution, but not the individual transactions.

2

An auditor's decision whether to apply analytical procedures as substantive tests usually is determined by the

Availability of documentary evidence that should be verified.

Extent of accounting estimates used in preparing the financial statements.
Icon indicating this is the correct answerPrecision and reliability of the data used to develop expectations.

Number of transactions recorded just before and just after the year end.

Precision and reliability of the data used to develop expectations.

nalytical procedures are reliable as substantive tests when information is subject to the development of expectations. The more reliable and precise the expectations, the more effective the analytical procedures will be. The availability of documentary evidence would be a factor in the performance of substantive tests other than analytical procedures. While estimates may be tested using analytical procedures, their existence does not necessarily affect the auditor’s decision to use them. The number of transactions recorded near year-end would not affect the auditor’s decision to use analytical procedures.

3

An auditor would express an unmodified opinion with an explanatory paragraph added to the auditor’s report for



I. An unjustified accounting change

II. A material weakness in internal control

Neither

When there is an unjustified accounting change, the auditor will express an adverse opinion, or a qualified opinion, depending on materiality. An unmodified opinion could be expressed if there is a material weakness in internal control, provided the auditor is able to obtain sufficient appropriate audit evidence to support the report. Although the weakness will be disclosed to management, it would not be mentioned in the audit report.

4

When an auditor assesses control risk below the maximum level, the auditor is required to document the auditor’s



I. Basis for concluding that control risk is below the maximum level

II. Understanding of the entity's internal control structure elements

Both I and II

Assessing control risk below maximum implies that the auditor intends to rely on internal controls. When relying on internal controls, the auditor is required to justify the basis of the assessment which is accomplished by testing internal controls and determining that the controls are effective. On all engagements the auditor is required to document his or her understanding of internal controls.

5

In which of the following circumstances is substantive testing of accounts receivable before the balance sheet date most appropriate?

The client has a new sales incentive program in place.
I
Internal controls during the remaining period are effective.

There is a high turnover of senior management.

It is a first engagement of a new client.

Internal controls during the remaining period are effective

nternal control can be tested at an interim period when controls over the remaining period are effective. With effective controls, the auditor will be able to rely on information available that will report inventory related activity between the interim date and the end of the period. A new sales incentive program does not affect the decision. A high turnover of senior management, or an audit of a new client increase risk and would discourage the use of interim testing.

6

When evaluating management’s fair value estimates of items for which only Level III inputs are available, an auditor would be most likely to


Consider the Pareto Principle and how it governs the relationship between cost and fair market value.


Evaluate how consistently the process by which management made the fair value estimates was applied from item to item.

Advise the client to solicit bids on the items in order to determine their fair market values.

Gather evidence of known prices for identical items actively traded in open markets.

Evaluate how consistently the process by which management made the fair value estimates was applied from item to item.

Management, not the auditor, is responsible for fair value measurements. The auditor’s responsibility is to make certain that the processes used by management are appropriate, are properly applied, and are used consistently. The auditor is not likely to suggest how management accomplish this, such as by soliciting bids. Evidence of known prices for identical items actively traded in open markets constitutes level I inputs, which are not available in this situation. There is no Pareto Principle used to evaluate the relationship between costs and fair market value.

7

If requested to perform a review engagement for a nonpublic entity in which an accountant has an immaterial direct financial interest, the accountant is

Not independent and, therefore, may not be associated with the financial statements


rNot independent and, therefore, may not issue a review report.

Not independent and, therefore, may issue a review report, but may not issue an auditor's opinion.

Independent because the financial interest is immaterial and, therefore, may issue a review report.

Not independent and, therefore, may not issue a review report.

An accountant with any direct financial interest in a client, regardless of materiality, is not independent of that client. The accountant may not perform a review or an audit of its financial statements and is precluded from issuing either a review report or an audit opinion. The accountant may, however, be associated with the financial statements by performing a compilation provided the lack of independence is disclosed.