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Flashcards in 11.7 Deck (17):
1

An auditor’s purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning relevant assertions about

Valuation and allocation.

Assertions about valuation and allocation address whether (1) assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and (2) resulting adjustments are properly recorded. Determining the net realizable value of accounts receivable includes assessing whether the client’s allowance for uncollectibility is reasonable. Reviewing the credit ratings of delinquent customers provides evidence for that purpose.

2

An auditor reconciles the total of the accounts receivable subsidiary ledger to the general ledger control account, as of October 31. By this procedure, the auditor would be most likely to learn of which of the following?

An opening balance in a subsidiary ledger account was improperly carried forward from the previous accounting period.

By reconciling the accounts receivable ledger to the general ledger control account, transfer misstatements will be identified.

3

Which of the following would be a consideration in planning a sample for a test of subsequent cash receipts?

Preliminary judgments about materiality levels.

Judgments about materiality will affect the sample sizes in a variables sampling plan. The smaller the levels of materiality, the larger the sample sizes needed to support the auditor’s conclusions.


4

When auditing a client’s statement of cash flows, an auditor will rely primarily upon

Cross-referencing to balances and transactions considered in connection with the audit of the other financial statements.

The statement of cash flows represents balances taken from the other statements as well as analysis of changes in those balances. Consequently, this statement is audited in conjunction with the balance sheet and income statement accounts.

5

An auditor ordinarily sends a standard confirmation request to all banks with which the client has done business during the year under audit, regardless of the year-end balance. A purpose of this procedure is to

Seek information about other deposit and loan amounts that come to the attention of the institution in the process of completing the confirmation.

The AICPA Standard Form to Confirm Account Balance Information with Financial Institutions is used to confirm specifically listed deposit and loan balances. Nevertheless, the standard confirmation form contains this language: “Although we do not request or expect you to conduct a comprehensive, detailed search of your records, if, during the process of completing this confirmation, additional information about other deposit and loan accounts we may have with you comes to your attention, please include such information below.”

6

An independent auditor asked a client’s internal auditor to assist in preparing a standard financial institution confirmation request for a payroll account that had been closed during the year under audit. After the internal auditor prepared the form, the controller signed it and mailed it to the bank. What was the major flaw in this procedure?

The form was mailed by the controller.

The AICPA Standard Form to Confirm Account Balance Information with Financial Institutions is used for specific deposits and loans. A confirmation is signed (requested) by the client, but it should be sent by the auditor. Thus, the auditor should control confirmation requests and responses. Control means direct communication between the intended recipient and the auditor to minimize possible bias of the results because of interception and alteration of the requests or responses.

7

The primary purpose of sending a standard confirmation request to financial institutions with which the client has done business during the year is to

Corroborate information regarding deposit and loan balances.

The AICPA Standard Form to Confirm Account Balance Information with Financial Institutions is used to confirm specifically listed deposit and loan balances. The form confirms the account name, account number, interest rate, and balance for deposits.

8

An auditor’s analytical procedures performed during the overall review stage indicated that the client’s accounts receivable had doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client explanations most likely would satisfy the auditor?

The client opened a second retail outlet in the current year, and its credit sales approximately equaled those of the older, established outlet.

Typically, an increase in accounts receivable usually indicates that a company is either increasing sales or making its credit terms less stringent. If a company is making its credit terms less stringent, then it should have a corresponding increase in the allowance for doubtful accounts because it is more likely that customers will default on payments. Because the allowance for doubtful account percentage remained the same, a reasonable explanation is that sales increased.

9

The usefulness of the standard bank confirmation request may be limited because the bank employee who completes the form may

Be unaware of all the financial relationships that the bank has with the client.

The standard form is designed to substantiate only the information that is stated on the confirmation request. Thus, the auditor should be aware that the standard form is not intended to elicit evidence about the completeness assertion. The individual completing the form may not be aware of all the financial relationships that the bank has with the client.

10

An auditor suspects that a client’s cashier is misappropriating cash receipts for personal use by lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme, the auditor most likely would compare the

Dates checks are deposited per bank statements with the dates remittance credits are recorded.

Lapping involves recording current cash payments on accounts receivable as credits to prior customers’ accounts to conceal a theft of cash. Comparing the date that a customer’s check was deposited with the date a record was made to reduce the balance determines whether the deposit was made prior to the recording date.

11

Analytical procedures performed during an audit indicate that accounts receivable doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client explanations would satisfy the auditor?

The client opened a second retail outlet during the current year, and its credit sales approximately equaled the older outlet.

Opening a second outlet with about the same credit sales as the first explains the receivables effects. Given no change in credit policy, the characteristics of the customers served, or economic conditions, the ratio of doubtful accounts should not change.

12

An auditor discovered that a client’s accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that

There was an improper cutoff of sales at the end of the year.

The receivables turnover equals net credit sales divided by average receivables. An improper sales cutoff could result in recognition of next-year sales in the current year. The effect of adding the amount of these presumably uncollected receivables to the numerator and denominator is to decrease a ratio that exceeds 1.0.

13

If the objective of a test of details is to detect overstatements of sales, the auditor should compare transactions in the

Accounting records to source documents.

Overstatements of sales likely result from entries with no supporting documentation. The proper direction of testing is to sample entries in the sales account and vouch them to the shipping documents. The source documents represent the valid sales.

14

Which of the following is not a principal objective of the auditor in the audit of revenues?

To verify cash deposited during the year.

The verification of cash deposits during the year is not part of the audit of revenues. Verification of cash and marketable securities is undertaken as a separate part of the audit program.

15

During the process of confirming receivables as of December 31, Year 1, a positive confirmation was returned indicating the “balance owed as of December 31 was paid on January 9, Year 2.” The auditor would most likely

Verify that the amount was received.

Responses to confirmation requests that involve significant differences are investigated by the auditor. Others are delegated to client employees with a request that explanations be given to the auditor. Such differences often arise because of recent cash payments. In that event, the auditor should trace remittances to verify that stated amounts were received.

16

Customers having substantial year-end past due balances fail to reply after second request forms have been mailed directly to them. Which of the following is the most appropriate alternative audit procedure?

Examine shipping documents.

When customers fail to answer a second request for a positive confirmation, the accounts may be in dispute, uncollectible, or fictitious. The auditor should then apply alternative procedures (examination of subsequent cash receipts, shipping documents, and other client documentation of existence) to obtain evidence about the validity and accuracy of significant nonresponding accounts. Thus, the auditor might verify the underlying transactions by examining supporting documents such as contracts, sales invoices, customer orders, shipping advices, and subsequent collections, and seek evidence of the existence, address, and financial standing of the debtor.

17

Many of the Granada Corporation’s convertible bondholders have converted their bonds into stock during the year under audit. The independent auditor should review the Granada Corporation’s statement of cash flows and related disclosures to ascertain that they show

The issuance of the stock and reduction in convertible debt.

Information about noncash financing and investing activities must be reported in related disclosures but not on the face of the statement of cash flows. Exclusion of such transactions from the statement avoids complicating it and emphasizes the entity’s cash receipts and payments. The issuance of stock and the reduction of convertible debt should therefore be disclosed in a related but separate schedule. All financing (and investing) activities during the period should be reported, including those that do not directly affect cash.