2.9.19 Flashcards
Audit procedures applied to purchase transactions at year end address the cutoff assertion. An entity should include goods in its inventory if it
Holds legal title to the goods.
In general, cutoff procedures determine that transactions are recorded in the appropriate period. A proper purchase cutoff is intended to assure inclusion of the goods in inventory and the recognition of a liability in the period in which the client acquired title to the goods.
As part of the process of observing a client’s physical inventories, an auditor should be alert to
The inclusion of any obsolete or damaged goods.
When observing a client’s physical inventories, the auditor always should be alert to the inclusion of any obsolete or damaged goods. The auditor should be alert for empty boxes, empty squares, and inventory defects.
The permanent (continuing) file of an auditor’s audit documentation most likely would include copies of the
Debt agreements.
The permanent section of the audit documentation usually contains copies of important company documents of continuing interest. The section may include (1) the articles of incorporation, share options, contracts, and bylaws; (2) the engagement letter; (3) analyses from previous audits of accounts of special importance to the auditor; and (4) information about internal control, e.g., flowcharts.
To obtain evidence about the effectiveness of controls, an auditor ordinarily selects tests from a variety of methods, including
Reperformance.
The auditor should perform other procedures in combination with inquiry to obtain evidence about the operating effectiveness of controls. Thus, inquiry by itself is not sufficient. Accordingly, inquiry combined with inspection, recalculation, or reperformance may be preferable to inquiry and observation. An observation is relevant only at a moment in time (AU-C 330). Reperformance is the independent performance of procedures or controls that are part of the entity’s internal controls (AU-C 500).
Which of the following factors is most likely to affect the extent of the documentation of the auditor’s understanding of a client’s system of internal controls?
The degree to which IT is used in the accounting function.
As internal control becomes more sophisticated, the documentation becomes more complex and extensive.
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.
According to the PCAOB, an accounting firm is most likely to be independent of its audit client if
The firm recommended an aggressive tax position to the client that is more likely than not to be legally allowed.
A firm is not independent of its audit client if, during the audit and engagement period, it provides any nonaudit service related to marketing, planning, or expressing an opinion in favor of the tax treatment of aggressive tax-position transactions for the purpose of tax avoidance. However, this Rule does not apply if the tax treatment is at least more likely than not to be allowable under tax law.
Audit documentation
Provides evidence that the audit was performed in accordance with GAAS.
The objectives of audit documentation are to provide (1) a sufficient and appropriate record of the basis of the auditor’s report and (2) evidence that the audit was performed in accordance with GAAS and other requirements. Audit documentation is the record of (1) the audit procedures performed, (2) relevant evidence obtained, and (3) conclusions reached.
An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the relevant assertion that all
Expenditures for property and equipment have not been charged to expense.
The auditor should vouch significant debits from the repairs and maintenance expense account to determine whether any should have been capitalized.
Which of the following controls would be most effective in assuring that the proper custody of assets in the investing cycle is maintained?
The recorded balances in the investment subsidiary ledger are periodically compared with the contents of the safe deposit box by independent personnel.
Custody of securities should be segregated from the accounting responsibility. Ideally, the CFO should have custody of investment securities, accounting should maintain the related records (establish accountability), and, periodically, assets should be independently reconciled with the records.
The objective of tests of details of transactions performed as substantive procedures is to
Detect material misstatements at the relevant assertion level.
Substantive procedures are (1) tests of the details of transaction classes, balances, and disclosures and (2) substantive analytical procedures. They are performed to detect material misstatements at the relevant assertion level. The auditor performs substantive procedures as a response to the related assessment of the RMMs (AU-C 330).
Which of the following types of audit evidence is the most persuasive?
Bank statements obtained from the client.
Evidence from independent sources outside the entity provides greater assurance of reliability for purposes of an audit than evidence secured or prepared solely within the entity. Although the bank statements are in the possession of the client, they originated outside of the client and, relative to the other responses, they are the most persuasive.
Which of the following audit procedures, if used, should be combined with other audit procedures when testing the operating effectiveness of controls?
inquiry.
The following tests are presented in the order of the sufficiency and appropriateness of the evidence they ordinarily produce (least to most): (1) inquiry, (2) observation, (3) inspection of relevant documentation, and (4) reperformance of a control. Inquiry alone does not provide sufficient, appropriate evidence to support a conclusion about the effectiveness of a control.
Which of the following procedures would an auditor most likely perform to identify unusual sales transactions?
Perform a trend analysis of quarterly sales.
Trend analysis considers ratios or accounts over time. Quarterly sales analysis compared with last year’s amounts or budgets will identify unusual sales transactions and raise questions that the auditor may want to address. Trend analysis is based on the assumption that performance will continue in line with previous performance or industry trends unless unusual transactions exist.
Which of the following documentation is required for an audit in accordance with generally accepted auditing standards?
A management representation letter.
AU-C 580 requires that the auditor obtain certain written representations from management. The written representations confirm certain matters (e.g., oral representations) or support other audit evidence. They complement other audit procedures but do not provide sufficient appropriate evidence or affect the other procedures.
