External Confirmations, Accounting Estimates, Investments in Securities, and Inventory held by others

Question 1

a confirmation is

Answer 1

a direct, written response to the auditor from a party outside of the entity being audited and is usually sent out using standard forms

Question 2

standard bank confirmation does not…

Answer 2

get into transaction level detail

verifies balances in deposit accounts, outstanding loans and agreements relating to compensating balances or collateral for loans

Question 3

2 acceptable reasons for management to refuse to authorize confirmations includes:

Answer 3

1. legal disputes
2. ongoing negotiations related to account balances

Question 4

3 types of confirmations

Answer 4

blank positive
positive
negative

Question 5

blank positive confirmations are…and suitable for…

Answer 5

-confirming party always required to respond
-manually fill in amount

-high risk
-large balances

Question 6

positive confirmations are…and suitable for…

Answer 6

-confirming party always required to respond

-high risk
-large balances
-customer may not investigate

Question 7

negative confirmations are…..and suitable for…

Answer 7

-customers asked to respond only if amount provided is incorrect

-low risk
-small balances

Question 8

the confirmation process

Answer 8

1. develop audit objectives
2. choose appropriate confirmation form and determine timing and extent of work
3. identify information to be confirmed
4. prepare and send requests
5. send second requests for non-responses
6. perform alternative procedures for non-responses
7. resolve exceptions
8. document procedures and results

Question 9

an auditor is required to confirm AR unless:

Answer 9

AR balance is immaterial
confirmations would not be effective
risk is low and addressed by other procedures

Question 10

what is an acceptable disclaimer?

Answer 10

those that do not call into question the accuracy or completeness of the information in the confirmation

Question 11

auditors standard report states an audit includes assessing

Answer 11

significant estimates made by management

Question 12

substantive procedures test existence of marketable securities by…

Answer 12

-confirming directly with thrid parties
-inspecting security documents
-tracing recorded investments to purchase docs

Question 13

with respect to the equity method

Answer 13

inspecting stock certificates indicates an investment exists/owned by the client
brokers advice indicates ownership
cancelled check confirms original purchase price
market quotations reflect investment’s current price
examine audited F/S indicates valuation (each reporting period, investment BV is adjusted)

Question 14

tests of controls are performed to see if substantive testing can be reduced. when there is a limited number of transaction, substantive testing is

Answer 14

already reduced

Question 15

auditor _____ about economic order quantity

Answer 15

does not care

Question 16

factors influencing interim substantive testing

Answer 16

-effectiveness of I/C
-availability of needed information at year end
-purpose of the test
-assessed RMM
-type of account or transaction
-cost and ability to control AR between interim and year end
-predictability of year end balances after interim testing

Question 17

pledging

Answer 17

using an asset as collateral for a loan

Question 18

presentation and disclosure assertions

Answer 18

address the way facts are presented in F/S (including footnotes)

Question 19

presentation

Answer 19

whether inventory is presented net of or separately from the allowance for inventory that is obsolete

Question 20

disclosure

Answer 20

whether appropriate disclosures of any pledging agreements have been made

Question 21

when reviewing inventory and inventory held by others…

Answer 21

review disclosures for GAAP compliance
inquire about pledging
review purchase commitments