Specific Audit Areas - Intro to Audit Individual Areas

Question 1

Four Assertions for Account Balances:

1. Existence - the validity of recorded items. (we go accounting records to supporting documents)
   
   1. Confirmation - espcially on overstatements
   2. Observation - on inventory and investment securities
   3. Agree to underlying documents - evaulation of pp&e, and various liabilities
2. Completeness - should have been recorded (we go supporting documents to the accounting record)
   
   1. Cutoff Test - trace from shipping documents to cost of goods sold or to the sales journal, or perform a “search for unrecorded liabilities.”
   2. Analytical Procedures - intended to detect omission and is done so with particular ratios or compare something specific
3. Rights and Obligation - Related to any restrictions to the entity’s rights to their assets or to the obligations for their liabilities.
   
   1. Inquire of applicable client personnel - Mgmt representation letter should
   2. Examine authorization of transactions - Whether the unusual condition apply.
4. Valuation and Allocation - Related to the appropriateness of dollar measurements.
   
   1. Recalculate account balances - Verify the client’s calculations
   2. Trace to subsequent cash receipts or disbursements - Includes tracing to cash receipts or cash disbursements journal and to the applicable bank statement.
   3. Analytical procedures - evaluate the apparent reasonableness of the allowance for uncollectibles. (auditor may also inspect underlying sales invoices or shipping documents to test the accuracy of the entity’s data underlying the analytical procedures)
   4. Examine published price quotations for fair value measurements, when applicable -Verify mathematical accuracy.

Question 2

Audit Procedures Generally Applicable to Every Individual Audit Area:

1. Consider the Implications of Internal Control - discussed in the “Internal Control Concepts and Standards” section”) to identify control activities of interest to the auditor relevant to planning the nature, timing, and extent of substantive procedures that underlie detection risk, based on the assessed level of control risk.
2. Substantive Procedures usually Performed in Every Individual Audit Area
   
   1. Agree the financial statement elements
   2. Scan the entity’s journals and ledgers for any unusual items.
   3. Make appropriate inquiries of management and other personnel (make sure yo document those areas including management response in mgmt representation letter)
   4. Perform specific analytical procedures—consider historical trends and events within the industry.

Question 3

In testing long-term investments, an auditor ordinarily would use analytical procedures to ascertain the reasonableness of the

Answer 3

Completeness of recorded investment income.

Question 4

A client uses a suspense account for unresolved questions whose final accounting has not been determined. If a balance remains in the suspense account at year-end, the auditor would be most concerned about

Answer 4

Suspense debits that management believes will benefit future operations must be audited carefully to determine whether they have value and should be classified as an asset.

Question 5

In verifying the amount of goodwill recorded by a client, the most convincing evidence which an auditor can obtain is by comparing the recorded value of assets acquired with the

Answer 5

identifiable assets acquired in a “purchase” business combination should be recorded at their appraised values.

Question 6

Most likely risk involved with a bill and hold transaction at year-end is a(n)

Answer 6

Sale may inappropriately have been recorded as of year-end.

Why?

A bill and hold transaction results in the recording of a sale prior to delivery of the goods—accordingly, sales may be inappropriately recorded.

Question 7

In testing the existence assertion for an asset, an auditor ordinarily works from the

Answer 7

Accounting records to the supporting evidence.

Summary:

Testing from accounting records to the supporting evidence discloses whether recorded transactions occurred and whether the asset exists.

Question 8

pairs of accounts would an auditor most likely analyze on the same working paper?

Answer 8

An auditor will often consider interest income with notes receivable because the interest is earned on those notes and therefore closely related

Question 9

In auditing intangible assets, an auditor most likely would review or recompute amortization and determine whether the amortization period is reasonable in support of management’s financial statement assertion of

Answer 9

Valuation or allocation.

The amortization of intangible assets deals with whether the accounts are properly valued, the valuation assertion

Question 10

Practice of “channel stuffing” for sales most likely to most directly affect, and thereby result in additional audit procedures?

Answer 10

Channel stuffing - is a marketing practice that suppliers sometimes use to boost sales by inducing distributors to buy substantially more inventory than they can promptly resell; accordingly, increased sales returns in the future are likely.