Evidence

Question 1

How should dividends earned on equity investments be verified?

Answer 1

Reconcile amounts with published dividend records, represents strong externally generated evidence

Question 2

What type of transactions are most appropriate for analytical procedures

Answer 2

They are most effective when they are applied to plausible and predictable relationships, often involving income statement accounts such as operating expense transactions.
Payroll and benefit liabilities, acquisitions and disposals of fixed assets, long term debt transactions relate to the BS and can vary widely by period.

Question 3

What are analytical procedures vs tests of details of transactions and balances?

Answer 3

APs are used to gather evidence relative to relationships among various accounting and nonaccounting data. Comparing financial info with info of prior periods is a suggested AP.
Tracing amounts to related documents, and ascertaining that NI amount in the cash flow statement agrees with the IS are both test of details of transactions and balances.

Question 4

What does the resignation of the client’s lawyer indicate after the attorney gives a letter in which no significant disagreements on assessments of contingent liabilities were noted?

Answer 4

The auditor is concerned with obtaining from the client’s lawyer corroborating evidence concerning info furnished by mgmt regarding litigtion, claims, and assessments. The resignation of the client’s lawyer may indicate the development of a conflict between the client and the lawyer regarding undisclosed unasserted claims.
The auditor should inquire as to the nature of the resignation.

Question 5

What is the appropriate limitation for an attorney’s response to a client’s letter of audit inquiry?

Answer 5

AU337 states that an attorney may appropriately limit his response to matters to which he has given substantive attention in the form of legal consultation or representation.
Attorney is obligated to reply to questions about unasserted and asserted claims and assessments.
Attorney must reply to matters regardless of whether the probable resolution.

Question 6

How does the auditor establish the accuracy of perpetual inventory records?

Answer 6

By comparing perpetual inventory records with receiving reports, which will indicate the quantity actually received.
Note that purchase orders - the quantity of ordered can be different that what is received.
Vendor pmts are not as helpful as it is difficult to convert pmt to the items received.

Question 7

What are purchase requisitions

Answer 7

Deals with the quantity of inventory ordered which differs from the quantity received.

Question 8

What is the focus of analytical procedures used in planning the audit?

Answer 8

APs used in planning the audit should focus on

1. enhancing the auditor’s understanding of the client’s business and events that have occurred since the last audit date, and
2. on identifying areas that may represent specific risks relevant to the audit.

Question 9

How does the auditor test the quantity of materials charged to work in process?

Answer 9

By tracing these quantities to the material requisition.
Material requisitions by production depts would be the basis for charging materials to WIP.
Note perpetual inventory records are maintained based upon supporting or initiating docs such as material requisitions.

Question 10

What is the primary reason auditors examine invoices from lawyers?

Answer 10

An auditor may learn of litigation, claims, and assessments on which an attorney has worked when the attorney lists them on an invoice.

Question 11

How can auditor assess legal ramifications and estimate contingent liabilities?

Answer 11

Note legal ramifications and estimates of contingent liabilities will be obtained primarily through use of lawyers’ letters and through discussions with mgmt.

Question 12

What are the types of financial statement assertions?

Answer 12

1- existence - is it present, did it take place
2 completeness - transactions are all included in FS
3 valuation - included in FS in the right proportion
4 rights and obligations - check that assets are rights and liabilities are obligations
5 presentation and disclosure - FS items are classified in the right way

Question 13

What are the management assertions?

Answer 13

Transactions (occurrence, completeness, accuracy, authorization, cutoff, classification)
Accounts Balance (existence, rights and obligations, completeness, valuation and allocation)
Presentation and disclosure (occurrence, rights and obligations, completeness, classification and understandibility, accuracy and valuation)

Question 14

What procedure do auditors use in identifying related party transactions?

Answer 14

Auditors review confirmations of compensating balance arrangements for indications that balances are or were maintained for or by related parties.
Note that mgmt accounting estimates often have little relationship to related party transactions.

Question 15

How does the auditor determine whether dividend income from publicly held investments is reasonable?

Answer 15

They refer to records produced by investment services, not available from SEC or registrars. Investment services maintain records of such dividend income and auditors compare with a client’s recorded dividend income.

Question 16

Which account would the auditor be most likely to analyze the details? Service revenue/sales/repairs expense/sale salaries expense

Answer 16

Repairs and maintenance expense - errors expensing capital acquisitions is a frequent accounting error.
The other three are frequently tested through APs and tests of controls.

Question 17

What are the auditor’s objective when evaluating mgmt estimates?

Answer 17

• ensure that all estimates material to the FS have been developed.
• auditor is responsible for determining the reasonableness of the estimates
• ensure that the FS are presented in accordance with GAAP
  Note no one estimate can be considered accurate with 100% certainty

Question 18

What can be found on the deed

Answer 18

Deeds generally consist of a legal conveyance of rights to use real property. Frequently the sales price is not even specified and the related mortgage acquisition costs are much less likely to be stated in the deed.

Question 19

What can be used to verify mortgage acquisition costs?

Answer 19

Canceled checks
Closing statement - detailed listing of costs of acquiring real property including possible mortgage acq costs
Interest expense

Question 20

When can interim testing be done?

Answer 20

Interim testing is considered inherently more risky so it would rely on good internal controls existing for the period after the testing.
If there is a high turnover of senior mgmt or it is a new client, this is considered higher risk and auditor should wait until year end to perform substantive procedures.

Question 21

What influences the auditor’s consideration of the reliability of data for purposes of achieving audit objectives?

Answer 21

• whether sources within the entity were independent of those responsible for the amount being audited
• whether the data were subjected to audit testing in the current or prior year
• whether the data were obtained from independent sources outside the entity or from sources within

Question 22

Why is the blank form of AR confirmations less efficient that the positive form?

Answer 22

Blank form (confirmations sent out without amounts) forces the respondent to provide the info and thereby discourages the practice of signing forms without proper investigation. However, requiring respondents to supply such info may decrease the number of responses obtained and result in the need for additional audit procedures.

Question 23

When should auditor use positive and negative forms of confirmation requests for AR?

Answer 23

The professional standards suggest the use of the positive form for large balances and the negative form for small balances. Positive are suggested when internal control is unsatisfactory, and negative when internal control is satisfactory.

Question 24

Why would an auditor’s analytical procedures indicate a lower than expected return on an equity method investment?

Answer 24

If the amortization is higher than proper, the return to the investment account will be lower than expected.
Note the cash dividend policy will not affect the return. Under the equity method, dividends reduce the carrying value of the investment. Fluctuation in the price of the common stock is not reflected by the equity method.

Question 25

What does auditor trace to obtain assurance that all inventory items in a client's inventory listing are valid?

Answer 25

Start with the inventory listing and trace to inventory tags and the auditor's recorded count sheets. This provides assurance that items in the inventory listing are valid in the sense that they have an inventory tag and some will have also been counted by auditor. If only the tags were noted during the auditor's observations to items in the inventory listing, it does not address whether the items on the listing are valid. If the tags were traced to receiving report and vendor invoices, it only addresses whether items with tags have proper support, not if the inventory listing is valid.

Question 26

What are the types of subsequent events and how do they affect the audit? Ex: loss on an uncollectible trade receivable recorded in year 1 from customer that declared bankruptcy in year 2, or uninsured loss of inventories purchased in year 1 as a result of flood in year 2, proceeds from a capital stock issuance in year 2 which was being approved by board in year 1

Answer 26

Type 1 subsequent events provide additional evidence with respect to conditions that existed at the date of the BS and affect the estimates inherent in the process of preparing FS. Advising mgmt to have FS adjustment is appropriate for Type 1. Ex: loss on an uncollectible trade receivable recorded in year 1 from customer that declared bankruptcy in year 2, others are type 2 Type 2 events provide evidence with respect to conditions that did not exist at the date of the BS being reported on but arose subsequent to that date. They do not require FS adj, but may be disclosed in the notes to keep the FS from being misleading. Note that the auditor does not issue FS for the client; the FS is the responsibility of mgmt.

Question 27

How does a subsequent event affect the auditor's report

Answer 27

The opinion paragraph should not be modified. If the auditor wishes to emphasize an unusually important subsequent event, the info should be presented in a separate explanatory paragraph preceding the opinion prgh.

Question 28

What info is ordinarily included among the written client representations obtained by the auditor?

Answer 28

Professional standards include info on compensating balances and other cash balance restrictions as items for which the auditor ordinarily obtains written representations. Note that mgmt need not acknowledge responsibility for illegal employee actions.

Question 29

Inventory assertions checks

Answer 29

Rights - ownership Valuation - pricing Existence - physical count quantities Note that inventory not on hand might be owned by client such as items purchased in transit at year end when title has passed, or inventory on consignment.

Question 30

What is the most efficient AP for verification of interest earned on bond investments?

Answer 30

An auditor may quickly and easily recompute the amount of interest which has been earned. Note that vouching the receipt and deposit of interest checks will test interest RECEIVED and records, NOT interest EARNED. The interest rate can be found on the bond agreement instead of confirming with issuer of bond.

Question 31

How does auditor verify accrued commissions payable?

Answer 31

Commissions are directly related to sales in verifying accrued commissions payable; by looking at sales cutoff review, the auditor can determine that both are recorded in the proper period.

Question 32

What should auditor do when it receives a confirmation on a client's fax machine?

Answer 32

The auditor should verify the source and content in some manner (ex: telephone call) before accepting the confirmation.

Question 33

What is included on a security count worksheet?

Answer 33

Auditor records details of the count on this worksheet and obtains acknowledgement by a client rep that he securities were returned so as to eliminate subsequent questions in the event that such securities disappear.

Question 34

Why does the auditor trace the details of the test counts made during the observation of the physical inventory taking to a final inventory schedule?

Answer 34

This AP is undertaken to provide evidence that items physically present and observed by the auditor at the time of the count are included in the final inventory schedule.

Question 35

What is the auditor required to do when errors exist that are not material in the aggregate?

Answer 35

AU312 - requires a summary of uncorrected misstatements/errors (other than those considered trivial) AND required to document the conclusion that the errors do not cause the FS to be misstated.

Question 36

Why should the auditor gain an understanding of each subsidiary's relationship to the total entity when searching for related party transactions?

Answer 36

Experience has shown that business structure and operating style are occasionally deliberately designed to obscure related party transactions. Auditor wants to determine whether related party transactions were done on terms not equivalent to arms length transactions.

Question 37

What is considered in deciding whether there is a need to perform a procedure?

Answer 37

If the auditor concludes that the omission of the procedure impairs his present ability to support a previously expressed opinion AND the auditor believes that persons may be relying on the FS, the omitted or alternative procedures should be applied.

Question 38

What does the auditor most likely do regarding litigation

Answer 38

Require that auditor discuss with mgmt its policies and procedures for identifying and evaluating litigation. The auditor cannot inspect the client's lawyers documents as they are privileged.

Question 39

Which procedures are performed before BS date and after? Review subsequent events, perform search for unrecorded liabilities, send inquiry letter to client's legal counsel, review detail and test significant travel and entertainment expenses

Answer 39

Review subsequent events, perform search for unrecorded liabilities - done after year end Send inquiry letter to client's legal counsel - usu send after year end, but could be sent prior (with a comment to lawyer to wait until date after year end to reply) Review detail and test significant travel and entertainment expenses - prior to BS date review and then update at a subsequent date.

Question 40

What are procedures involving sales and what do they test

Answer 40

Trace sales invoices to supporting bill of lading - conclude that sales invoices represent bona fide sales Trace bill of lading to entries in subsidiary ledger - conclude that all sales have been properly recorded Trace sales invoices to subsidiary ledger - conclude that sales invoices have been properly posted to customer accounts Trace debit entries from subsidiary ledger to sales invoices - conclude that entries in ledger are properly supported by sales invoices.

Question 41

What is a primary audit objective in examining PPE?

Answer 41

Test adequacy of internal control, abandoned property is properly reflected in FS, depreciation is reasonable. Note that the adequacy of replacement funds does not bear directly on the fairness of presentation in conformity with GAAP.

Question 42

What is a procedure that an auditor would most likely perform in obtaining evidence about subsequent events?

Answer 42

A typical audit inquiry is to ask mgmt whether there has been a change in working capital since year end. Note inquiry IS a procedure. Note that a recomputation of depreciation is likely to occur in connection with the next year's audit, not this year's audit.

Question 43

What are substantive procedures

Answer 43

They are used to control the risk of incorrect acceptance of a popn which is materially in error. The auditor faces two separate risks - the first risk is that material misstatement may occur in the accounting process, and the second risk is that material misstatements that have occurred will not be detected in the auditor's examination. The auditor relies on internal control to reduce the first risk and substantive tests to reduce the second risk.

Question 44

How can the auditor learn of retirements of equipment>

Answer 44

Equipment retirements will reduce depreciation, have debits to the accumulated depreciation account, and insurance policy riders are often added for new equipment which replaces old equipment that has been retired. Note that the purchase return and allowance account is credited upon the return of merchandise purchased by the client, and has no relationship between merchandise returned and retirement of equipment.

Question 45

What procedure would an auditor perform to obtain evidence about subsequent events?

Answer 45

Obtain a letter from the entity's attorney describing any pending litigation, unasserted claims, or loss contingencies - standards require this procedure. Note that bank reconciliation for the month after year end is normally the client's responsibility.

Question 46

According to PCAOB requirements, audit documentation must be sufficient to allow...

Answer 46

Requires work to be understood by an experienced auditor having no previous connection with the engagement.

Question 47

When mgmt prepares FS in conformity with GAAP, assertions are made about..

Answer 47

Assertions for account balances, transaction classes, and disclosures.

Question 48

What must the auditor do if intending to use the work of an actuary who has a relationship with the client? What is auditor's obligation with specialist?

Answer 48

Auditor must consider that specialist's objectivity and may rely on the actuary. An auditor should obtain an understanding of the nature of the work performed by the specialist, including the objectives and scope. The auditor should also understand the specialist's relationship with the client, the methods or assumptions used (including a comparison with the preceding period), the appropriateness of using the specialist's work, and the form and content of the specialist's findings. Note that the specialist's assumptions are primarily the specialist's responsibilities. Client does not need to consent to auditor's use of specialist.

Question 49

What should the auditor do after inquiries with mgmt disclosed derivative hedging?

Answer 49

Identify an appropriate AP for auditing - examine contracts for possible risk exposure and the need to recognize losses. Note that the need to recognize losses is important.

Question 50

What are the objective of tests for sales? Tracing cash receipts journal to sales journal Tracing sales journal to cash receipts journal Tracing source docs to accounting records Tracing accounting records to source docs

Answer 50

Tracing cash receipts journal to sales journal - whether a recorded sales exists for each cash receipt Tracing sales journal to cash receipts journal - whether cash has been received on recorded credit sales (could detect overstatement of sales as cash receipt is not expected for recorded sale that is not proper) Tracing source docs to accounting records - address understatement of sales, not overstatements (test completeness) Tracing accounting records to source docs - tests for overstatements (existence) - could trace from sales journal to support (sales invoices, shipping docs, customer orders)

Question 51

What is the risk of applying substantive test to the details of asset and liability accounts as of an interim date?

Answer 51

Interim testing increases detection risk since end of year balances will receive less testing. If there are rapidly changing economic conditions, interim testing is less likely due to the higher risk of misstatement. Statistical sampling methods may be used for interim testing. At BS date, the procedures will not include a complete reperformance of interim tests.

Question 52

How does auditor audit cash flow statement?

Answer 52

Reconcile the amounts in the cash flow statement to the other FS amounts. Note confirmations are not associated with cash flow statement.

Question 53

What are COD (cash on delivery) sales?

Answer 53

Transactions involving COD sales are frequently recurring business transactions which are under the internal control.

Question 54

To establish illegal slush funds, corporations may divert cash received in normal business operations. Where would this be hard to detect?

Answer 54

Scrap sales are generally irregular in nature and these sales often are inadequately controlled by the internal control. This makes it difficult for auditor to detect any irregularities. Dividends, purchase returns, and COD sales are under internal control.

Question 55

What statements are included in the written client representation by CEO and CFO?

Answer 55

There are no unasserted claims or assessments that the lawyer has advised are probable of assertion and must be disclosed of which the auditor has not been informed. We have no plans or intentions that may materially affect the carrying value or classification of assets and liabilities. No events have occurred subsequent to the BS date that would require adjustment to, or disclosure in, the FS.

Question 56

How would an auditor obtain evidence about subsequent events?

Answer 56

A comparison of interim financial info with the FS is performed when such interim info is available. Note that analytical procedures have already been performed prior to this stage of the audit.

Question 57

What is generally included in the auditor's working for the audit of a nonpublic company

Answer 57

Generally include the manner in which exceptions and unusual matters were resolved. The workpapers must contain support for the auditor's conclusions concerning significant aspects of the examination. Note that reference to pertinent authoritative pronouncements in the audit workpapers are sufficient to support compliance with GAAP, exercpts from the pronouncements are not required.

Question 58

What would provide the highest level of assurance in an attestation engagement?

Answer 58

AT101 - evidence from independent sources, from the attester's direct personal knowledge, and obtained under effective controls provide the highest level of assurance, more so than multiple internal inquiries.

Question 59

What assertion is an auditor concerned for the renewal of a note payable shortly after the BS date?

Answer 59

Presentation and disclosure as the renewal of the note may provide an auditor with info on whether the note should be presented as a current or noncurrent liability.

Question 60

What does the auditor place primary emphasis on auditing related party transactions?

Answer 60

The auditor should view RPTs within the framework of existing pronouncements, placing primary emphasis on the adequacy of disclosure. Note valuation is difficult to ascertain. Auditors also look at existence and rights and obligations but not primary.

Question 61

What provides the least assurance?

Answer 61

Anything conducted by the client or developed solely within the entity. Auditor's calculations, independent third party conclusions, and confirmation requests are more persuasive. Note that negative confirmation requests have no issue if there is no response. A recalculation of amounts is highly reliable evidence.

Question 62

When would the auditor after issuing the auditor's report be obligated to make continuing inquiries?

Answer 62

When the auditor becomes aware of info that existed at the report date that might have affected the audit report had it been known, it should be investigated. Note that events that occur AFTER the auditor's report (such as going concern impact, resolution of contingent liability) do not apply.

Question 63

What procedure does auditor use for litigation, claims, and assessments?

Answer 63

Obtain assurance from mgmt that it has disclosed all unasserted claims that its lawyer has advised are probable of assertion. The lawyer is ordinarily required to inform mgmt of such unasserted claims, but the lawyer is not required to inform the auditor. This makes it important for the auditor to obtain assurance from mgmt. Note that confirming with the lawyer is not possible as they may not have the necessary accounting expertise to know whether it is properly recorded in FS.

Question 64

What are the retention requirements for audit documents of a nonpublic company?

Answer 64

Retain for the longer of five years or the legal requirements.

Question 65

When an outside specialist has assumed full responsibility for taking the client's physical inventory, when is reliance on the specialist's report acceptable?

Answer 65

Some test counts will still be necessary. CPA has to conduct the same tests he would have if client employees had taken the inventory - only then will sufficient evidence be collected. The CPA may reduce the extent of his work in many cases. Auditor is required to make or observe some physical counts of the inventory, recompute calculations of the submitted inventory on a test basis, and conduct tests to the intervening transactions. Note that the auditor's report need not refer to the specialist. The auditor must be responsible for the amount of inventory and cannot delegate that.

Question 66

How are AR turnover and ratio of uncollectible AR to gross AR calculated? Given year 1 and 2, net sales of 1M and 2M, avg gross AR of 100k and 300k, and allowance of 30k and 50k.

Answer 66

Turnover is sales/avg AR. AR turnover is 10 and 6.6 and the ratios are .3 and .16 - this indicates that the allowance might be understated, being lower than year 1.

Question 67

What is window dressing

Answer 67

A deliberate attempt to overstate a company's financial position.

Question 68

What is required of audit evidence?

Answer 68

To be appropriate, it must be both relevant and reliable. The difficulty and expense involved in testing a particular item is not in itself a valid basis for omitting a test. Note that a client's accounting data, by itself CANNOT be considered sufficient support of the FS - corroborating evidential matter is necessary.

Question 69

What do the assertions deal with: presentation, completeness, existence, rights

Answer 69

presentation - whether particular components of the FS are properly classified, described, and disclosed completeness - whether all transactions have been included in the proper period. rights - whether assets are the rights of the entity and liabilities are the obligations at a given date existence - whether assets or liabilities of the entity exist at a given date and whether recorded transactions have occurred during a given period.

Question 70

What is the primary method to corroborate info on litigation, claims, and assessments?

Answer 70

AU337 - reviewing the response from the client's lawyer to a letter of audit inquiry. Note that mgmt doe corroborate its earlier statements to the auditor in a representation letter but this is more limited than from the lawyer, who is an expert outside the company. Legal invoices may reveal info but examining them is not considered a primary method compared to reviewing the lawyer's response.

Question 71

What happens if customers having substantial year end past due balances fail to reply after second request forms have been mailed to them - what is the most appropriate AP?

Answer 71

This may indicate that these accounts are in dispute. Auditor should examine shipping documents to determine whether proper items and quantities have been shipped. Note that collections made during the year only provide limited assurances as to the proper valuation of the account. Note that although there is an indicated need for an increase in the allowance account, there is no reason to make the entry at this point.

Question 72

When is specialist referred to in an auditor's report?

Answer 72

Only referred to when that report directly relates to a matter resulting in modification to the report - ex: an unusually important subsequent event. It might also involve a case in which a specialist's valuation differs from mgmt's valuation. Note that a specialist would not be referred to suggest a more thorough audit, suggestions to mgmt, or corroboration of mgmt assertions.

Question 73

What is the accounts payable account examined for?

Answer 73

Presentation and disclosure - detect which are past due Existence - ascertain the reasonableness of recorded liabilities Completeness - determine that all existing liabilities at the BS date have been recorded Note that whether accounts payable was properly authorized is an internal control principle that an auditor examines by compliance testing. Proper authorization only suggests that related account balances are more likely to be correct.

Question 74

What is a typical objective of an OPERATIONAL audit for the auditor?

Answer 74

Develop recommendations for improving performance Another objective is to assess performance and identify improvement opportunities Note that evaluating the feasibility of attaining operational objectives is only part of the objective.

Question 75

If client does not permit inquiry of outside legal counsel, what opinion is usually given?

Answer 75

A client imposed scope limitation would usually result in a disclaimer of opinion. A scope limitation not imposed by client could lead to qualified opinion. Note scope limitations do not result in unqualified with explanatory prghs

Question 76

What is the date of the mgmt representation letter?

Answer 76

The rep letter should be dated as of the auditor's report, NOT the BS date.

Question 77

What are approaches the auditor may use when evaluating the reasonableness of mgmt estimates?

Answer 77

Review and test mgmt's process to develop the estimate Calculate an independent expectation of the estimate Review subsequent events or transactions occurring prior to completion of fieldwork Note that confirmation of most estimates is NOT appropriate as an approach.

Question 78

What is auditor's objectives regarding mgmt estimates?

Answer 78

Concerned with whether the estimates are reasonable, and if all estimates relating to material matters have been developed and the estimates presented are in conformity with GAAP. Estimates are used when outcomes of future events is unknown or when relevant data cannot be accumulated on a timely, cost effective basis.

Question 79

What is included in sufficient and appropriate documentation

Answer 79

Should include evidence that the audit working papers have been reviewed. Note accounting estimates can be documented in working papers, Audit documentation is the property of the auditor, not the client, and should be retained for at least 5 years.

Question 80

When using the work of a specialist, the understanding between the 3 parties is documented and includes....

Answer 80

- the objectives and scope of the specialist's work - any relationship of specialist to the client - specialist's understanding of the auditor's use of the specialist's findings Note that the assumptions used by a specialist may be inconsistent with those used by the client.

Question 81

What tests might the auditor conduct for owner's equity of a public client

Answer 81

- analysis of the accounting for the proceeds of stock issuance - existence and valuation - confirmation of outstanding shares with independent registrar - existence - tests of the computation of EPS - valuation Note that the auditor is least likely to reconcile the stock certificate book with the GL due to the fact that most stock certificate books are maintained by independent registrars.

Question 82

What are situations when auditor would use a specialist?

Answer 82

Assess valuation of inventories of artwork Determine quantities of materials stores in piles on the ground Determine the value of unlisted securities Note that it is unlikely that an auditor would be concerned with the assessed valuation of fixed assets. Historical cost of fixed assets would be of audit interest instead.

Question 83

How would an auditor identify contingent liabilities?

Answer 83

Lawyer's letter - lawyers often address contingent liabilities relating to their clients Note that an AP confirmation might identify a contingent liability, but it is generally related to the actual liability as of year end. Note auditors do not send related party transaction confirmations. Note a confirmation to a transfer agent provides more evidence on the number of shares issued and outstanding.

Question 84

An auditor confirms a number of open receivables at year end and investigates exceptions and comments. What could they find?

Answer 84

If one of the cashiers has been covering a personal embezzlement by lapping - lapping slows down the recording of customer payments. Customer may state that they have paid the receivable well before year end. Note that family and friends would not be expected to disclose fraud they are involved in. Note it was open accounts, and not accounts written off.

Question 85

What is the primary purpose of audit working papers?

Answer 85

Primary - Support the auditor's opinion and to aid in conducting and supervising the audit engagement. Note that audit workpapers should include documentation showing how the work was adequately planned and supervised.

Question 86

What do registrars and stock transfer agents do?

Answer 86

Registrars verify that stock issued is properly authorized. Stock transfer agents maintain detailed stockholder records and carry out transfers of stock ownership. They maintain records of shares issued and outstanding. They do not maintain records of dividends paid, expected proceeds from stock subscriptions receivable, or records of proper authorization of stock rights and warrants.

Question 87

What is likely performed before BS date? | Observation of inventory, internal control procedures, confirmation of receivables, search for unrecorded liabilities

Answer 87

Observation of inventory when internal control is strong, internal control procedures, confirmation of receivables - can be done prior to year end Search for unrecorded liabilities is performed near the completion of the audit to determine that proper cutoffs have been made.

Question 88

The letter of audit inquiry addressed the the client's legal counsel...

Answer 88

This letter is the auditor's primary means of obtaining corroboration of the info originally obtained from mgmt, concerning litigation, claims, and assessments (incl unasserted claims, pending or threatened litigation). Will be sent to a lawyer regardless of whether he has resigned. This letter is used for both SEC and non SEC reporting firms.

Question 89

What is inventory turnover analysis useful for?

Answer 89

Can detect the existence of obsolete merchandise - if the proportion of obsolete inventory to total grows, the turnover decreases. Note that to find mispricing of inventory would need to be significantly material to affect the turnover ratio to a noticeable degree.

Question 90

``` Who creates which documents? Customer purchase orders Bank statements Shipping documents Receiving reports Vendor invoices Packing slips Bills of lading AR confirmations ```

Answer 90

``` Customer purchase orders - customer Bank statements - bank Shipping documents - client Receiving reports - client Vendor invoices - vendor Packing slips - vendor Bills of lading - common carriers AR confirmations - auditors ```