ACC 2101 Study Guide - Quiz Guide: Trial Balance, Financial Statement, Accounts Receivable
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The independent auditor is allowed to use a specialist for evaluating a complicated financial transaction provided the specialist is
knowledgeable and independent of the audit client. |
approved by the client's board of directors. |
all of the above. |
acceptable to the PCAOB. |
Inappropriately dating transfers of funds between bank accounts to cover shortages of cash is properly referred to as
lapping. |
reconciling. |
kiting. |
embezzling. |
Cash equivalents
represent current assets that can be converted to cash within a year or an operating cycle, whichever is shorter. |
include only cash and highly liquid investments that are virtually free of risk. |
should be reported as investments and not be included as cash on the balance sheet. |
typically exclude money market funds and treasury bills. |
A cut-off bank statement primarily is used to
determine whether reconciling items on the year-end bank reconciliation have cleared the bank. |
prepare a year-end bank reconciliation. |
test for kiting. |
confirm the year-end balance of cash. |
An imprest cash account
typically is used for many large miscellaneous disbursements. |
typically earns large amounts of interest. |
is another name for the general cash account of an organization. |
is an account containing a stipulated amount of money to be used for a specific purpose. |
An auditor may estimate the appropriate amount of interest expense to be recorded by an audit client by multiplying the average debt by the average interest rate. If the auditor's estimate is considerably larger than the client's recorded interest expense this would be evidence of a potential
failure of the client to accrue interest expense at year end. |
the violation of significant loan covenants. |
overstatement of recorded interest expense. |
understatement of long-term debt. |
Internal controls over fixed assets in a smaller entity
usually include authorization by the board of directors. |
typically will be very similar to internal controls over other assets within the entity. |
must be the same as in larger entities. |
are of little importance since fixed assets are not subject to theft or misuse. |
A change in depreciation methods employed by an audit client resulting in a material change in depreciation expense
is not necessarily a violation of generally accepted accounting principles. |
requires disclosure by the audit client in the footnotes to the financial statements. |
must be noted in the audit opinion due to lack of consistency. |
is properly described by all of the listed statements. |
Auditors typically assess inherent risk for material accounts requiring significant estimates as
low. |
high. |
zero. |
moderate. |
Which of the following loans from an audit client, which is a financial institution, made in accordance with the normal lending practices of the financial institution would impair the CPA's independence?
A loan fully secured by certificates of deposit from the same financial institution. |
A credit card loan in which the balance carried forward each month does not exceed $9,000. |
An automobile loan secured by the automobile. |
A home loan equal to less than 50% of the home's value and collateralized by the home. |
A CPA has obtained some original records from a client during the course of an audit engagement. At the completion of her audit according to the proper professional standards the client fired the CPA and demanded that the CPA return all of his original records immediately. Under these circumstances which of the following statements is most correct according to the AICPA Code of Professional Conduct?
The CPA may hold the original records she obtained until the client pays for the services she has completed. |
The CPA must return only the original records of the client upon demand regardless of the circumstances. |
The CPA must return all original records and all copies of original records of the client upon demand regardless of the circumstances. |
This is a matter of state law and not a matter covered by the AICPA Code of Professional Conduct. |
A424
Homework #3
Due Tuesday, February 28
Worth 100 Points
Note: Students are expected to work independently (i.e., on your own) on all homework assignments. Please type and post to Canvas.
Part I. Risk Assessments
1. For each illustration, select the component of audit risk that is most directly illustrated. The components of audit risk may be used once, more than once, or not at all. (10 points, 1 point each). |
Components: Inherent Risk (IR), Control risk (CR), or Detection Risk (DR) |
a. A client fails to discover employee fraud on a timely basis because bank accounts are not reconciled monthly.
b. Cash is more susceptible to theft than an inventory of coal.
c. Confirmation of receivables by an auditor fails to detect a material misstatement.
d. Disbursements have occurred without proper approval.
e. There is inadequate segregation of duties.
f. A necessary substantive audit procedure is omitted.
g. Notes receivable are susceptible to material misstatement, assuming there are no related internal controls.
h. Technological developments make a major product obsolete.
i. The client is very close to violating debt covenants.
j. XYZ Company, a client, lacks sufficient working capital to continue operations.
2. Read Case 1.6, Nextcard, Inc. from our Casebook. Pretend you are the auditor for Nexcard, Inc. in the planning phase of the audit for FY 2000 and perform the following risk assessment procedures. That is, just focus on the information in the case prior to the discovery of the fraud (pages 83-86). (50 points total)
a. Perform a risk assessment as part of your audit plan for fiscal year 2000. Set or assess each component/factor of the audit risk model. Describe in detail how you set or assessed each factor (i.e., include specific risk factors from the case and explain how they influenced your assessment). (25 points)
b. Perform a fraud risk assessment for the risk of material misstatement due to fraudulent financial reporting. That is, identify and briefly describe specific fraud risk factors (i.e., more than 1) for each of the three components of the fraud risk triangle, specific to fraudulent financial reporting. (15 points)
c. Identify and describe one significant pervasive risk present during the Nextcard audit. In doing so, explain how the pervasive risk affects the risk of material misstatement. Then, describe how the auditor could respond to that pervasive risk (how could they change the audit plan to address that risk). (5 points)
d. Identify and describe one significant specific risk present during the Nextcard audit. In doing so, explain how the specific risk affects the risk of material misstatement. Then, describe how the auditor could respond to that specific risk (how could they change the audit plan to address that risk). (5 points)
Part II. Evidence and Management Assertions
1. For each of the following specific audit procedures, indicate the type of audit procedure it represents: (1) inspection of records or documents, (2) inspection of tangible assets, (3) observation, (4) inquiry, (5) confirmation, (6) recalculation, (7) reperformance, (8) analytical procedures, and (9) scanning. (10 points, 1 point each)
a. sending a written request to the entityâs customers requesting that they report the amount owed to the entity
b. examining large sales invoices for a period of two days before and after year-end to determine if sales are recorded in the proper period.
c. agreeing the total of the accounts receivable subsidiary ledger to the accounts receivable general ledger account.
d. discussing the adequacy of the allowance for doubtful accounts with the credit manager.
e. comparing the current-year gross profit percentage with the gross profit percentage for the last four years.
f. examining a new plastic extrusion machine to ensure that this major acquisition was received.
g. watching the entityâs warehouse personnel count the raw materials inventory.
h. performing test counts of the warehouse personnelâs count of the raw material.
i. obtaining a letter from the entityâs attorney indicating that there were no lawsuits in progress against the entity.
j. tracing the prices used by the entityâs billing program for pricing sales invoices to the entityâs approved price list.
2. For each of the audit procedures listed above in Part II. 1. (a-j), identify the category (assertions about classes of transactions and events, or assertions about account balances) and identify the primary management assertion being tested. (30 points, 3 points each)