What are the standard auditing procedures?
Examining, Confirmation, Analytical Procedures, Reperformance, Reconciliation, Observation, Tracing, Cut-off review, Auditing related accounts simultaneously, Representation letter, Subsequent events review
What are the relevant assertions to the audit of account balances?
Completeness, Valuation, allocation and accuracy, Existence, Rights and obligations
What are the relevant assertions to the audit of transactions and events?
Completeness, Cut-off, Valuation allocation and accuracy, Existence, Understandability and classification
What are the relevant assertions to the audit of disclosures?
Completeness, valuation allocation and accuracy, Rights and obligations, Understandability
T/F: Audit evidence obtained from an independent party provides greater assurance of reliability.
T/F: Relationships among balance sheet accounts tend to be more predictable that income statement accounts.
Where should the direction of the audit test come from to determine whether transactions have been recorded?
Original source documents
When an analytical procedure is used as the principal substantive test of a significant f/s assertion, what is the auditor required to document?
The auditor's expectation and the factors considered in developing that expectation
What assertion would recalculation of the amortization and review of the amortization period test?
Valuation and allocation assertion
T/F: Information obtained indirectly from outside sources is the most reliable evidential matter.
When would positive confirmations be acceptable to send?
-Weak internal control
-Expected errors and disputes
What cash fraud scheme involves the theft of cash often concealed by failing to account for cash receipts
T/F: Frequent kiting may result in a high level of deposits coupled with a low average balance.
What is kiting?
When one check drawn on one bank is deposited in another bank and no record is made of the disbursement in the balance of the 1st bank
What internal control would most likely reduce the risk of diversion of customer receipts by an entity's employees?
Bank lockbox system
What would a responsible employee do immediately upon receiving checks from customers by mail?
Prepare a duplicate listing of checks received
How would an auditor provide assurance that each voucher is submitted and paid only once?
Stamp 'paid' by the check signer
T/F: Reconciling the control totals for sales invoices w/ the A/R subsidiary ledger would be an effective internal control to reduce the risk of errors in the billing process.
False! Not effective
Accounting for unused prenumbered purchase orders and receiving reports is usually performed in the vouchers payable department.
What assertion would an auditor's review of credit ratings of customers with delinquent accounts receivable concern?
Valuation and allocation
T/F: Examination of evidence of credit approval supports the assertion of rights and obligations.
T/F: There is an opportunity for a person to embezzle cash and cover it up if he/she who disburses cash (via blank checks and signature plates) also reconciles the bank statement.
What procedure would best detect a liability omission by management?
Review purchase contracts and other legal documents
T/F: By tracing from the shipping documents to the invoices, the auditor confirms that goods that were shipped were properly billed.
What account would an auditor focus increased attention on during a recession?
Allowance for doubtful accounts
Why would an auditor review the reconciliation of payroll tax forms that a client is responsible for filing?
To identify potential liabilities for unpaid payroll taxes
How is dividend income from investments tested by?
Referring to dividend record books produced by investment advisory services
How would an auditor generally test the segregation of duties related to inventory by?
Personal inquiry and observation
What assertion does inquiries of production and sales personnel concerning possible excess or obsolete inventory items support?
Valuation and allocation
T/F: In auditing payroll, an auditor would most likely compare payroll costs with entity standards of budgets.
In auditing long-term bonds payable, what would an auditor most likely do?
Compare interest expense w/ the b/p amount for reasonableness
What would an auditor do in performing tests concerning the granting of stock options?
Trace the authorization for the transaction to a vote of the board of directors
Should periodic inventory counts be used to adjust perpetual records to maintain perpetual inventory records?
T/F: Examining an analysis of inventory turnover helps identify slow-moving and obsolete items included in inventories.
T/F: When the A/P manager issues purchase orders, this indicates a strength in A/P procedures.
What is a key control for ensuring sales are properly authorized when assessing control risks for sales?
Sales orders are sent to the credit department for approval
What evidence does tracing shipping documents to prenumbered sales invoices provide?
Shipments to customers were properly invoiced
What substantive testing of payroll balances would be limited if the control risk is assessed as low
Applying analytical procedures and recalculating payroll accruals
What assertion does looking at related party transactions support?
Valuation, allocation, and accuracy
What procedures would be applied to determine the existence of related parties?
-Evaluating the company's procedures for identifying and accounting for related party transactions, and obtaining a conflict of interest statement from the client
-Asking management for the names of all related parties
-Reviewing the entity's filings with the SEC
-Reviewing material transactions for related party evidence
-Reviewing prior years' audit documentation or inquiring of the predecessor auditor
T/F: To identify a contingency, an auditor would NOT send an inquiry letter to the client's attorneys.
False, they would!
What factors would an auditor concentrate on in evaluating the reasonableness of an estimate?
-Significant to the accounting estimate
-Sensitive to variations
-Deviations from historical patterns
-Subjective and susceptible to misstatements and bias
T/F: It is unlikely that a CPA would not accept a new audit engagement when the prospective client is unwilling to permit inquiry of its legal counsel.
T/F: Transactions based on terms that are significantly different from those that would be expected in an arm's length transaction may be indicative of related party involvement.
Why are auditors hesitant to use embedded audit modules?
Auditors are required to be involved in the system design of the application to be monitored
T/F: Embedded audit modules allow the auditor to capture specific data as transactions are being processed.
T/F: Continuous performance of audit tests is not required when financial data is processed electronically.
False, it is required
T/F: When an auditor tests a computerized accounting system, test data are processed by the client's computer programs under the auditor's control.
T/F: Whether or not a misstatement is considered material, it is not ultimately a matter of professional judgment.
False, it is
When do significant deficiencies exist?
When an engagement team
-fails to obtain sufficient appropriate evidence
-reached an inappropriate overall conclusion
-report is not appropriate
-Firm is not independent
If analytical procedures performed in the overall review stage of an audit suggest that several accounts have unexpected relationships, what would this indicate?
Additional tests of details are required.
T/F: Average number of days sales in inventory is defined as 365 days per year divided by the inventory turnover.
How may inventory turnover ratio increase?
Cost of sales must increase or average inventory must decrease
T/F: The lower the inventory turnover, the better the entity's performance.
False, the HIGHER, the better
T/F: An auditor ordinarily uses a working trial balance resembling the f/s without footnotes and contains columns for reconciliations and tickmarks.
False, columns for reclassifications and adjustments
A copy of what would be included in the audit documentation that makes up the current file?
T/F: In testing the existence assertion for an asset, an auditor ordinarily works from the supporting evidence to the accounting records.
False, from the accounting records to the supporting evidence
What assertion would reviewing the renewal of a note payable shortly after the b/s date support?
Understandability and classification
Would inspection of bank statements obtained directly from the client's financial institution provide reliable audit evidence?
T/F: The measure of sufficiency of audit evidence does not lie in the auditor's judgement.
False, it does!
What assertion would selecting items for test counts and tracing the test counts to the client's inventory listing support?
What provides a greater assurance of reliability: Bank statement of bank reconciliation?
Between a sales invoice and vendor invoice, which provides the least assurance of reliability?
What confirmation would an auditor be most likely to identify a contingent liability?
Standard bank confirmation
What is the sampling unit in a test of controls pertaining to the existence of payroll transactions?
Payroll register entry
What procedures are good controls over the payroll system?
-A voucher for the amount of the payroll is prepared in the general accounting department based on the payroll department's payroll summary
-Payroll checks are prepared by the payroll dept. and signed by the treasurer
-The personnel dept sends employees' hire and termination notices to the payroll department
What is the purpose of segregating the duties of personnel and distributing payroll checks?
To separate the authorization of transactions from the custody of related assets
T/F: Confirmation of A/R provides evidence that the customer and the receivable are complete.
Why might auditor confirmation of A/P balances at the balance sheet date be unnecessary?
There is likely to be other reliable external evidence available to support the balances
What are the 2 assertions for which confirmation of A/R balances provides primary evidence for?
Rights and obligations and existence
What is the most likely method of auditing interest earned on bond investments?
Recomputing the interest earned
What internal controls most likely would give the greatest assurance that securities held as investments are safeguarded?
Access to securities requires the signatures and presence of 2 designated officials
What control is most likely to prevent the improper disposition of equipment?
A separation of duties between those authorized to dispose of equipment and those authorized to approve removal work orders
T/F: Customer confirmations relate to contingent liabilities disclosed.
False, relate to receivables
What step is required in an auditor's program to examine long-term debt/
Examine bond trust indentures
What is the primary purpose of sending a standard confirmation request to financial institutions with which the client has done business?
To corroborate information regarding deposit and loan balances
What population of documents is appropriate to determine whether A/P are complete and an auditor performs a test to verify that all merchandise received is recorded?
What is a cashier's job description that would contain compatible duties?
Receive remittances and prepare the daily deposit slip
If the objective of a test of details is to detect overstatement of sales, the auditor should trace transactions from the:
Accounting records to the source documents
T/F: Tracing bills of lading to sales invoices provides evidence that shipments to customers were recorded as sales.
False, that shipments to customers were invoiced
T/F: Inquiries about access to recorded cash, tracing from the cash receipts journal, and testing the general ledger balance provide evidence regarding possible unrecorded transacionts.
False, they do!
T/F: Observing the consistent use of cash registers and tapes by employees would provide evidence to the auditor regarding the controls over the existence of cash receipts.
What department stamps, perforates, or otherwise cancels supporting document after payment is mailed: vouchers payable or treasury/cash disbursement dept?
What should be used to determine whether A/P are complete when the auditor performs a test to verify that all merchandise received is recorded?
When the shipping department returns nonconforming goods to a vendor, should the purchasing dept. send to the accounting dept the credit or debit memo?
What assertion does an auditor's purpose in reviewing credit ratings of customers with delinquent A/R support?
Valuation and allocation
What are the2 documents most likely to be generated by the revenue cycle application
Credit memos and sales invoices
What would be the source for when the company considers the decline in value of equity securities classified as available-for-sale to be temporary?
Management representation letter
Who has the ultimate responsibility for the performance of the audit and preparation of the report?
The engagement partner
What does tracing items in the inventory listing to inventory tags and the auditor's recorded count sheets verify?
Assurance that all inventory items in a client's inventory listing are VALID
What is an alternate procedure to support the existence of receivables when an auditor doesn't receive replies to 2nd requests?
Inspect the shipping records documenting the merchandise sold to the debtors