Study Unit 12: questions Flashcards
When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely is
Vendors with whom the entity has previously done business.
When sending confirmations for accounts payable, the population of accounts should include small and zero balances as well as large balances. The auditor should use the activity in the account as a gauge for sample selection. That is, if orders are placed with a vendor on a consistent basis, a confirmation should be sent to that vendor regardless of the recorded balance due.
In an audit of a purchasing department, which of the following usually is considered a risk factor?
A.Purchase specifications are developed by the department requesting the material.
B.Purchases are not rotated among suppliers included on an approved vendor list.
C.Purchases are made from parties related to buyers or other company officials.
D.Purchases are made against blanket or open purchase orders for certain types of items
Purchases are made from parties related to buyers or other company officials.
Purchasing from parties related to buyers or other entity officials is a risk factor because it suggests the possibility of fraud. Such conflicts of interest may result in transactions unfavorable to the company.
The search for unrecorded payables should include:
(1) examining cash disbursements made after the balance sheet date and comparing them with the accounts payable trial balance,
(2) sending confirmations to vendors with small and zero balances, and
(3) reconciling payable balances with vendors’ documentation.
Unrecorded liabilities are most likely to be found during the review of which of the following documents?
Unpaid bills.
The auditor examines the accounts payable vouchers prepared during the subsequent period to determine whether they were for amounts recorded as liabilities at year end. (S)he also examines unvouchered invoices (unpaid bills) because they could represent payables that should have been recorded prior to year end. This procedure should be performed through the date of the auditor’s report.
When confirmation for accounts payable is undertaken, which form of confirmation should be used?
Positive confirmation.
Ideally, the blank form of positive confirmation should be used. It requests that the balance due be provided by the creditor. External confirmation need not be performed if the auditor can become satisfied as to the existence of recorded payables using evidence available directly from the entity.
Would an auditor perform confirmation of AP before or after balance sheet date?
Confirmation of AP would least likey be performed before the BS date.
The most important assertion about accounts payable is completeness, which is best tested at year end. For example, the auditor may examine subsequent cash payments to determine whether the related payables are not recorded. Although confirmation is not a required auditing procedure, it may be useful in detecting unrecorded payables if the auditor’s sample includes vendors for which the risk of understatement is high, e.g., regular vendors with zero or low recorded balances.
An auditor’s purpose in reviewing the renewal of a note payable shortly after the balance sheet date most likely is to obtain evidence concerning relevant assertions about
Classification and understandability.
Events such as the renewal of the note payable do not require adjustment of the financial statements but may require disclosure. Accordingly, the auditor should determine that the renewal had essentially the same terms and conditions as the recorded debt at year end. A significant change may affect the classification of notes payable (e.g., as current or noncurrent), the understandability of the statements, and the required disclosures.
How do accrued liabilities differ from AP?
Accrued liabilities usually pertain to services of a continuing nature whereas accounts payable are the result of completed transactions.
The procedures differ because the balances result from different transactional processes. Liabilities are accrued for such continuing transactions as rent, salaries, and interest. Accounts payable are short-term obligations arising from the purchase of goods and services in the ordinary course of business.
For existance assertions you trace or vouch?
You trace from the schedule to the inventory tags and ultimately to the auditor’s count sheet.
The existence assertion about inventories included in the balance sheet is that they physically exist. Examples of substantive procedures are:
(1) observing physical counts,
(2) confirming inventories at outside locations, and
(3) testing transactions between a preliminary physical inventory date and the balance sheet date. The most reliable of these procedures is observation. It provides direct personal knowledge.
What is inventory turnover formula?
COGS/Average inventory
A portion of a client’s inventory is in public warehouses. Evidence of the existence of this merchandise can most efficiently be acquired through which of the following methods?
A.Calculation.
B.Observation.
C.Inspection.
D.Confirmation.
Confirmation.
Confirmation is efficient because of its low cost. The auditor ordinarily obtains confirmation of the existence of inventories by direct communication with the custodian.
An auditor most likely would inspect loan agreements under which an entity’s inventories are pledged to support management’s financial statement assertion of
Classification and understandability.
Assertions about presentation and disclosure address whether particular components of the financial statements are properly classified, described, and disclosed. Determining that the pledge or assignment of inventories is appropriately disclosed is an audit objective related to the classification and understandability assertion.
The auditor tests the quantity of materials charged to work-in-process by vouching these quantities to
Materials requisitions.
Vouching is the examination of documents to obtain audit evidence about recorded amounts or transactions. Thus, the direction of testing is from records to documents. Testing in the opposite direction (documents to records) is tracing. Materials requisitions are authorization documents used to release materials for use in production. The auditor vouches quantities recorded in work-in-process by examining the documents for materials requisitions.
Inquiries of warehouse personnel concerning possible obsolete or slow-moving inventory items provide assurance about management’s assertion of
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.
